Farm Letter

In December a letter went around Australia via Facebook regarding bank foreclosures on farms. A precis would read ‘drought. farms not worth as much. banks behaving badly and foreclosing on farmers. possible conspiracy to sell farms to Chinese and miners’.

I am not much of a fan of emotionally simplistic communiques so I just spent a bit of time Googling the subject.

It seems the Australian Wheat Board at one time held the mortgages for hundreds of farms but during the GFC sold these to the big four banks, probably at a loss and maybe due to an issue with liquidity.

Due to the current drought in some parts of Australia the value of some farms is now below book value and the banks are probably using a clause in the contract to demand more mortgage guarantees from the farmers, and if these are not met then exercising an option to foreclose. Even if a farmer is meeting all repayments!

This is so just so messed up and belies the old-school partnerships between businesses and banks, the latter which are ironically permanently illiquid themselves, in principle.

The only reason the banks could pick up the loans during the GFC was because our savings in them were underpinned by the Australian Government – otherwise they wouldn’t have had this flexibility. So in a way we the Australian taxpayers underwrote their ability to buy these loans at cents in the dollar and now to exploit them for capital gain.

The Wheat Board should only have on-sold these mortgages with the revaluation demand clauses excised, or the government should have demanded so. And to the farmers I would say, you should demand a first option to buy out or re-finance your mortgages, rather then allow a Wheat Board to sell them to whoever.

The value of farm properties in an extended drought is very low due to the low demand for properties which in turn is impacted by cashflow in the sector. Because farmers are struggling there are no buyers; however this probably doesn’t reflect the true value of properties – it’s a sort of second order effect that exaggerates the drop in value of farms. Given that droughts are a way of life I believe that farmers should not be exposed to the extremes of property value fluctuations (by government decree) otherwise we won’t have anyone willing to go into farming,

I suppose a conspiracy theorist would argue that the whole farm mortgage scheme is designed to recapitalize farms (downwards in value) to reflect the true value in a post-climate change world (where droughts will be more common and the land will dry out) and put the assets into corporate hands where economies of scale will allow lower costs and continued operations. But only after the land has been stripped of any useful mining resources for a one-off bonus.

In the end this will probably just happen and the only thing that may halt it is market intervention by parliament; this will come down to the effectiveness of the power of representation of the farmers in parliament versus the power of lobbying of the finance and corporate sectors to those who are not supposed to represent these interests in parliament.

On current form the farmers are well behind and fighting a rearguard action – they need to start getting seriously aggressive if they want to fight entropy and greed and preserve the past in a rapidly changing world.

To be honest, I am not even sure it makes sense for them to do so unless they come up with an entirely new structure for their sector. One which they control.