We look forward at the key themes in agricultural finance for 2024 and how farmers can position for the challenges and opportunities ahead.
The agricultural debt landscape changed in 2023. After a run of profitable years farm businesses faced headwinds from less favourable seasonal conditions, commodity prices and interest rates. The response from lenders was swift – making access to debt more difficult and increasing the cost of debt. Will this trend continue? –
1. Debt is just more expensive
Farmers are paying more for debt and should prepare for it to remain higher for longer. After 15 years of declining and low interest rates, the cost of debt has increased and interest rates of 2-3% are now just a fading memory. The inflation story has longer to run as cost pressures on many key inputs (e.g. labour, energy) remain. There are also other inflationary factors to consider like the heightened geopolitical risks, deglobalisation of western supply chains from China post the pandemic and the energy transition to renewables.
The November 2023 inflation figure of 4.3% was better than expected but still sits well above the RBA’s target range of 2-3%. How long it takes to return to target range is uncertain, reducing the likelihood of the RBA cutting the 4.35% cash rate in the near term.
2. The risk pendulum has swung
One farmer mentioned a bank was asking them about their growth strategy in early 2023 and 6 months later which assets they planned to sell to reduce debt. We expect this mentality to continue in 2024 and the lending breaks to remain well and truly on. Lenders are likely to be less inclined to take on risk, even when it comes to backing the growth of existing clients and may look to rebalance their portfolio by offloading exposures. New debt will be more expensive and have more onerous conditions attached.
3. Turnaround times to remain slow
Wanting to buy a property at auction and have your financier’s formal support? Start early. A common sentiment we hear from farmers is frustration their lender is too slow turning around loan requests. Often farmers want to move quickly to capitalise on opportunities but can’t get the funding approved in time. It is often taking 4-6 weeks to get bank approval, let alone the additional time required to settle the loan and cover off compliance. This shows no sign of easing in the year ahead.
4. Meeting the bank serviceability buffer is harder
Regulation requires the majority of lenders to assess a borrowers’ ability to service debt at an interest rate ~3.00% higher than current levels. When interest rates were at 2-4% meeting this threshold was relatively straight forward. Now that farmers are paying interest rates of 6-8% showing they can cover interest costs at +10% is problematic. Throw in principal repayments and the serviceability picture looks even worse. This makes obtaining bank approval for new loans and refinancing of existing loans when they reach maturity harder.
5. The compliance burden continues to grow
Compliance red tape shows no signs of easing and remains a burden to doing business. This trend gained momentum after the Global Financial Crisis in 2007 and has been supercharged since. It is often easier and quicker to get bank credit approval for a new loan than satisfying the compliance requirements that come with it. This burden shows no sign of easing and borrowers need to prepare for extensive questions and information requests if they want a loan.
6. Flat to inverted long-term yield curve
After a volatile 2023 long-term interest rates have reduced to now sit on par or below short-term interest rates. The 3-year interest rate swap is now 0.24% below the 1-month Bank Bill Swap Rate which most banks price off, and the 5-year 0.26% below. This presents an opportunity for borrowers to capitalise on the relative value of long-term rates and take interest rate protection by fixing interest rates.
Navigating 2024
Agriculture is a cyclical business and lending to the industry is no different. There will continue to be ebbs and flows in the appetite of lenders and we see the next 12 months being a slower period for lending, particularly for the banks.
While there are challenges ahead, we see also opportunity for lenders with a deep understanding of agriculture and a long-term focus. This allows them to navigate beyond the current dynamics and take a longer-term view on the fundamentals of borrowers.
Our tips for borrowers for navigating the year ahead:
- Be prepared and start early on new loans or refinancing existing debt
- Keep your lender up to date on your business strategy and performance to avoid surprises
- Have a clear idea on how you will manage the downside risks in your business
- Factor in higher interest rates in your budgeting
- Consider taking advantage of the downward movement in long-term rates to reduce interest costs and volatility.
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