After being disappointed by New Zealand’s trade agreement with South Korea nearly a decade ago, the dairy and deer velvet industries are hoping for better treatment second time around.

Prime Minister Christopher Luxon and his South Korean opposite number Yoon Suk Yeol recently announced the two countries would explore upgrading the 2015 agreement although did not set out a timeframe for doing so.

“I look forward to continued growth in our trade relationship and was pleased to announce that we will explore the possibility of an upgrade to our bilateral free trade agreement,” Luxon said.

Five years of often testy negotiations concluded with an agreement in November 2014, entering into force a year later after being ratified by Korean lawmakers in December 2015.

Kiwifruit had been the major winner with tariffs of 40% eliminated in six years, compared to the nine years major rival Chile had achieved in its 2003 deal with the Koreans.

Beef exporters were also reasonably content, achieving the same 15-year phasing-out of tariffs as Korea’s deals with competitors in the European Union, Canada, Australia and the United States.

The same could not be said for the dairy industry.

While hefty tariffs on butter, cheese and infant formula were to be phased out over a respectable 15 years, the Koreans were harder to budge on NZ’s key milk powder exports.

The Koreans conceded an initial tariff-free quota of a mere 1500 tonnes per year, equivalent then to three days’ production at Fonterra’s Edendale factory. This was to rise by a paltry 3% each year to a maximum of 1957t after 10 years.  For all other milk powder exports the existing tariff of 176% was to remain.

But in 2015 hopes were high South Korea’s imminent application to join the TransPacific Partnership (TPP) would allow NZ to use its leverage as a foundation member of the 11-country trade agreement to gain more than the Koreans had been willing to give up in bilateral negotiations.

Fonterra’s director of global stakeholders affairs Simon Tucker said the withdrawal of the United States from the TPP by Donald Trump on his first day as United States president in 2017 dashed those hopes.

“When the US pulled out there was a bunch of those that had been around the table and those who were candidate countries who reassessed [joining].”

Tucker said the dairy industry welcomed the agreement being re-examined.

He said NZ exporters had been disadvantaged by not having the same market access as European and US rivals had achieved through their countries’ own trade deals.

“The Europeans are the biggest dairy exporters and the US and NZ are second and third.

“We all have market access deals into Korea so it is a pretty competitive market and obviously we would like to have the best possible access and where it is not as good as what our US and European competitors [have] we would like at least equivalent so we could compete on a level playing field.”

Deer Industry NZ chief executive Rhys Griffiths said when negotiations concluded the deer velvet industry had been disappointed at the outcome for tariffs for its single largest market.

While tariffs had been reduced on dried velvet, the 20% tariff on unprocessed velvet was left untouched.

At the time unprocessed velvet made up 75% of NZ’s velvet exports to Korea.

However Griffiths said the gradual reduction in tariffs on dried velvet coincided with a sharp increase in demand from Korean contemporary health food companies for the product.

Velvet exports to Korea had since increased from $20 million to $40m, with much of that growth in exports of the dried variety.

“It came just as we were beginning to engage with these healthy food companies that preferred the velvet dried in NZ just because of our regulatory system.

“Of course we said we were disappointed that we did not get unfettered market access but in reality having that outcome put us in a very good position to add more value here.”

Griffiths said the agreement as it stood took 15 years for tariffs to be fully phased out for dried velvet.

“It would be really helpful if we got that rate of [tariff] decrease increased or got free access as soon as possible and for consumers over there too.”

In Focus Podcast | Meeting the market in the US and EU

Roving reporter Neal Wallace calls in from Brussels to share insights on the first week of his Meeting the Market tour. He’s been in the United States where some of our biggest customers are, including Mars and McDonald’s. Neal says they love NZ food but there are a couple of things we need to improve if we’re to remain as a supplier of first-choice.

An anti-dumping probe by the Chinese government could sideline European dairy producers and create new opportunities for New Zealand in the world’s biggest dairy import market.

China’s Commerce Ministry last month said it would investigate claims that the dumping of subsidised imports from the European Union on the Chinese domestic market was damaging its dairy industry.

The announcement came a day after the EU confirmed it would use tariffs to stem a surge in imports of Chinese-made electrical vehicles.

Rabobank dairy analyst Emma Higgins said the products under investigation, which include fresh liquid cream and grated and blue vein cheese, are not a large part of the EU’s dairy exports to China, in comparison to other dairy categories like whey.

