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Agricultural Banking without Government Payments:

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  • 1. Agricultural Banking without Government Payments: The Australian Experience
  • 2. Agenda
    • Agricultural Banking In Australia
    • Campbell Chambers
    • Head of Agribusiness Strategy & Operations
    • National Australia Bank
    • Agriculture, Support and farmer reaction
    • Graham Jennings
    • General Manager Agribusiness
    • Westpac Banking Corporation
    • Case studies in Market Reform & current position
    • Stephen Carroll
    • Director Rural & Regional Banking Policy
    • Australian Bankers Association Inc
  • 3. Australia’s Banking Sector
    • Banks operating in Australia offer a wide range of products and services
      • Banking
      • Funds management
      • Insurance
      • Financial advice
    • Major banks have an investment grade greater than “A”
    Source: APRA Monthly Banking Statistics (July 2006) * Total resident assets = sum of assets adjusted for provisions for impairment 22.1 Deutsche Bank AG 32.2 ING Bank (Australia) 47.1 Macquarie Bank 35.4 Bank of Western Australia 41.0 Suncorp-Metway 86.3 St George Bank 214.7 ANZ Banking Group 223.7 Westpac Banking Corporation 268.1 National Australia Bank 280.4 Commonwealth Bank of Australia A$b*
  • 4. Agribusiness Banking Sector Major Banks Regionals Specialists
  • 5. Agricultural Finance in Australia CAGR 2.9% CAGR 8.6% CAGR 14.4% CAGR 13.3% CAGR 10%
    • Credit Outstanding $43b
    • Lending Breakdown:
      • Banks 90%
      • Pastoral Houses 7%
      • Government 2%
    • Annual growth ~ 10% p.a
    Source: Agribusiness Banking System Loan Outstandings by Loan Size Source: APRA, RBA, NAB Economics
  • 6. International Comparison Ave Debt per Farm (LHS) Debt as % Farm Income (RHS) Source: NAB Economics
  • 7. Agricultural Finance in Australia
    • Total value of sales Up 34%
    • Total no. of sales Down 7%
    • Average sale price US $616,000: Up 44%
    Source: ABARE
  • 8. Opportunity with Change
    • Rate of return on capital:
    • Bottom third: 5.8% Middle third: 7.7% Top third: 8.0%
    Source: ABARE Farm Income – with no debt Farm Business Debt Farm Income – with debt
  • 9. Trends Impacting on the Australian Banking Sector (5 – 10 years)
    • Macro:
      • Industry consolidation
      • Workforce management
      • Increased security risks
      • Regulation
    • Greater farmer sophistication
      • Next generation farmer tertiary qualified
      • Strong competition in agricultural banking sector
      • Margin compression
      • High demand for skilled agricultural specific bankers
    • Brokerage market increasing
    • Climate variability
  • 10. Agriculture in Australia
    • Farm production: $35b
    • Farm dependent economy: 12.1%
    • 670,000 employed
    • 131,000 farm businesses
  • 11. Major Agricultural Industries Source: ABARE. Westpac Economics
  • 12. How Prices are Determined Source: Westpac Economics World indicator price, NY Asia mkts Sugar Cotlook ‘A’ index Asia mkts Cotton Supply contracts Export contracts UK, US mkts Supermarkets Wine Saleyard prices Export contracts US, Middle East Saleyard Sheep meat Eastern market indicator China Wool World indicator prices Europe, Asia Major producers Dairy Domestic pools, trades CBOT futures Global stocks Local traders Wheat Saleyard prices Export contracts US, Asia Saleyard Beef Reference Export Domestic Industry
  • 13. Government Support for Agriculture Source: ABARE. Westpac Economics
  • 14. Government Support by Industry Sources: ABARE, Productivity Commission. Westpac Economics
  • 15. Farm Subsidies Inflate Prices Source: OECD
  • 16. Australian Farmers Terms of Trade Source: ABARE
  • 17. Terms of Trade - the reality Source: NAB Economics In 1950 In 2006
  • 18. How Farmers are meeting the challenge
    • Farm consolidation
    • Alternate income sources: off farm employment and off farm investment
    • Farm expansion
    • Productivity improvements
  • 19. Farm Consolidation Source: NAB Economics
  • 20. Off Farm Employment Source: ABARE % Share Income from off-farm % Farms with off-farm incomes
  • 21. Off Farm Investment Source: NAB Economics All farm investment 60% farm investment 40% non farm investment No farm investment
