The damning final report of the Royal Commission into misconduct in the financial services industry today has brought to light the rapacious sales culture and exploitation practiced by some of Australia’s largest financial institutions. While malpractice was seen across many sectors, the vulnerability of Australia’s agriculture industry to predatory financial practices was a core issue. Loans to the sector total $70 billion.
Many farmers rely heavily on debt. To compete in the global market, the conventional wisdom is that farmers should increase scale, leverage new technology and equipment, and invest in the latest seeds, fertiliser and sprays. As a result, the average Australian farmer owes more debt than a year’s gross revenue, yet fixed costs can be as high as 40% of an average year’s revenue.
Australian farms are particularly exposed to the extremes of weather: last month alone, we saw the devastation of drought, bushfires, cyclones, floods and hail. Droughts hit particularly hard: revenue for broadacre crop farmers can drop to nothing; graziers see feedstock costs skyrocket; and irrigators have their water allocations cut.
These two factors combined lead to financial vulnerability. Farmers are forced to rely on the goodwill of banks when weather disasters strike. Although many of the farmers we spoke with last year maintain a positive relationship with their bank, particularly their local representative, the report highlights systematic failings by financial institutions.
Poor behaviours include exploitative increases in interest and repayment rates; banks triggering a ‘non-monetary default’ when property values dip below a certain value despite on-time repayments; and the frequent appointment of financial receivers who look to rapidly sell property and assets seized by banks, often well below their long-term value.
The report, and the government’s response to its recommendations, is welcome. Independent land valuations, the banning of default interest on loans in areas affected by weather disasters, debt mediation for farmers in financial distress, and instructing banks to assign experienced account managers for distressed agricultural loans are a helpful start. And an expanded complaints authority with a compensation scheme of last resort may provide some restitution for farmers harmed by financial misconduct.
But these ameliorate the issue rather than prevent it. There is little in the report on shifting the culture of predatory lending, meaningful changes to interest rate controls, or encouraging financial tools to manage the natural volatility that comes from the weather. Some banks are still resisting offset accounts for agricultural loans, instead encouraging farmers to take on more debt in bumper years. Traditional crop and livestock insurance don’t cover many of the major weather risks, especially drought. And neither the banks nor the government provide incentives for farmers to take out weather insurance that would lower their credit risk.
This report shows why we are so passionate at Hillridge Technology about changing the status quo. Farmers need new tools to manage the financial risks of weather volatility. That’s what we are aiming to offer: better financial control against weather risks, and greater peace of mind for our farming community.