If China responds against them with tariffs it could create opportunities for Chinese dairy manufacturing companies and others from outside the EU to fill the gap. 

Higgins said China’s dairy industry is known to want to increase its small cheese manufacturing capacity to boost returns from milk surpluses currently in the market.

“The trade tensions with EU potentially mean trade flows could easily benefit us here in NZ as well as potentially the domestic dairy players in China with offshore assets in this part of the world as they look to maximise any opportunities that present themselves.”

While the European products being investigated do not include the milk powders, butter and cheeses that dominated NZ’s trade with China, that could change as tensions rise. 

Higgins said that China has shown with its now-settled diplomatic and trade dispute with Australia that it is not afraid to ratchet things up.

China hit back at calls by then-Australian prime minister Scott Morrison’s call for an inquiry into the origins of coronavirus with tariffs on Australian barley in May 2020 before quickly moving to blacklist multiple beef plants, and later in the year used tariffs against its wine exports.

“Right now the disruption to global dairy markets is likely to be minimal based on the small volume of product and the types of products that are under investigation,” Higgins said.

“But these kinds of disputes can last several years and can extend out and either the [basket of] products being investigated expands out or the time period of uncertainty extends out.”

An executive at one large dairy exporter said his company is watching the situation closely “because it involves the world’s biggest dairy import market and the world’s largest dairy exporter”.

Another industry figure believes China could argue that the recent period of low returns for its producers has been made worse by European subsidies contributing to higher global production than could be justified by market prices. And targeting a small selection of products could be the easiest case to prove.

A study commissioned by the Dairy Companies Association of NZ backed this up when it found earlier this year that a 50% reduction in EU subsidies would lead to a 2.4% increase in factory-gate cheese prices for non-EU producers.

At the same time the timing of China’s dairy probe so soon after the EU’s tariffs on Chinese-made EVs suggested retaliation and further tit for tat escalation to include larger volume products couldn’t be discounted.

“China has basically said if you are going to look at our industrial policy then we are going to look at your agricultural subsidies,” one source said.

The EU is a significant competitor in most of NZ’s major dairy exports to China.

While last year it accounted for only 2% of China’s imports of whole milk powder compared to NZ’s 88%, the EU had a 22% share of skim milk imports while NZ accounted for 45%. For cheese the EU’s market share was 18% versus NZ’s 59%. For butter the EU accounted for 11% of Chinese imports and NZ’s share was 87%.

However, a dairy company executive who spoke to Farmers Weekly on condition of anonymity said NZ farmers shouldn’t rush to cheer on China in a trade war with the EU which escalates to include tariffs on major dairy commodities.

“If the European dairy industry cannot send cheese to China then it will send it somewhere else and probably with even more European Commission subsidies to help them sell it.

“There might be some short-term opportunities but that is the reality.”

In Focus Podcast | Meeting the market in the US and EU

Roving reporter Neal Wallace calls in from Brussels to update Bryan on the first week of his Meeting the Market tour. He’s been in the United States where some of our biggest customers are, including Mars and McDonald’s. Neal says they love NZ food but there are a couple of things we need to improve if we’re to remain as a supplier of first-choice.

Kiwibank says an increase in the size of its rural lending book over the past 12 months is not the start of a deep dive into the market.

According to Reserve Bank data the state-owned bank increased its rural lending 32% in the year to June, the largest percentage increase of the seven largest rural lenders.

However, the numbers remained small.

Kiwibank increased its rural loan book over the period by $8 million to $24m. Farming loans by the second-largest rural lender, Heartland Bank, were $716m, up $16m, or 2.3%, over the same period.

The rural loan book of the largest rural lender, ANZ, fell by $147m, or 1%, to $14.9 billion in the year to June.

Speculation has grown in recent months that Kiwibank could be directed by its shareholder to get more involved to address complaints of price gouging by the established rural lenders.

That speculation has only grown since Finance Minister Nicola Willis wrote to the chairs of Parliament’s Finance and Expenditure and Primary Production select committees in June asking them to begin an inquiry into competition in the rural lending market. 

And it grew stronger still last month after Willis revealed she was seeking advice on a recapitalisation of the bank to give it the funds needed to take on the Australia-owned banks.

But in a statement last week a Kiwibank spokesperson said the rural lending market looked crowded with all four Australia-owned banks and Netherlands-owned Rabobank active participants.

“The rural lending market is primarily dominated by major Australian banks and specialist providers, which control most of the lending in this sector.

