Our Insights

A timely and welcome OCR response

Mar 16, 2020 1:15:00 PM / by Andrew Laming

A timely and very welcome OCR response, but let’s make sure it flows through to farmers.

This cut to OCR bring to mind two things- obviously costs of borrowing will fall on this, but then access to capital may well get harder as the economic impacts deepen.   [This short article talks about what the banks might do with Agri funding costs with the OCR cut and also what farmers should do with access to capital to prepare for a period of uncertainty]

On the first point – cost of borrowing falling:

All other impacts of Covid-19 aside, the cut to OCR in today’s news was very welcome news to support the impacts on business across NZ.   Covid-19 will have an impact no matter what business you are in.

The one thing that we all now turn our minds to is the impact on ACTUAL interest rates.   We are all aware that bank’s cost of funds is not perfectly aligned to the OCR (nor at that level).

However, we are aware that most banks view their returns out of the Agri Sector as being “insufficient”.    This rate cut might then present an opportunity for banks to “claw” back some of that.   We ask that banks pass as much onto the sector as able to ensure that farmers are able to continue to stay resilient during this time.  

We also note the RBNZ have extended timeframes on bank capital requirements for 12 months and that should take some pressure of funding costs.

On the second point (and this will start to flow through in coming months) – access to capital will not get any easier on the back of this. 

Whenever there is significant erosion of confidence around the world, access to capital will get harder on the back of it.  

So, our message to farmers for dealing with their debt positions through Covid-19:

  1. Protect cash. Alongside great operational performance to generate free cash, make sure you have adequate facilities to cope with various economic scenarios.
  2. Work out the impact on borrowing requirements under different scenarios (good, average, worst case) – and then agree on actions for how you might solve for any cash hole this creates.
  3. Think about the length of your facilities as well – move to longer dated facilities so banks are not reviewing your facilities at a negative time in the economy
  4. Present your plans to your stakeholders and get support from all. This means the banks, your other shareholders and anyone else that will need to agree to the plans you’re putting in place.
  5. Don’t panic, but then again, don’t adopt a “she’ll be right” approach. Stable, mid-term plans are the best.   Farmers produce food, we all need to eat.  You are well placed, but make sure you have a well-considered and independently prepared/tested strategy in an environment like this.

Tags: Debt, Action, Planning, Agriculture, Banking, Covid-19, Strategy, OCR

Andrew Laming

Written by Andrew Laming