There is little doubt interest rates are going up.
When, and by how much, is the $64 question. I certainly don't know and there are a lot of external factors at play.
Fixed rates have already risen - normally a precursor to variable rates heading in the same direction.
The markets have already factored in medium to long-term rate rises.
Adding to the intrigue is the differing views of the Reserve Bank Australia and the bond market on when rates will rise, with the bond market tipping it well before the RBA.
It will be interesting to see how this plays out in the next 12 to 18 months.
Agribusinesses are used to dealing with uncertainty. There are things an agribusiness can control, and a whole suite of things it can't. But some things can be mitigated, including interest rates.
Discussions with your bank about possibly fixing a portion of your debt may be useful. There are many products on offer that allow debt to be fixed in certain ways.
Before this happens, a review of the risk rating should be undertaken. If your risk rating improves, it sets the baseline for everything else, including fixed rates.
All agri customers in all banks are allocated a certain risk category.
The stronger the position of the business, the lower the risk rating, and this translates into a lower interest rate being charged.
You can always just ask the bank to review the risk rating, and see what happens.
I think a better approach is to help the bank help you by providing all the information the bank needs to make an informed decision.
All the agri managers are under the pump, and mostly have diminished resources and extra internal compliance requirements to meet.
There are many components that make up the risk rating matrix. The two big ones are equity and ability to service debt. It may pay to obtain an updated valuation.
This can be done independently and assigned to the bank, or the bank may have an internal mechanism to update the valuation.
The businesses historical profitability and account conduct - meeting loan obligations - are important.
Timely availability of accurate financial information is another important aspect.
Having this information at your fingertips feeds into another area the bank looks at - character.
Banks have internal checklists that include things like: Is the business professionally run and is it constantly improving?
Not just agronomically, but how well is the business run overall? Are there external revenue sources? Is there a succession plan? Are there policies and procedures? Does the business engage external advice?
These last three components could be described as internal governance.
After going through the risk rating exercise, the facility mix may not change but at least this decision will be an informed one.
We all know there are lots of things that are out of our control in farming, financial management is one area where we have control, if we are willing to put in the effort.
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