“Given this, we currently have no plans to enter the rural lending market and are focusing on our strengths, including driving competition in retail and business banking.”

Overall the Reserve Bank data showed agricultural lending growth was roughly flat in the year to June, up 0.2%, or $115m, to $61.5bn.

In a note to its clients, rural debt advisory firm NZAB said loan growth was stronger in the second half of the year, up 1.4%, or by $860m, as high early season dairy payments tapered off and principal repayments with them.

It noted market leader ANZ continued to lose market share, along with Westpac, which decreased its share of the rural lending market by 4% in the 12 months to June. Of the four Australia-owned banks, only BNZ increased its share of the market.

Rabobank was the major beneficiary, accounting for 40% of all new rural lending during the period, outpacing its market share of 21%. 

With end-of-year shipping deadlines bearing down on them, beef exporters have all but given up hope of an exemption from new European deforestation rules.   

From December 30 the European Union Deforestation Regulation will require all beef exports to the European Union, from anywhere in the world, to prove they are not a product of land cleared of trees in the previous four years or risk heavy fines.

Trade Minister Todd McClay last month told Farmers Weekly the rules were an unjustified barrier to trade and risked undermining the limited gains for beef exporters from the EU-NZ free trade agreement just months after it entered into force.

“They have a one-size-fits-all which does not work for NZ and is unnecessary,” McClay said.

“We have provided them information about our laws and asked for an exemption.”

Because large-scale clearing of native forests is illegal in NZ, the government has argued that the country represents a low risk to global deforestation.

But exporters spoken to by Farmers Weekly are not confident those arguments have been heard by the EU.

They are working towards NZ being held to the January 1 implementation date along with everyone else.

And because shipping deadlines for exports to enter the EU on that date fall in the middle of October, time is running short to get the required documentation in order.

“It is going to be tight,” said ANZCO’s general manager of sales and marketing, Rick Walker.

Walker said a system for matching satellite images of farms and National Animal Identification and Trading (NAIT) records of individual animals grazing them had been pulled together by the industry in recent months.

“It is not just ‘We picked up a cattle beast off this farm and we processed it and that farm was not deforested’.

“In theory we are meant to be able to show that animal moved across three different farms over the whole of its life and all three of those farms since 2020 were not impacted by deforestation.

“That has been part of the challenge of how do we do this.

“Is NAIT good enough? We are relying on NAIT to enable us to implement the solutions and inevitably there will be some blips.”

And with deadline fast approaching, exporters are still operating with incomplete information from the EU about what is required from them and their in-market agents.

For example, it is still not clear how often the EU requires each country’s deforestation information be updated, Walker said.

“Do we need to do it once a year and say we did this in January and we are working on this being our baseline for the rest of the year, or do we need to do it quarterly?

“If you took it to the nth degree, do we need to do it every week because we don’t know what happened last week and we killed animals this week?

“That is the information we are still trying to shake out through [the Ministry of Foreign Affairs and Trade and the Ministry for Primary Industries] to really understand what the EU’s expectations are of us as an exporting nation.”

A spokesperson for the Meat Industry Association said there had been no update to guidelines issued by the European Commission in December 2023 despite assurances there would be by now.

Even so, it is not anticipating a delay and is working with exporters to meet the requirements of the regulation as they are currently set out by the end of the year.

Walker said it is frustrating that NZ exporters will carry the cost of complying with the regulations when the country is planting more trees on farmland than it is cutting down.

It is clear that NZ is not the intended target but it is caught by the regulation nonetheless.

“On that basis the EU should be providing a derogation from the regulation and review it every three years to determine whether NZ is actually contributing significantly to deforestation around the world.

“We tick that box and we carry on. That would be the perfect solution but it is not going to happen.”

Trade Minister Todd McClay says New Zealand’s longstanding friendship with the United States could be the government’s best card to play should Donald Trump be returned to the White House.

The Republican presidential candidate has promised to take the protectionist trade policies of his first term to a higher level should he be re-elected, with 10% to 20% tariffs on all imports.

China would be targeted with tariffs as high as 60% to raise revenue for the federal government and strengthen the US’s industrial base at the expense of its rival.

McClay told Farmers Weekly should Trump make it back in November, the government would strenuously argue that new tariffs were not in either NZ or the US’s interests.

“It would be very harmful and America would miss out on some great products that their consumers enjoy.”