  • 22. Farm Expansion Source: ABARE Farms acquiring land Resulting increase in capital value
  • 23. Australian Farmers Productivity Lift (average for 80’s & 90’s) Source: Westpac Economics, ABARE
  • 24. Agricultural Support
    • Overall Australia has eliminated most agricultural production and trade distorting support reflecting comprehensive market orientated reforms undertaken over the past 15 years. The level of remaining support is low (OECD 2006)
      • Removal of Minimum Reserve Price for Wool - 1991
      • Dairy Industry Deregulation - 2000
      • Sugar Industry Reform - 2004
  • 25. Wool Minimum Reserve Price
    • Commenced in 1971 in response to a severe recession in Nth Hemisphere textile industries
      • 206c/kg clean – 1974
      • 870c/kg clean – 1988 (a 30% increase)
      • Market price fell below MRP – 1989
      • Abandoned 1991, market price falls to 430c/kg clean
      • Stockpiled wool sold when market price > than 500c/kg clean
      • Stock pile cleared 2001
      • Current price is approx 840c/kg clean
  • 26. Dairy Industry Reform
    • From 1980s phased reduction in assistance for the export sector – Closer Economic Relations NZ
    • 2000 - over night elimination of all price support mechanisms
    • Adjustment payments for those directly affected
    • Immediate decline in fluid milk prices, 18% QLD, 12% NSW in the 1sr yr
    • 3yrs latter approx 17% decline in number of dairy farmers
    • Producers responded to decline in per unit returns by increasing farm output
        • Larger herds, efficient use of inputs, increased carrying capacity
    • After initial adjustment milk production recovered and export performance maintained
  • 27.
    • In response to low world prices and other issues, the Government put together a package of assistance measures that were made available on the basis the industry committed to reform.
    • The reform included deregulation of domestic marketing arrangements
    • Assistance measures included a range of short term income support measures, re-establishment grants, training assistance, counselling services, and development industry and local reference groups
    Sugar Activity Reforms 2004
  • 28. Government Support
    • Agriculture Advancing Australia (AAA) is package of Australian Government programmes to help primary producers in agriculture, fishing and forestry be more competitive, sustainable and profitable
      • FarmBis – education and training activities
      • Rural Financial Counselling Service
      • Farm Help – Short term income support
      • Industry Partnerships Programme - help industry’s manage adjustment challenges
      • Farm Management Deposits - enables primary producers to set aside pre-tax primary production income from good years as cash reserves to help meet costs in low income years      
  • 29. Government Support
    • Exceptional Circumstances (EC) assistance is the Australian Government’s main vehicle for providing assistance to farmers in a region or industry that is experiencing a severe downturn due to a rare and severe climatic or other event.
    • EC assistance ensures that viable farmers are not forced to leave the land due to events that are beyond the boundaries of normal risk management.
    • EC are events that occur on average once in every 20 to 25 years and have an impact for a prolonged period
    • Assistance is available in the form of EC Relief Payments and EC Interest Rate Subsidies. 
  • 30.  
  • 31.                                                                                                                                                                                                                                                      
  • 32.  
  • 33.  
  • 34. Thankyou
    • Campbell Chambers
    • Head of Agribusiness Strategy & Operations
    • National Australia Bank
    • T +61 3 8634 1699
    • [email_address]
    • Graham Jennings
    • General Manager Agribusiness
    • Westpac Banking Corporation
    • T +61 2 8254 1083
    • [email_address]
    • Stephen Carroll
    • Director Rural & Regional Banking Policy
    • Australian Bankers Association Inc
    • T +61 0500500408
    • [email_address]