Frontpage News 2014 The agriculture mu...

The agriculture must focus on risks

18 August 2014

​Today, the agriculture finances almost all of its debts through variable rate loans. This gives the trade a high sensitivity towards interest rates, which should be dealt with by risk management.

As the loan to the agriculture has increased through the recent decade, the composition and the use of loan methods have changed character. Loans with variable interest rate have gained ground at the expense of the fixed rate loans.

Today, the variable rate loans make up about 90 percent of all the mort-gage credit loans to the agriculture, and in a time with record low interest rates, it has given the trade relatively low financing costs.
 
’’The agriculture has in the recent years benefited from the low interest rates, and it has provided a much needed economic latitude,’’ says Chief Economist at the Danish Bankers Association, Niels Storm Stenbæk.
 
However, it is important that the individual farmer is aware about the financial risk that he is exposed to. No one knows how the interest rate will develop, but it might still be a good idea for some farmers to restructure their loans, or restructure to loans with a longer maturity or to loans with a fixed rate,’’ Niels Storm Stenbæk assesses.
 
Through the recent decade, the agriculture has doubled the sector’s debt, and the total borrowing now represents 350bn DKK. Combined with an increased preference for loans with a variable rate, it makes the agriculture in general very sensitive towards interest fluctuations. The interest level is currently very low, and when it becomes normalised, it may push the earnings.
 
Calculations from Denmark’s Central Bank suggest that interest rate in-creases will especially hit the agriculture with a low solidity and the need for risk management:
 
’’In general, it is necessary to work more systematically with risk within agriculture. I do not only think of interest rate sensitivity but also on sensitivity to fluctuations in input prices, settlement prices etc.,’’ Niels Storm Stenbæk outlines.
 
He suggests that the farmers’ operating accounts are supplemented by an analysis which includes sensitivity calculations on the five most relevant risk factors in the individual holding.
 
’’It will increase the awareness of the risks that the individual farmer is impacted by, and it may be a good start when initiating the work with risk management.’’ 
 
The development in the banks’ and mortgage credit institutions’ lending to agriculture
Note: The dotted line indicates a break in series in the MFI-statistics (which covers the loan from banks and mortgage credit institutes) in September 2013. The break in series includes i.a. changes in the level of the total loan and the loan from banks and mortgage credit banks respectively.
Source: Denmark’s Central bank and the Danish Bankers Association’s own calculations.
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