The Center for American Progress Action Fund, a left-leaning think-tank, has calculated Trump’s tariffs would add US$3900 (about $6200) every year to the average US family’s living costs.

“That is why tariffs are very blunt and it does not necessarily bolster a domestic economy,” McClay said.

“In many cases it lessens choice and puts prices up for consumers.”

Fonterra’s trade strategy, sustainability and stakeholders affairs Americas manager James McVitty agreed.

“These levels of tariffs would be highly inflationary. 

“NZ agricultural exports are often ingredients for further processing, support food manufacturing jobs in the US and are required to produce essential products in health and wellness, pharmaceutical, infant formula, medical and organic applications for consumers.”

During his presidency Trump’s tariffs tended to target countries with which the US had trade deficits.

McClay said the trade balance between the two countries has swung marginally in NZ’s favour since then.

“At that time NZ did not have one and it has changed now as a result of some the new areas we trade in in space and so on, but it is still a fairly balanced relationship and that is important.”

Aside from the economic rationale, McClay said the government would invoke NZ’s close and longstanding relationship with the US to argue for an exemption from any new Trump tariffs.

“The use of tariffs indiscriminately on those that you get on with has a greater impact than using them against those you get on with less.

“So we would very strongly advise against that but ultimately it will be for the next administration to decide what their policy is.

“But NZ is a good friend and if they want to do that they should be exempting us.”

However, Stephen Jacobi, the executive director of the International Business Forum, representing exporting heavyweights including Fonterra, Silver Fern Farms, ANZCO and kiwifruit marketer Zespri, said that relationship counted for little when NZ was caught by Trump’s 2018 steel tariffs. Those tariffs stayed in place despite NZ’s lobbying for them to be lifted.

Should NZ’s arguments for an exemption to a new round of Trump tariffs fail, the government’s reaction should be swift, joining inevitable legal challenges at the World Trade Organisation, Jacobi said.

“You couldn’t really retaliate against them until you had a World Trade Organisation case saying they were wrong.

“And we can’t really send a warship.

“I suppose we could send the Aratere but it might run into Mexico instead!”

While Kamala Harris is not proposing the same damaging tariffs as her Republican opponent, she has a record on free trade agreements in keeping with most of her Democratic Party colleagues, Jacobi said.

She voted against both the TransPacific Partnership and the US-Mexico-Canada free trade agreements while in the US Senate.

More encouragingly, her running mate, Tim Walz, is on record as saying he could not understand why the US did not have a free trade agreement with NZ.

“So we might have a friend at court, you never know,” Jacobi said.

A long-awaited Parliamentary probe into rural lending hasn’t even started and at least one bank is dragging its feet about appearing for questioning.

Getting to the bottom of why farmers pay more in interest than homeowners is one of the top priorities for the Finance and Expenditure and Primary Production select committees, which hope to report findings from their banking inquiry back to Parliament before the end of the year.

The chair of the Finance and Expenditure Select Committee, National MP Stuart Smith, said he could compel bank executives to appear – but he doesn’t expect to have to use those powers.

“I did point that out to a banking representative when they suggested it will be quite difficult to align diaries and so on.

“I told them their social licence would be lost if they didn’t appear or it didn’t appear that they wanted to appear.

“But I am sure they will turn up and I am sure they will cooperate.”

The inquiry’s terms of reference, released in August, include questions about the extent to which rules set by the Reserve Bank are to blame for high rural borrowing costs.

The banks say the rules requiring them to hold additional capital against rural loans are a large contributor to the higher lending costs for farmers.

But Reserve Bank Governor Adrian Orr says the criticism is unfair and the banks are using the rules as a fig-leaf for charging higher interest margins on rural loans than is justified.

Smith said he is keeping an open mind about who is right but does expect Orr to appear before the committee members to explain himself further.

“Either the Reserve Bank is requiring the banks to hold too much capital unreasonably and they may or may not be.

“Or the banks themselves are deciding to hold more capital than they need or they have got a margin on their lending which is greater than it needs to be.

“We do not know the answer to that but that is what we seek to find out.”

Comparing interest margins here with comparable rural loans overseas is one way the committee can assess whether the banks are gouging their farmer clients, Smith said.

“The big five rural lenders all operated overseas and we will ask them what is happening overseas and I would expect them to tell us.”

Asked what confidence the public could have in committee members to properly scrutinise those answers, Smith said the committee will appoint specialist advisers to assist it. Officials from the government’s key economic departments will also be on hand.

