Balancing the farm cashflow in the face of rising interest rates

Chris Guillemot
24 February 2023
4 min read

24 February 2023

While managing inflation and rising interest rates may seem like all anyone is talking about, it's for good reason. The Official Cash Rate (OCR) is forecast to rise and push rates even higher, coupled with the rising cost of major inputs such as fuel, fertilizer, and labour, farmers can continue to expect to face increasing expenses, and with their advisers should be looking at ways their business can cope

Review your debt/loan structure

Floating interest rates have risen significantly over the past 12 months and based on Bank Economist forecasts they aren’t likely to stop within the next quarter. So, structuring your debt repayment profile around future cashflow is essential to managing risk and cost.

Banks will provide fixed, floating and interest only loans which can all be utilised to manage your repayment risk. Financial Advisers like Findex can help you obtain the right mix of loan products to mirror your cashflow and general risk appetite.

When reviewing your loans, it is important to know where your core debt is placed. For example, if you have used your overdraft account to buy plant equipment and you are unlikely to repay that debt within 12 months, that debt should be placed on a longer term (e.g., 5 year) principal and interest loan. Using the right financial products for the right purpose will almost certainly improve your cashflow.

Unfortunately, banks are limited on what advice they can legally offer you, especially around future interest rates and what strategy to take, however they do provide weekly economic updates that are free to download from their websites.  While they cannot be treated as gospel, these forecasts do provide economic data to help you make interest rate decisions.

Revisit your budget

With rising interest rates it’s important to revisit your current 2023 and updated 2024 budget to consider the increasing cash cost of debt funding and identify any shortfalls. This will help you quantify savings you need to make, or additional finance required.

Off farm assets

Identify if there are any off-farm assets that can be offered as alternative security to improve the interest rates being offered, or in a worst-case scenario are there any non-income generating assets surplus to requirements that could be sold or downsized to cover any forecasted shortfalls, such as a holiday house, boat or motorhome.

Managing your costs

If the impact of additional interest rate costs is material, what areas of spending can be managed down to compensate?

Can any maintenance or Capex be deferred that won’t have a significant detrimental impact on the current farm cash flows?

As it’s not only interest rates that have been rising, have you checked supplier options, early payment discounts, bulk purchasing, or collective purchasing with other farmers as options to improve cash flow?

Drawings is always a sensitive topic but often there is some scope to economise for a period to help cover some of the cash shortfall as a result of increased interest costs. Every little bit helps.

Are there opportunities for increased income?

Often the generation of income is limited due to physical constraints of the land and the price taking position most farms are in, however its always worth reviewing any options to generate more revenue even in the short term. Are there non-farm assets which could also offer a better return, such as renting out the holiday house, reviewing rent charged on residential or commercial investment properties, reviewing any managed funds or term deposits etc. or are there other or new options in the market in a farming sense that can be looked at?

So, what do you do?

The worst thing you can do is nothing. While it’s always a bit of a balancing act, there are proactive things faming businesses can do to respond to the rising interest costs and the general inflationary environment.

If you need some help to review your options, or support in dealing with your lender, Findex can help, we have a dedicated rural lending specialist and a team of agribusiness advisers to help you through. Find out more and contact us today.

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February 2023.

Author: Chris Guillemot | Partner

Chris has a varied client base that includes farming, manufacturing, and construction and is a specialist in agri business and company structures. Prior to Crowe Horwath Chris was an investigator for the IRD and is an expert in benchmarking, forecasting and profitability analysis.