And he sounded a warning to all New Zealand farm businesses during the HortNZ conference in Auckland: farming businesses must be prepared for 25% falls in commodity prices in uncertain times with raised risk; 15% falls in production; a 2-3% increase in interest rates; or a combination of all of these as they manage their businesses.
“And we should be prepared for at least two significant events over a 2-3 year period,” Palmer said. Generation of cash surpluses and strong balance sheets were absolutely vital.
“As an apple grower myself and someone who has spent a lifetime in the horticulture industry, that has been incredibly difficult to do. A problem inherent in the apple industry is that it has lived for the last five years at least on eating individual growers’ capital and that cannot continue. There are stresses in the industry which are already causing some businesses to fail and I suspect more still to come.”
Agricultural debt in New Zealand “is not out of control but very significant,” Palmer said. “[It] doubled between 1998 and 2008. [Agriculture] did not double revenue and it did not double profit or cash surplus. The industry is more highly leveraged as an industry than is wise or sustainable given the inherent risks attached to the industry.”
Palmer said the banking industry should accept a good deal of responsibility for the level of agricultural sector debt and the willingness to lend beyond what was sensible in a burgeoning market. “We know that now and, where we have impaired our balance sheet, we know we are suffering the consequences of that.”
Palmer said Rabobank is primarily an agribusiness and will support clients through the cycle.
“The outcome of the current financial crisis and the change in international banking regulation has a significant impact on all banks weak and strong,” he said.
“Banks under the new standards will be required to hold more liquidity and… more capital. What that means for individual clients globally is that the banking margins that were skinny up to 2008 have changed; banking margins in future will rise and credit will be harder to access.”
