Farm debt – relief before the squeeze

Farm debt – relief before the squeeze

With effect from July 1, 2020, the Farm Debt Mediation Act 2019 will be law.

In a nutshell, banks must offer mediation if a farmer is in default before the bank may take enforcement action arising from a debt secured over any farm property. For the process to be effective, constructive engagement is required between farmers and lenders to mitigate financial risks and ultimately protect the name and reputation of farmers and their enterprises. A farm debt incurred by a farmer is one which is incurred solely or principally for the purpose of developing, managing or owning a primary production business and covers operations within the agriculture, horticulture and agriculture industries. It is important to understand that the farmer, the spouse of a farmer, trustee who is “engaged” in the business concern may also initiate the mediation process.

Before defaulting on a loan instrument, it will be important to encourage farmers to seek mediation early as a measure of “good faith” reflecting a desire to reach a mutually beneficial outcome. We are told that the banks are supportive of this process. Farmers need to ensure that they are adequately prepared for this process which would include the preparation of a thorough cash flow analysis, detailed scenario planning in regards to forecasts, preferred restructuring options and possibly, within the organisation itself, the ability to unlock dormant value, ie assets on balance sheet, which when properly prepared, will give the banks some idea as to what may be achieved through the mediation process. If an agreement is reached, a mediator prepares a mediation agreement and even after this agreement has been signed, the farmer has a 10 day cooling off period where the farmer may cancel the agreement. If no agreement is reached, the farmer may apply for a prohibition certificate which suspends any enforcement action for 6 months. It is important however to understand the limited grounds for the farmer to be able to apply for a prohibition certificate which would include, the creditor declining to mediate or a creditor not acting in good faith during the mediation process. Overall, the timeframe allocated to the mediation process is 60 working days and can be processed at a nominal cost to the farmer (capped to a maximum of $2,000).

Primary industry debt (estimated to be in the region of over $60 billion) is managed by a small group within the country. The ripple effect of an economic downturn in this sector if this process is not managed correctly, will be widespread, particularly for those peripheral industries where this relief is not available. Crop sprayers, fencing companies, logistic enterprises, etc will however all benefit from a healthy farming sector where extreme financial downturns in the sector can be avoided. The Act certainly provides welcome relief to farmers in trying to anticipate financial stress as a result of high levels of debt to income ratios where national economic growth is not as buoyant as one would hope.

Farmers are encouraged to work closely with their financial advisers and lawyers to devise the appropriate strategy (supported by accurate and comprehensive financial analysis) to ensure that the mediation scheme is as beneficial as possible and to avoid any enforcement action.