ABAPresentation

Agricultural Banking without Government Payments: The Australian Experience: 

Agricultural Banking without Government Payments: The Australian Experience

Agenda: 

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

Australia’s Banking Sector: 

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

Agribusiness Banking Sector: 

Agribusiness Banking Sector Major Banks Regionals Specialists

Agricultural Finance in Australia: 

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

International Comparison: 

International Comparison Ave Debt per Farm (LHS) Debt as % Farm Income (RHS) Source: NAB Economics

Agricultural Finance in Australia: 

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

Opportunity with Change: 

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

Trends Impacting on the Australian Banking Sector (5 – 10 years): 

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

Agriculture in Australia: 

Farm production: $35b Farm dependent economy: 12.1% 670,000 employed 131,000 farm businesses Agriculture in Australia

Slide11: 

Major Agricultural Industries Source: ABARE. Westpac Economics

How Prices are Determined: 

How Prices are Determined Source: Westpac Economics

Slide13: 

Government Support for Agriculture Source: ABARE. Westpac Economics

Slide14: 

Government Support by Industry Sources: ABARE, Productivity Commission. Westpac Economics

Farm Subsidies Inflate Prices: 

Farm Subsidies Inflate Prices Source: OECD

Slide16: 

Australian Farmers Terms of Trade Source: ABARE

Terms of Trade - the reality: 

Terms of Trade - the reality Source: NAB Economics In 1950 In 2006

How Farmers are meeting the challenge: 

How Farmers are meeting the challenge Farm consolidation Alternate income sources: off farm employment and off farm investment Farm expansion Productivity improvements

Farm Consolidation: 

Farm Consolidation Source: NAB Economics

Off Farm Employment: 

Off Farm Employment Source: ABARE % Share Income from off-farm % Farms with off-farm incomes

Off Farm Investment: 

Off Farm Investment Source: NAB Economics All farm investment 60% farm investment 40% non farm investment No farm investment

Farm Expansion: 

Farm Expansion Source: ABARE Farms acquiring land Resulting increase in capital value

Slide23: 

Australian Farmers Productivity Lift (average for 80’s & 90’s) Source: Westpac Economics, ABARE

Agricultural Support: 

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

Wool Minimum Reserve Price: 

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

Dairy Industry Reform: 

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

Sugar Activity Reforms 2004: 

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

Government Support: 

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      

Government Support: 

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. 

Thankyou: 

Thankyou Campbell Chambers Head of Agribusiness Strategy & Operations National Australia Bank T +61 3 8634 1699 campbell.j.chambers@nab.com.au Graham Jennings General Manager Agribusiness Westpac Banking Corporation T +61 2 8254 1083 gjennings@westpac.com.au Stephen Carroll Director Rural & Regional Banking Policy Australian Bankers Association Inc T +61 0500500408 scarroll@bankers.asn.au