“We will fact-check them. I would expect them to be fulsome with their answers and to be honest – I am not going to question that for a moment – but we will do what we can to validate those answers.

“We need to get the answers to those questions because if we do not have a competitive banking sector that is making enough money to be a viable, thriving business but not so much that they are strangling the sector or taking unreasonable profits then we will not have a successful economy.”

Federated Farmers is backing the finance minister’s shot across the bows of the Reserve Bank warning it to do more to encourage competition between banks or risk facing legislation requiring it to.

Nicola Willis was responding to a recent Commerce Commission market study when she likened competition between the major banks to a “cosy pillow fight”.

The study found the industry operates as a “two-tier oligopoly”, with no significant competitive threat to the biggest banks having emerged since state-owned Kiwibank was established more than two decades ago.

As a result, the returns for bank shareholders were in the upper quartile globally between 2010 and 2021, were even higher for the owners of the largest banks and were excessive given the high proportion of low-risk lending in New Zealand.

Willis said the government intends to act on all 14 of the Commerce Commission’s recommendations, including taking advice on how to provide new capital for Kiwibank to increase its market share.

She said she would also write to the Reserve Bank urging it to take competition into account in its decisions as overseer of the stability of the financial system.

Willis said she agreed with the Commerce Commission that rules for calculating the capital that smaller lenders must hold against their loan books is stifling competition.

She said she does not rule out legislating to force the Reserve Bank to do more to increase competition if it does not heed new guidance issued by her.

Willis said she accepted there is a trade-off between increasing competition by relaxing bank capital requirements, and financial stability, but said the pendulum has swung too far towards guarding against bank failures.

“What the OECD and others have said … is that our Reserve Bank is particularly conservative.

“And that is partly because of the guidelines government has given it and we have to look at those guidelines and understand how that might alter its decision-making.” 

Federated Farmers national board member Richard McIntyre said while the Commerce Commission market study focused on personal banking, many of the same factors are relevant to the rural lending market, which will be the focus of upcoming parliamentary inquiries.

“But we were even more encouraged by Nicola Willis’s comments.

“It shows she gets the issues and is going to do something about it.”

McIntyre said he was particularly encouraged by Willis’s comments about Reserve Bank requirements for bank capital stifling competition in the banking sector.

“I am delighted when businesses make a profit and the more the better provided it is through running an efficient business, but if it is due to a lack of competition or price gouging then I have an issue with it.”

McIntyre expects the upcoming inquiries by Parliament’s Finance and Expenditure and Primary Production select committees will test Federated Farmers’ claim that the amounts of capital the Reserve Bank requires the banks to hold to back their rural loans is excessive.

“It is equivalent to your own insurance right?

“You can insure absolutely everything you own at zero excess and for the full replacement value but no one does because it is uneconomic to do so.”

McIntyre said Reserve Bank officials have estimated the cost in higher rural interest rates from the most recent increases in capital requirements to be between $320 million and $720m a year.

“As a nation and a rural sector we could be doing far greater things with that money.”

However, banking academic Claire Matthews of Massey University said the minimum capital requirements for different classes of lending are set by global banking regulators and are “not just something the Reserve Bank has come up with by sticking their finger in the air”.

While it is true the Reserve Bank went further in its 2019 capital review, it only did so because in its expert judgment that extra capital was what it would take to avoid costly bank failures in NZ conditions.

For the government to second-guess that judgment risks undermining the independence of the central bank.

“I have a sense of unease that the government is looking to get themselves so involved in the banking sector because it is popular and that is not a good reason to be doing it fundamentally.”

Dairy trade tensions with Canada continue to mount, with the New Zealand industry demanding the government take legal action to head off a billion-dollar threat to high-value milk protein exports.

The Dairy Companies Association has written to Trade Minister Todd McClay pressing him to “urgently” take a case to the World Trade Organisation to stop subsidised Canadian dairy exports undercutting its members in the United States and other global markets.

DCANZ has longstanding concerns about Canada’s Milk Class 4 (a) system of subsidising milk production and its impact on international skimmed milk powder markets.

But the surpluses of subsidised milk protein created by the milk classification, previously converted into SMP by Canadian processors, are spilling over into markets for higher-value milk protein concentrates and isolates.

That threat has grown since the Canadian government last September earmarked $400 million to invest in the country’s dairy factories over the next 10 years.

“We are seeing increased investment to expand Canada’s production capacity and Canadian exporters targeting our members’ high-value customers.

