{"id":9881,"date":"2014-02-27T00:00:00","date_gmt":"2014-02-26T11:00:00","guid":{"rendered":"https:\/\/www.farmersweekly.co.nz\/preparation-the-best-policy\/"},"modified":"2014-02-27T00:00:00","modified_gmt":"2014-02-26T11:00:00","slug":"preparation-the-best-policy","status":"publish","type":"post","link":"https:\/\/www.farmersweekly.co.nz\/news\/preparation-the-best-policy\/","title":{"rendered":"Preparation the best policy"},"content":{"rendered":"Reading Time: <\/span> 3<\/span> minutes<\/span><\/span>

Economists generally are predicting the official cash rate (OCR) will rise by about 1% this year, most likely in four rises of 25 basis points each starting from this month. The consensus in mid-February was increases to about 4.25% by the end of 2015, amounting to a rise of up to 2% over the next two years.<\/p>\n

The country\u2019s total agricultural debt is almost $52 billion and projected interest costs would take a $500 million a year bite from farm incomes nationwide. Alexander cautioned that rates might remain high for longer than is generally expected.<\/p>\n

While Christchurch was \u201call gangbusters\u201d he said the feeling was that building houses there was going to take a lot longer than was being allowed for in models.<\/p>\n

\u201cI guess that means interest rates stay up at a high level for much longer than people are thinking.\u201d<\/p>\n

This would strengthen the exchange rate and have an adverse impact on exporters, too.<\/p>\n

Alexander said farmers should allow for a 3% increase in their floating borrowing costs over the next two years.<\/p>\n

\u201cAnd I would advise caution regarding forecasts that interest rates may start coming down again over 2016-17.\u201d<\/p>\n

Farmers should fix a solid portion of their debt not just for three years but, if they can, for five years.<\/p>\n

Federated Farmers said interest rate increases will have the biggest impact on the minority of farmers who are heavily indebted.<\/p>\n

President Bruce Wills called on the Reserve Bank to delay increasing the OCR, after analysing results from the federation\u2019s mid-season farm confidence survey in January.<\/p>\n

But he did expect the OCR would reach 4% next year.<\/p>\n

The federation was also concerned about the impact of OCR increases on farm incomes through the exchange rate. Generally a higher OCR relative to other countries\u2019 equivalent policy rates will prop up the New Zealand dollar.<\/p>\n

Farmers are in better shape to handle higher interest rates as commodity prices are strong, especially dairying which holds most of the farm debt. Reserve Bank statistics show the percentage of rural loans reported as \u201cnon-performing\u201d was less than 2% at September last year after peaking at 4.5% in March 2011. The percentage of rural loans on \u201cwatch-lists\u201d was down from 14% to 4% and the growth in agricultural debt slowed in the second half of 2013.<\/p>\n

The federation\u2019s farm confidence survey showed, as it has since 2010, more farmers intending to reduce debt than increase it.<\/p>\n

Overall agricultural debt has increased over that period but Wills said the likely reason is a smaller number of farmers are increasing debt at a greater rate than the majority who are reducing it or holding it steady.<\/p>\n

Farm accountants are urging clients not to forget the tax implications when interest rates rise and recommend the preparation of sound cashflow projections.<\/p>\n

Cambridge-based Acccounted4 has many dairy farmer clients and said its discussions with them had largely been around cashflow and the need to hold as much income as possible from the current season to cover tax over the next two seasons.<\/p>\n

Craig Savage, senior accounting manager, said his firm is recommending farmers factor higher interest rates into their cashflow projections.<\/p>\n

\u201cSensitivity analysis should be done with potential rises of 3% in mind,\u201d he said.<\/p>\n

\u201cKnowing the farming operation can sustain rates at these levels will help to give peace of mind.\u201d<\/p>\n

Higher interest rates obviously would hit highly geared farmers more, so they should be cautious about increasing debt in any form.<\/p>\n

\u201cWe tend to recommend farmers structure their debt to have varying amounts fixed for different terms \u2013 some floating, some one to two years fixed and some three to six years,\u201d he said.<\/p>\n

\u201cThis allows them to make additional payments if cash allows (on the floating rates) while still knowing what cash outflows will be on the bulk of the debt. It also allows flexibility to take advantage of lower rates in the short term while they are rising and not be caught with everything on higher rates as they are falling.\u201d<\/p>\n

These advantages are tempered for now by banks having already priced the expected interest rate rises into their rates. Savage said he could understand why Reserve Bank governor Graeme Wheeler was focused on the residential housing market in light of his past experiences, particularly in the United States.<\/p>\n

\u201cHe has seen the impact of reckless lending and house price bubbles, and is trying to avoid that here,\u201d he said. \u201cBut Auckland and Christchurch \u2013 not NZ \u2013 have a housing price problem.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Economic activity driven by the Christchurch rebuild has coloured BNZ chief economist Tony Alexander\u2019s expectations of where interest rates are headed and what dairy farmers should do to brace for that.\n","protected":false},"author":33,"featured_media":9882,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_FSMCFIC_featured_image_caption":"","_FSMCFIC_featured_image_nocaption":"","_FSMCFIC_featured_image_hide":"","footnotes":""},"categories":[3],"tags":[],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t