The distressed clients

When news of “killer cucumbers” hit the headlines in Europe an awful lot of growers faced financial ruin. Their banks bent over backwards, however, to keep them in business, a model that is being rolled out here for the $4.5bn Kiwifruit industry, which has been struck down by the bacterial canker PSA.

Many growers have seen the value of their farms plummet to land value only. Thanks to die-back and loss of cropping a reduction in volumes of 30% is likely. For many growers, post-harvest operators such as packing houses and other stakeholders, that could mean financial disaster. Even Zespri will be affected financially.

The short term prognosis is bad for the industry both economically and psychologically. Kiwifruit Vine Health, a pan-industry organisation set up to manage the response to PSA says that growers have been turning to Lifeline, the Depression Helpline, churches and mental health services. A supportive bank can mean a lot.

According to accountancy company Grant Thornton New Zealand, land that was previously worth up to $450,000 per hectare in its improved state may hit rock bottom at $50,000 per hectare.

Such devastating occurrences as PSA strike without warning. Pestilences such as fruit fly infestations and foot and mouth disease or just plain freak weather patterns are a constant threat.

Debt servicing is the big issue with distressed rural banking clients such as the Kiwifruit growers. The industry has already produced a PSA-resistant cultivar but it won’t be ready for commercial release for at least another year or two, which is when their cashflow crisis is likely to be at its worst.

According to KVH, growers will need $40,000 to $60,000 cash per hectare to graft new PSA-resistant vines and return to profitability. KVH has developed a standardised model for growers to outline their financial situation to banks, which includes key variables.

Tim Downes, partner at Grant Thornton says that banks and other debt funders will need to look at repayment holidays, capitalising of interest, or converting loans into equity stakes. Agribusiness is a huge growth story for the banking industry. Too many distressed clients can lead to distressed banks as well, so it’s good business to endeavour to pull clients through a difficult period.

“Calling in loans is not an attractive option as current selling prices could mean that, in the short term, recovery could be as low as 15 cents in the dollar.”

The banks would prefer to work with clients providing they can trust them to be open and honest about their situation, says Downes. Ironically, the higher the debt the better the client, providing the client has the cash flow to service that debt.

There are other things the banks can do to assist their clients. After the Manawatu floods of 2004 agri bankers were encouraged to muck in at their clients properties rescuing ewes, rebuilding fences or whatever they could do help.

The industry and bank response to PSA could well provide a blueprint for future crises in the agricultural sector, which are inevitable.

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