Regulation strangling agribusiness
OPINION: It's not regulation that's the major issue for New Zealand's farmers.
Crowe Horwath spokesman Hayden Dillon cautions that with markets still volatile, it is risky to make hedging decisions based on economists’ advice.
“Even with another cut appearing imminent, the market appears to have little appetite for more,” he says. “Inevitably talk will begin about when rates may start to go up.
“Many rural borrowers are now looking at an interest rate curve that is still relatively flat, and are thinking now could be the time to take some cover. But there are variables you need to be aware of.”
In this new era of banking, banks are being set higher hurdles by regulators to maintain their stability. Some banks have added extra clauses to lending agreements. Dillon advises rural borrowers to ask the right questions and fully understand all the relevant clauses before accepting bankers’ fixed rate offers.
“Understand exactly what you are agreeing to before signing for any fixed rate deal. Since the global financial crisis lenders have adjusted clauses in fixed term rates to provide themselves with more flexibility to exit the loan if they are not comfortable with the credit conditions.
“In the event your credit position deteriorates, some contracts will allow the bank to exit the fixed loan, and any costs are borne by the client. So you must fully understand exactly what your agreement with your lender means.”
The global financial crisis also brought in new central bank regulations from the government for banks to comply with.
While these changes have created legitimate additional costs, they should not be used as an opportunity for banks to obtain a few extra points at the borrower’s expense.
“You need to ensure there is transparency in your pricing. Whatever your credit position, you want to ensure you are getting the best possible outcome for your business.”
There are various ways to do this and Dillon says the best way will depend on the business’ credit position and the type of lending facilities being used.
“Each bank has its own yield curve; this means that even though you may have the same credit margin as your neighbour, each bank has a different cost of funds for the lending so your ‘all up rate’ will be different.”
Given risks such as Brexit, farmers should work on their own hedging strategy, taking into account those risks and their ability to manage them.
“Once you ask yourself ‘what if’ questions to assist in establishing a hedging framework, you will find it easier to act proactively, rather than being reactive to market commentary,” says Dillon.
