Adjust land financing and free up billions

Protesting agricultural entrepreneurs have shaken the public and politicians awake hard in October about the nitrogen problem. A much more fundamental problem, however, remains completely underexposed: the current financing structure of the land-based agricultural sector is not sound. It really needs to get underway.

The government letter 'Nature-inclusive agriculture' was published in July 2017. No policy was deliberately formulated in this letter, but a broader future was outlined for nature-inclusive agriculture. During a workshop of the National Green Fund in the same year, it became clear that agricultural entrepreneurs want to make the transition to nature-inclusive agriculture. This is often not possible due to the limited financial possibilities and resources.

The National Green Fund and the Netherlands Environmental Assessment Agency decided, together with a number of other stakeholders, to conduct a study into the financing needs of nature-inclusive agriculture. Even though the second phase of this research has not yet been completed, I am already prepared to take an advance on the results.

Soil does not wear out
Many agricultural entrepreneurs have tough existing financing obligations, which means that there is little liquidity left to really make them more sustainable and expand. Although interest rates have fallen in recent years, the repayment obligations have certainly not. In fact, Basel III has forced the banks to shorten loan maturities and to ban interest-only land financing.

Soil does not 'wear out', states the Dutch Civil Code. Accounting depreciation is not allowed, so repayments on the land financing must be coughed up from the free cash flow. Almost every land-based agricultural company struggles with this. Add to this the fact that in our densely populated country land prices are sky-high and it should be clear that renewal, extensification and sustainability are hardly feasible.

Quick refloating problem
Cooperation between the agricultural sector, the government, politicians and pension funds must be able to quickly resolve this problem, but how? The Financial Assessment Framework (FTK), part of the Pension Act, lays down the statutory financial requirements that are imposed on pension funds. Only investments in Dutch or German government bonds are considered risk averse. Today, pension funds are achieving negative returns on these government bonds.

Pension funds and land-based agricultural entrepreneurs are greatly helped if the legal financial requirements in the pension law are amended, so that financing on agricultural land is also regarded as risk-averse. Land-bound agricultural entrepreneurs can then place negotiable 30-year mortgage-backed zero-coupon bonds (covered zero bonds) with the pension funds, whereby the bankers can of course act as intermediaries.

snatch farmland
Whether the 30-year covered zero bonds are placed above par, below par or at par depends on the situation on the money and capital markets and the amount of cover. For example, one covered zero bond with a face value of €50.000 can be covered by one hectare of land with a value of €75.000. Only after 30 years does the issuer of the bond become obligated to repay or refinance the entire amount (may be more or less than €50.000).

A lot can be said about the value development of agricultural land. The fact is that every year agricultural land is 'snapped' for other destinations, which means that the price of agricultural land is guaranteed to rise in the long term. Of course with temporary price corrections.

mismatch disappears
During the term of the covered zero bond, the agricultural entrepreneur has no financing burden whatsoever, as a result of which the mismatch between depreciation and redemption disappears. The free cash flow can thus be fully used to invest in sustainable innovations. At the same time, the pension fund has found a safe haven for part of the pension money and has a better return than on Dutch government bonds.

If Dutch politicians and government dare to take the lead in making such land financing possible, many billions will be mobilized each year that can be used for sustainability and extensification. Without the taxpayer being the victim. At the same time, a major contribution is made to the desired nitrogen reduction!

(This is part I. This article previously appeared in the Financieele Dagblad on November 11, 2019. Part II will be published soon).

Dick Kruythoff

Dik Kruijthoff is a managing partner at Novifarm in Numansdorp, an integral partnership of arable farms

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