Monday, 14 November 2016 08:24

Hedging decisions risky

Written by 
Crowe Horwath spokesman Hayden Dillon. Crowe Horwath spokesman Hayden Dillon.

With an 80% likelihood the Reserve Bank will lower the official cash rate by 25 basis points next month, many rural borrowers are wondering if now is the time to look at fixing rates.

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.

More like this

Farmer resilience will be tested

OPINION: Perhaps Captain Bligh’s infamous line, “the beatings will continue until morale improves”, best summed up the mood of New Zealand’s weary agribusiness sector at Fieldays last year.

Vigilance around fixed rate mortgages

Market commentators are indicating with 80% certainty the Reserve Bank of New Zealand will lower the official cash rate by 25 basis points next month and then it will begin to stabilise.

Helping farmers save time and take control

With volatility in the dairy payout, there has never been a more important time to have a clear picture of your farming business’ performance, says Dairy Women’s Network.

Featured

Sheep drench resistance costly

Analysis by Dunedin-based Techion New Zealand shows the cost of undetected drench resistance in sheep has exploded to an estimated $98 million a year.

Dairy sheep and goat turmoil

Dairy sheep and goat farmers are being told to reduce milk supply as processors face a slump in global demand for their products.

Hurry up and slow down!

OPINION: We have good friends from way back who had lived in one of our major cities for many years.

National

Knowing bugs means fewer drugs

A mastitis management company claims to deliver the fastest and most accurate mastitis testing available at scale for New Zealand…

Machinery & Products

100 years of Farmall Tractors

Returning after an enforced break, the Wheat and Wheels Rally will take place on the Lauriston -Barhill Road, North-East of…

JD unveils its latest beast

John Deere has unveiled its most powerful tractor ever, with the launch of the all new 9RX Series Tractor line-up…

Biggest Quadtrac coming to NZ!

In the biggest announcement that Case IH Australia/New Zealand has made around its tractor range, its biggest tractor is about…

A different shade of blue for Norwood

Norwood and ARGO Tractors, the Italian manufacturer of Landini and McCormick tractors, have announced an agreement that gives Norwood exclusive…

Kubota tests diesel engines

Kubota last month used the UK LAMMA Show to test the water with its new 200hp, four-cylinder 09-series diesel engines.

» Latest Print Issues Online

The Hound

Why?

OPINION: A mate of yours truly wants to know why the beef schedule differential is now more than 45-50 cents…

Fat to cut

OPINION: Your canine crusader understands that MPI were recently in front of the Parliamentary Primary Sector Select Committee for an…

» Connect with Rural News

» eNewsletter

Subscribe to our weekly newsletter