As profits dwindle and debts mount, farmers are tightening their belts and spending less

Over the past few years farmers were able to use profits to expand their businesses, but with the cost of farming rising significantly, farmers now used debt to keep the farm running.

Farmers are borrowing money from banks not to expand their businesses, but to keep farms going, say economists.

Federated Farmers said in February, agricultural sector lending was $62.26 billion, up $49 million from January and also up $746m, 1.2%, from February last year.

Reserve Bank sector lending figures showed agriculture lending was rising after a steep drop 2019.

Senior agricultural economist at Westpac, Nathan Penny, said over the past few years farming had been lucrative and instead of making more debt, farmers and growers used profits to expand the businesses, pay off debt or accumulate money for deposits to buy more land.

That overall trend had changed, Penny said.

The last few years were unique because many farmers had overdraft facilities but did not use them, he said.

Farmers now used overdrafts to fund working capital because they were not as profitable and the cost to farm increased, Penny said.

“On the back of lower margins and lower profits it's expected that farmers will need to use overdrafts,” he said.

Penny said he expected to see an increase in the milk price, and with current good beef and lamb prices, farmers might again take out longer term debt to grow their business next year.