Western Queensland Rural Debt Crisis

8 July 2014

Senator O’SULLIVAN (Queensland—Nationals Whip in the Senate) (21:04): I rise tonight to speak on a matter of importance for beef producers in Australia and, in particular, for beef producers in northern Australia—that is, northern Australia as described in a survey by Meat and Livestock Australia as being those properties above the line reflected by the New South Wales-Queensland border, which takes us all the way through to the northern aspects of Western Australia.

Since 2004 farm debt in our country has increased by some 75 per cent—up, in dollar terms, from $40.3 billion in 2004 to approximately $70 billion this year. One of the indicators of concern associated with that debt is around a figure established in 1980. In 1980 a producer or a private farm enterprise generated $3.12 in gross income for every dollar of debt held. When last surveyed in 2010 by ABARES, that figure had collapsed to 64c of gross income generated for each dollar of debt that farm enterprises held.

Of the national debt I have referred to, Queensland producers are responsible for about $16.9 billion, which equates to 36 per cent of the national debt and yet we do not generate 36 per cent of the GDP of agricultural production in our state. While, across the country, each state’s primary producers have had their challenges over the last decade or more, I would argue that primary producers in Queensland—particularly those in agriculture and most particularly those in beef production—have faced more challenges than most; in some areas they are accompanied by those in the sector in the Northern Territory and northern Western Australia. These primary producers, in beef cattle production in particular, have battled the force majeure of droughts, floods and cyclones and the impacts that occurred through the suspension of the live cattle trade in 2011. Indeed, some of the issues associated with those decisions are still working their way through the balance sheets of some producers in the Northern Territory, northern Western Australia and northern Queensland.

The increase of debt that has occurred has been applied largely to the purchase of additional property in response to the trend of ‘get big or get out’ that has occurred during the last decade to 15 years, and additionally to farm improvements and capital purchases on-farm for plant and equipment. It is well known that many of these producers who now find themselves in trouble were the darlings of their financial providers as recently as four or five years ago, and certainly up until the advent of the global financial crisis. Over those years, because of the incidence of some improvement in property values, which I will refer to later as having declined, many producers were able to borrow more money against the value of their assets. In many cases this money was applied in depreciating investments or for stocking purposes or for general operational purposes in the belief that, by subsidising the operations of their property for a period of time, their fortunes would turn around—that is to say that they would have a break in the weather, the dollar would reduce, market demand would increase or the fortunes of the live cattle trade would improve quicker than many of them had hoped.

In subsidising their production and operational costs, many of these producers have in fact artificially subsidised the cost of beef production in our country. When those sorts of things happen, it can sometimes take a number of years before the impacts are felt on the balance sheet of the individual primary producers or, indeed, across the industry. We saw these debt trends commence about 10 years ago with agribusiness banks offering low-interest, interest-only loans. These are dangerous for the non-sophisticated borrower, which many of these producers are—I do not say that in a deprecating way; I say that in the sense that many of these producers are not necessarily sophisticated in the ways of big finance. In much the same way as we have seen with the recent revelations of the Commonwealth Bank here in Australia, this is no less the case when bank managers and agri-advisers within banks are giving advice to primary producers about their expansion programs. They encouraged them to borrow money, in this case in particular it was interest-only loans, some with terms of 10 years.

This was soft credit into what arguably ought to have been seen as a subprime market in the sense that the wrong time to borrow is when there is grass up to your knees and the dams are full, but that was what was happening. It is my view that these agribankers, including in many instances the banks that are part of the big four and those others that specialise in this space, did not take into account the seasonal variations that would generally present to producers. They possibly could not have known about, but ought to have made some contingency provisions for, things such as fluctuating currencies and large impact interference in things like the live cattle trade if the borrower, if their client, had a big exposure in that area. Soft money is what things like credit cards provide: you really do not feel the effect of it; there are no principal payments to be made, just interest payments. Indeed, at the time when interest rates are at an all-time low, one can cope with that until such time as it is time to pay the piper. When it is time to pay the loan back or it is time to restructure the loan or your income streams collapse for some of the reasons I articulated earlier in this speech, then you have a complete incapacity to service your loan.

Many of these loans were a 100 per cent lend against the purpose of the loan. For example, many of these producers who were buying expanded landholdings were doing so by borrowing 100 per cent of the money and using alternative properties—sometimes their only other principal place of business, their home property as it is referred to in this sector—or assets that were off-farm. Not only were they at risk, again in a subprime capacity, of exposing the asset acquired, but they also put at risk in many cases some of the only other assets they had. Tragically, for some these were third-, fourth-and fifth-generation holdings passed down through their families.