“We anticipate this will continue so long as Canada’s policy goes unchecked, and result in increasing losses to unsubsidised NZ dairy exporters,” the letter said.

Unless action is taken, DCANZ said, there is an “immediate risk” to $500m in sales of milk protein concentrates and isolates to the US, while $400m of casein sales would also eventually come under threat. Total NZ dairy exports to the US in the year to May 2024 were $1 billion.

The average export price for milk protein concentrates was $13,000 a tonne in 2023, compared to $4800 for SMP.

“Our experience is that export subsidies significantly erode market opportunities and export returns, particularly where there is a trend of rising volumes,” DCANZ wrote.

“We therefore consider this issue as increasingly urgent.”

DCANZ said the issue also has the potential to derail one of the government’s key economic goals.

“The market values involved for NZ are such that any delay to action will result in an increasing drag on ambitions to double the value of total exports,” DCANZ said.

McClay told Farmers Weekly he had raised these concerns with his Canadian counterpart at the WTO trade ministers meeting in Abu Dhabi in March.

However, he wants to meet industry representatives before committing to a WTO lawsuit.

“We will be able to have a better idea of the impact it is having on them at that stage.

“It is clear, though, that what Canada is doing is having an impact on some markets, or could.”

Canada is known as a stout defender of its supply management system, of which Milk Class 4 (a) is the latest iteration.

NZ needs to be sure it has a sound case, McClay said.

“We have got to be sure in whatever we are doing we quantify and demonstrate harm but I am more than sympathetic to the concerns of the sector.”

Meanwhile, NZ is continuing to fight Canada over its refusal to abide by a legal ruling to open its domestic dairy markets to NZ exporters.

A panel of judges last September ruled against Canada, finding it had failed to meet its obligations under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) by allocating the bulk of import quota created for NZ exporters to local processors instead.

Exporters estimated their failure to get their hands on the low-tariff quota cost them $120m in lost earnings in the trade agreement’s first three years.

In response to the ruling Canada created a new allocation method, which came into effect on May 1.

McClay said he told his Canadian counterpart last month that NZ believed it had still failed to comply with the CPTPP’s rules.

“I made it clear to them that we are looking at what other action we can take and we would like formal consultation.”

Article 28.20.1 of CPTPP states where one country believes a ruling hasn’t been complied with it can request formal consultations with the non-compliant country.

Consultations would be to agree “mutually acceptable compensation” by the non-compliant country.

If there is still no agreement, retaliatory tariffs can be imposed.

McClay said: “The amount of trade we are missing out on might not seem significant in the scheme of things but it is still a matter of principle.

“Both sides entered into CPTPP knowing their obligations and Canada has an obligation to meet those just as we do to them.”

The government says it is too soon to say whether it will push Kiwibank to use funds from a possible partial privatisation to shake-up competition in the rural lending market.

Finance Minister Nicola Willis recently floated the idea of giving the green light to the state-owned bank to raise new capital from outside investors to boost its lending capacity.

Earlier Willis wrote to Parliament’s Primary Production Select Committee, asking it to investigate competition in the rural banking market as part of a wider inquiry into banking competition.

That’s led to speculation that the government is giving serious thought to directing a recapitalised Kiwibank to make a bigger splash in the rural lending market.

However, a spokesperson for Willis said she is still taking advice on how to go about recapitalising the bank and it is too early to say where any proceeds would be deployed.

“Growing the rural economy is critical to rebuilding New Zealand’s economy and with farmers’ satisfaction with banking services dropping in recent years, it’s critical we better understand the role of bank competition in that sector,” the spokesperson said.

“That’s why we have requested a select committee inquiry into banking competition, and why we are considering options to recapitalise Kiwibank so it can grow and compete with the big four Aussie banks.”

According to Reserve Bank data, ANZ, BNZ, ASB and Westpac, alongside Dutch-owned Rabobank, account for 95% of the $63 billion rural lending market. Kiwibank, with agricultural loans of just $23 million, is a minor player at best.

One fund manager has estimated an enterprise value of roughly $2bn should Kiwibank list on the NZX.

Banking academic Claire Matthews of Massey University said assuming the privatisation is achieved through issuance of new shares, as opposed to a part sale with the government pocketing the proceeds, up to a billion dollars of new capital could be available to the bank. 

This assumes the government retains a controlling 51% stake in the bank as it did with its partial privatisation of the electricity generators a decade ago.

