There is concern the already subdued rural property market could be sent spiralling from an influx of forced sales after South Canterbury Finance was placed in receivership yesterday.
It has been estimated up to $400 million of the $700 million of bad loans on the financier's books could be rural, and farming leaders were yesterday urging for a calm and rational management to dealing with those lenders in default or unable to meet their loan terms.
"If they find their way on to the market, there is not a lot of credit about and no loan books will want to see their asset value drop dramatically," Federated Farmers president Don Nicolson said.
South Canterbury Finance was a mezzanine or second-tier lender, so most of its loans were second mortgages, which ranked behind bank mortgages.
Farming leaders are wondering how the receivers will deal with those borrowers struggling to meet their loan conditions.
The fear is that an influx of forced farm sales on an already subdued real estate market could depress land prices further, eroding the equity of other land owners.
So few have been the number and regularity of farm sales, industry sources say they have struggled to determine land prices, as tight credit has limited the number of buyers.
In the three months to the end of July, 262 farms changed hands, an improvement on the 229 that sold over the same period a year earlier, but just 45% of the 601 that sold for that period in 2008.
Just eight dairy farms sold in July, prompting the Real Estate Institute of New Zealand to describe the market as "subdued".
PGG Wrightson real estate manager Stuart Cooper said some farmers who sold in the peak of market were still waiting to buy and there were cashed up corporate investors and syndicates also looking, but they were taking their time on due diligence before making an offer.
He said the lack of sales had created a "Mexican standoff" over just what the value of land was.
Craigs Investment Partner's broker Peter McIntyre estimated that of the $700 million in bad loans, $350 million to $400 million were to farmers and would be written down or impaired.
"It will have an impact," he said.
Mr McIntyre believed trading banks would have been approached by the Government to take over some of those loans, but that left a question over those that were in trouble.
North Otago Federated Farmers president Ross Ewing also called for the rural loans to be carefully managed, saying dairy farms had strong cash flows and if they were meeting their obligations, they should be left to operate.
"It's not as if $1.7 billion has gone down the drain," he said.
It seems the farms most exposed from the SCF receivership were those SCF founder and president for life Allan Hubbard loaned directly, and there have been plenty of those, but the relationship and structure of those loans to SCF was unclear.
SCF's 33% stake in Dairy Holdings, which operates 58 dairy units on 14,200ha and is one of Fonterra's largest milk suppliers with 15 million kg of milksolids, appears safe.
The Otago Daily Times understands its debt to SCF was just $2.5 million as at May 2009.
Given tight credit conditions, farming leaders have also questioned who will replace SCF as a second-tier lender to farming and small business.
