Farmers look at reducing debt
The lowest interest rates in memory are tempting farmers to look at fixed rates in their drive to reduce $48 billion of debt in the farming community.
Floating rates are hovering around 5 per cent and farmers are weighing up if the floating rate has more room to drop or if they should call up the bank to put some of their farm loans on a fixed rate.
Farmers are looking closely at their cashflows as commodity prices appear unlikely to reach last season's heights and costs stay the same.
Federated Farmers president Bruce Wills said there would be farmers thinking seriously about rejigging their interest payments.
He said they were some of the lowest rates he had seen.
"I can't remember them being this low for borrowing. The feedback I get is some people say interest rates will be lower and they are comfortable with sitting on the floating rate and others say they are at a historical low. In my view it comes down to the risk profile that the individual borrowers are comfortable with and it would be prudent if you are a borrower with a high level of debt and concerned about what it will do to lock in some of these very favourable rates while they are here."
The decision either way will hinge on their risk appetite and debt level.
Wills said many farmers would remember when interest rates were in the mid-20s with overdraft rates at more than 30 per cent and this might influence their decision.
Even five years ago farmers would have struggled to believe rates would have fallen this low.
"What does worry me a lot is we have $48b of debt in rural New Zealand at historical low interest rates which is good for borrowers and bad for lenders. At some stage interest rates will go up and we don't know when but 2-3 per cent or perhaps more and at this rate on $48b we are looking at a massive increase for farming New Zealand. Is that going to be sustainable?"
Surveys show farmers were reducing debt after being given a sharp reminder in 2008 with sheep and beef farmers making good progress from high returns last season. These returns have since tapered off.
Wills said much of the rural debt was with dairying and often this was good or productive debt from ongoing dairy conversions to change to more profitable land use. Dairying returns, however, have also fallen.
The bad debt was when sheep and beef farmers could not keep up with running costs several years ago and had to increase their borrowings.
Rural debt has increased since the financial crisis and New Zealand farmers are likely to have two to three times the debt of Australian farmers who farm more conservatively because of droughts and flooding.
Farmers are unlikely to have much of an appetite for interest rate swaps, complex derivative instruments which can provide them with gains if rates rise and losses if they fall as happened during the global financial crisis. Some farmers lost hundreds of thousands of dollars.
Wills said farmers feeling cheated about losing money were blaming banks and had contacted the federation to respond.
Borrowers had to look closely at terms and be comfortable with any risks they might take and the returns they might make.
- © Fairfax NZ News
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