Assuming Kiwibank pro-rated its new capital according to agriculture’s total share of private debt in NZ, Matthews estimated $200m of capital could be freed up –  enough to support a billion dollars of new lending to the rural sector.

Exactly how much capital would be allocated would depend on the bank’s shareholders and their appetite for riskier rural lending.

“If you have got the public buying it then they might not really care so long as they can see Kiwibank is making a difference to NZ, but a corporate investor may be more interested in their return or the growth in their asset value and how rural lending may contribute to that,” Matthews said.

Asked how big an impact a billion dollars of new credit would have in the $63bn rural lending market, Matthews said that depended on what segment of the market Kiwibank targeted.

“If you are talking about large agribusiness loans then you are talking about multi-millions per loan and that amount wouldn’t go very far at all.

“But if you are talking about smaller rural loans that might be where they could make a real difference.”

However, director of agricultural debt advisory firm NZAB Andrew Laming said in a note to clients that Reserve Bank rules mean there are no guarantees any new capital would find its way to the rural market.

Higher capital requirements for rural loans mean banks have tended to allocate their capital to more profitable residential mortgages, which require less capital.

To offset that, Laming said, the government should make any new capital-raising by Kiwibank conditional on at least $200m of that capital being used to back rural loans.

“Left to their own devices without this mandate, this capital addition could be instead converted to $2bn of new lending into housing – great for home lending competition and house values, but do we really need more competition in that sector?”

Laming estimated the rural banking market is operating with a $5bn-$10bn capital shortfall.

More players are needed to provide adequate competition.

“But this move with Kiwibank would be a good start and a strong signal from the government about its commitment to grow NZ farming and exports.”

Suggestions that the trading banks are covering up their rough treatment of rural borrowers have been strongly denied by the body representing the country’s largest lenders.

The New Zealand Banking Association labelled as “outrageous” claims its members misled the Reserve Bank in their most recent reporting of credit availability to the rural sector.

A full 100% of banks reported credit availability to the rural sector as “about normal” in response to questionnaires sent out by the banking regulator in March.

But Federated Farmers said those results don’t match those of its own banking survey, covering roughly the same period, showing the number of farmers reporting dissatisfaction with their banks at the highest level since the survey began, in May 2015.

The previous Reserve Bank credit conditions survey in September showed 60% of banks reporting “about normal” credit availability to rural borrowers and 40% reporting credit had become “somewhat tighter”.

Federated Farmers national board member Richard McIntyre said that was also contrary to results from its own survey two months later which showed a record 26% of respondents saying they had come under “undue pressure” from their banks in the previous six months.

“I think it is being reported in a way that paints a rosier picture.”

McIntyre agreed that the mismatch in survey results appeared to coincide with calls from Federated Farmers and others from the middle of last year for a parliamentary inquiry into competition in the rural banking market. 

Earlier results appeared to more closely match those in Federated Farmers own surveys. For example, throughout 2019 and 2020 the two surveys moved in lockstep as declining farmer satisfaction and increased reports of farmers coming under undue pressure from their lenders matched the banks’ own reporting of tighter credit to the rural sector.

Asked whether he thought the banks had airbrushed their more recent responses to distract from calls for an inquiry, McIntrye said he thought it “quite possible”.

“I don’t think these [survey results] paint a true picture, one that reflects what is going on.

“One of the things I would like to see come out of this inquiry is for the Reserve Bank asking for some more meaningful data from the banks to reflect what is actually going on.”

McIntyre said making banks report credit availability according to the riskiness of borrowers would be a good start.

“If you are a farmer that does not have very good cashflow at the moment and is on the margins from an equity point of view then credit is not available to you and that is where the change of bank sentiment has really moved over the past few years.

“But you can see how that doesn’t really fit into the reporting that the banks are sending into the Reserve Bank.”

NZ Banking Association chief executive Roger Beaumont dismissed any suggestion the banks had deliberately misreported lending conditions in an attempt to undermine calls for an inquiry.

“It is outrageous to suggest banks would mislead the Reserve Bank.

“Providing accurate data to the central bank for supervisory purposes is fundamental for banks to maintain their registration.

“There are a few assertions and opinions circulating about banking at the moment which may be influenced by the current state of the economy.

“Our banks welcome the opportunity, through the select committee inquiry, to provide clarity on the issues being raised.”

Parliament’s Primary Production and Finance and Expenditure select committees are still to set the terms of references for their inquiries.