It's not stock or crops that are the hard decisions for farmers - it's how to structure their finances. Photo/File
The biggest management decision most farmers have to face doesn't involve their pastures, crops or stock - it's how they want to structure their bank lending.
While good farming practices are a large influence on profitability, at some stage farmers have to make a crucial decision based solely on instinct - their personal appetite for risk.
It's been a tough few years for those farmers saddled with onerous debt, particularly in the dairy sector, but even those with moderate debt levels will be wondering how to approach the next year or two.
Profitability - and confidence - is returning to most rural sectors, interest rates are at historically low levels, but uncertainties abound in a world grappling with terrorism, strident nationalism and disrupted global trade.
Does the prudent farmer fix debt on a long-term basis, thereby locking in the interest rate despite what might happen internationally? Or, is wisdom dictating that farmers should grab the short-term rates because they are too good to ignore? Is there any hurry to make the decision?
Hayley Moynihan, senior analyst at Rabobank International, agrees that it all depends on the borrower's own business plan and appetite for risk.
"Longer-term rates have come off their lows over the past 6-12 months -- those farmers looking to pick the bottom [of the cycle] have probably missed it.
"Farmers are generally very efficient and adapt quickly when market events turn. Many are well-run family businesses. Given the severity of the [latest] downturn, there hasn't been widespread [rural] business failure. We make sure all of our borrowers can accommodate higher [than now] interest rates and build this into the provisions.
"We treat them all as long-term borrowers - they can select their rates online."
She says some farmers are already working to survive the next severe downturn.
"Global agriculture markets will be volatile on an ongoing basis. They need to make sure their business can withstand the next shock, especially if there is more than one shock at the same time.
"We are looking to the new European season now. Interest rates are the market's perception of risk factors. These might include the global economy, or political disruption. We have general elections in France and Holland this year, and in New Zealand. I don't think it will be quiet."
Con Williams, agri-economist at ANZ, also has an eye offshore, convinced the US interest rates, which have surged since Donald Trump's victory, will be a big factor in our long-term rates market.
"We think the bulk of the 'shock' rise is behind us, but even so, we expect global rates to be on a gradually upward trajectory as markets focus on the exhaustion of super-easy monetary policy and the transition to pro-growth fiscal policy. Put simply, that's central banks buying fewer bonds and governments issuing more.
"This combination of a basing in short-end rates and scope for higher long-end rates leaves us comfortable maintaining our preference for terming out interest rate hedges. It has become more expensive to, say, move from two years to five years, but even so we see merit in doing this.
"Although, for example, five-year rates are about 0.8 percentage points above their third-quarter lows, they are well below where they were at the beginning of the year, and lower than they have been at any point prior to 2016. Similarly, the gap between two years and five years is positive, but low by historic standards. We therefore continue to favour terming out hedges, and spreading out fixes across 2-5 year terms in a bid to balance out cost and certainty."
The ANZ expects short-end interest rates to hold steady over coming quarters as the Reserve Bank leaves the official cash rate (OCR) on hold. "Further OCR cuts are unlikely given the strength of the domestic economy, reduced deflation risks and improved prospects for inflation to return towards the Reserve Bank's 2per cent target. But OCR hikes are equally unlikely in the foreseeable future, with growth on track to moderate somewhat over 2017 and financial conditions already on a tightening trajectory courtesy of already-observed rises in long-term interest rates."
He says longer-term interest rates have responded to a different policy mix (less central bank buying of bonds and more government issuance) and risen. Indicative rural rates have moved a touch lower at the short end, but this has been offset by larger moves at the long end.
"Prospects for a steeper interest rate curve - courtesy of lifts in long-term interest rates relative to short-term ones - make it attractive to look at longer-term fixing of interest rates now. While some of this movement has already taken place -- rates are already up so the horse might have bolted, so to speak - we expect further upwards pressure on longer-term interest rates over the coming two years."
While New Zealand farmers coped well with the recent downturn, Nick Tuffley, chief economist at ASB, suggests those farmers reliant on a bigger overdraft to fund working expenses should pay down debt levels now.
"By and large the [farming] industry has been very resilient. They have found ways to reduce costs and continue farming. They had falling interest rates last year and some took interest-free loans from Fonterra or received added financing through their bank.
"We think the OCR will be steady until late 2018, although the Reserve Bank says longer, and will then start to go up. Very short-term -- up to six months -- should be relatively stable until the OCR is on the cusp of rising.
"The 12 to 24-month rates are relatively stable, but are increasing, so fixed rates for longer-term two to three years and onwards will go up."
He says the five-year swap rate, which underpins the wholesale banking market, is about 3 per cent at the moment, but will start to rise next year. Long-term rates will continue to lift.
A "fair number" of farmers were still on floating interest rates, so there was no significant "roll-over" date in the future when large numbers of farmers would need to refinance at the same time.
He warned of the potential for global instability, whether from the US fiscal stimulus, protectionist trading policies, elections in Europe - "There have been some outlier outcomes."