These properties were subject to biannual review covenants, and the same smiling bankers who left them two years previously and helped them to expand a business that always had the potential to fail—or certainly was, by any other measured examination, high risk—were to return into their lives, only this time it was no longer a friendly visit. We had the enormous tragedy, and it plays itself out still today, where there were neighbours with identical circumstances, identical properties and identical debts but where one of them was in grave difficulty and in fact losing their enterprise whilst the other one had perhaps a year or 18 months longer to live. During that time—as was the case with many properties, fortunately, in the Northern Territory—fortunes can turn around, allowing these second families, these second businesses, to recover. The cases I refer to, of course, are where the live cattle trade was reinstated—and has indeed prospered for many over the last 12 or 18 months.

We have a situation where I believe that in some defined sectors of beef production, certainly more pronounced as one goes further north—indeed, by the time one gets to the line of Townsville to Broome and north of there—this has had a terrible impact. For some months now—indeed, from the very first stages of my time here in this place—I have been calling for a debt survey to occur so that industry and policymakers, both at a state and federal level, have all the facts before them that one would need to make policy decisions that will impact on the lives of many thousands of these producers.

The banks have a responsibility here. I am not a bank basher. I have had a lot of association with banks over time and it has been my experience that, if I have held up my end of the deal, they have largely held up theirs. But in this case the banks are frustrating any efforts by us to determine exactly the extent and type of debt levels we are dealing with through what I regard as a crisis. Through many and various media outlets, the Australian Bankers Association chief executive has said that the banks will not participate in a state debt survey. Mind you, from 2000 or 2001 through 2011 the banks did participate in such a debt survey with the rural reconstruction authority in my home state of Queensland, and they acknowledge that by saying:

Banks have previously participated in the survey, however, a number of banks have raised questions about its effectiveness, particularly given the considerable investment banks need to make to contribute.

I find that to be, in all the circumstances on the public record, a difficult statement to accept. The banks are suggesting—mind you, I often cringe when this is said by someone else—that, with the massive profits they have generated, much of it on occasion from people in rural and primary production, they find the cost involved in collating their own data too high. It is their data, yet cooperating with, in this case, a state government agency to determine the debt levels is too difficult. I find that to be a remarkable statement and one that I would suggest does not accurately reflect the truth of why the banks are not participating.

It is my view that the banks would not want to exacerbate a belief that there is softness in the property market. I have said this before and I will say it again: I need to be particularly careful that I do not, or that anyone else making commentary in this space does not, exacerbate an already difficult situation. But it is a broadly held belief that many properties are in that uncertain space where the banks will progressively and in a very orderly fashion move on them. Many of those property operators are no longer viable. Their loan to valuation—LVR—ratios are in some cases up in the 70 per cent and 80 per cent range, which we all know is not sustainable for rural production, having regard to the return on investment that we have been seeing from these properties over the last 15 or 20 years. In fact, many of them have reported through ABARES surveys a decline in their gross incomes and most certainly a significant decline in their net profits. There was some work done in this space by the meat and livestock authority that showed that, in the 14 different regions surveyed by them, there were losses of about

2.9 per cent of gross turnover recorded. They made this statement at the end of their report:

The majority of northern beef producers are not generating profits sufficient to fund current and future liabilities.

That is a massive statement and well worth repeating. The majority of northern beef producers—and I described who they were: above the line of the Queensland-New South Wales border across to the northern part of Western Australia—are not generating profits sufficient to fund current and future liabilities. That is a very disturbing statement. In the same period that I reported the increase in borrowings we have an increase in non-viable business operations from one per cent to 6.5 per cent at the same time as there was a 75 per cent increase in the debt.

It is essential that the banks of Australia participate in this case in a debt survey in my home state of Queensland. Without diminishing the circumstances of many primary producers in other states, I would have to say that, given that 66 per cent of the nation’s herd is in Queensland, the number of producers who are affected by this subprime crisis in agriculture is probably greater. Given the circumstances in Northern Queensland, with the run of drought, fires and the live cattle job, there are many producers who fit in this situation.

Only a pigeon knows how to get to where they are going when they don’t know where they are. That certainly would not apply to the agricultural sector or the banks in my home state. I say to the banks: I have been moderating what I have had to say to date. I have been persistent over these last three or four months, but my patience, like the capacity of primary producers, is running thin. They are called upon to immediately respond.