Crippling rural debt looms as biggest threat to our beef producers

What will happen now that the rains have come to many parched beef lands of Queensland? Current high cattle prices and renewed pastures suggest optimism, even good times. Perhaps record exports from the world’s largest beef exporter? If only if was that simple.

While an important indicator of Australia beef prices peaked recently, analysts warned export volumes were likely to fall.

High prices for Australian meat has already seen Chinese imports down this year by 30% and US imports down 40% (largely correcting a recent Australian trade gain).

Restocking after drought would seem to account for the near record East Australian cattle price.

Unfortunately, eager buyers paying top dollar for a production input take a considerable risk, as was discovered 40 years ago when prices last peaked.

Not only is a cattle price of $6.66/kg on July 27 2016 still short of around $7.00/kg in the mid-1970s. Costs are markedly higher, as are debts.

Indeed, investigations reported by the Queensland Rural Debt and Drought Taskforce show extremely high levels of financial and personal stress. Key financial ratios are in disarray for many enterprises, small and large, family and corporate. Speculating on near-record cattle prices can, at best, buy a little time.

Most worrying are the inadequacies of income to service very high and rising levels of debts, secured by properties that have halved in values. A debt-deflation spiral is clearly underway.

Using projections, survey data and cross checking with those in the industry, it is estimated debt is up 50% since 2006. (A disclaimer is needed here as financiers have refused to release needed data, despite all manner of requests including last November at the Queensland Treasurer’s Rural Roundtable.)

Land values went the other way. In Queensland’s western pastoral areas, for example, Queensland’s Valuer General estimates the land market peaked around 2008 and then fell back to around 2005–06 value levels. “This market continues to be subdued, with very few sales transactions”, it reported.

Even initially very sound borrowers now see serious equity destruction. Extensive capital exposures seem to have been little appreciated, all round. Farmer equity below 70% is usually regarded as high risk. Average equity positions of even previously very low risk enterprises are now likely to be markedly declined.

Apprehension, deep angst and quiet hope were evident in hearings of the Rural Debt and Drought Taskforce held across Queensland six months ago. The report is now in, but is surprisingly little discussed so far.

Evidence of widespread, serious financial and other problems has led to 14 recommendations, including establishing a reconstruction board, agricultural bank and a Royal Commission. Action was recommended on income, education, mental health and other needs.

In a nutshell, serious responses to major foundational financial problems are needed. Farm and town enterprises are depressed with many (once) “resilient” communities very much on the edge.

Rural Bank recently published research which reinforces the seriousness of the problem. A high number of transactions occurred in a rising market with asset values rapidly moving away from income potential. A significant number of loans involved speculation, on both sides of the agreement.

Fundamentally, incomes cannot support debts. What on earth was going on when, across Australia, farmland prices and associated debts inflated in the teens each year for almost a decade, while incomes hardly moved?

The subpriming of Australian Agriculture is just one of the questions facing further Parliamentary Inquiries into finance, and Royal Commissions.