Rural Banking – Beyond the Royal Commission

I just wanted to share some observations on rural banking since the Banking Royal Commission has been completed. These observations come from both farmers and advisers that have been using the farm business software P2PAgri to help sharpen their farm business performance and improve the information they provide to their bank.

Can you really negotiate low interest rates in rural banking?

Interest rates are now at an historic low level with the Reserve Bank of Australia (RBA) decreasing interest rates twice in the last few months. See this in the Graph 1 below. This combined recent interest rate drop of 0.5% may not have been fully passed on to your bank’s lending interest rate, as not all the bank’s ‘cost of funds’ (the interest on money they buy) are affected by the RBA’s set interest rates. However, you should have noticed some drop in your interest being paid. If you don’t know, ring your bank and find out if it has dropped, and if not, ask them why!!

The second part of this discussion is that the setting of your interest rate is made in a market environment. This means you can negotiate lower rates if you can show the bank you are either (1) managing your business risk better than what they think you are or (2) you have put your financial business out for other banks to quote, which increases the competition for your business financial requirements and you may get better interest rate deals offered to you. In this case, it is highly likely your current bank will meet any interest rate quotes from competitors, so you should be better off either way.

Graph 1: Rural Banking Interest Rates are set on the RBA Cash Rate

Recent users of P2PAgri have reported that they have achieved drops in their interest rates of 1 – 1.5% after discussion with their bank. On a $1m loan, this means an annual savings in annual interest payments of $10,000 – $15,000. In some cases, it has been reported to be as high as a $40,000 annual saving on this size of borrowing, so higher interest rate savings may be achievable.

So there is room for negotiating your rural banking rates.

Has anything really changed since the Royal Commission?

The frustrating observation is that even though the Banking Royal Commission highlighted significant banking malpractice and gave significant guidelines for the Federal Government to implement, little has changed. The Federal Government argue that in the last 6 months with the election, they have only had a limited number of parliamentary sitting days in which to implement changes. The question remains, though, of whether they have the political appetite to push for the changes needed!

One change that has occurred is that banks are placing more emphasis on lending governance, which means more information needs to be provided with any new rural banking and the process now takes longer. So if you are looking to change your rural banking, you will need to (1) do more paperwork and (2) allow for more time to get your financial proposal accepted.

The irony is that even though the bad banking habits were shown in the Banking Royal Commission, it appears yet again the banks’ customers pay the price!!

The rural economic planets have lined up for many Australian farmers

I just wanted to point out that a number of significant shifts have occurred to make farm financial performance look very good at the moment for many Australian farmers. This is a summary of a number of talks I have given to Grains Research Development Corporation (GRDC) workshops in the last month. While large areas of Qld and NSW are still in drought, other parts of rural Australia will be benefiting from:

1. Record low interest rates

As has been mentioned above, interest rates are at record lows. So the cost of borrowing money is the cheapest it’s been in living memory. This means if you have surplus you have more capacity to pay off your business principal. Or if you borrow more money, make sure you allow for the risk of higher interest rates, should they start rising in the future.
2. Ten-year low $A exchange rates

With the current trade war between the US and China, the $A exchange rate is at 10-year lows. Today it’s A$0.67 to the US$1.00. This means it’s harder for Australia to import overseas products and easier to sell our Australian products overseas. So if your farm products are sold overseas, your selling prices should improve, but the cost of farm inputs that come from overseas such as tractors, chemicals and fuel, will increase. Generally speaking, farmers sell more overseas than they import, so the lower $A is good for farmers.

The only downside is that it’s more expensive to travel overseas. You might have to delay that European holiday!!
3. Very high wool and livestock prices

The livestock industry is going through a great period at the moment with high wool and livestock prices. For those with livestock enterprises, profits may never have been better, at least since the Australian Wool Floor Price came to an end in the late seventies.
4. Record high land values

The Rural Bank has recently released its annual Australian Farmland Values Report on the movement of rural land values around Australia. The growth in Australian land values has been very steady at about 10.7% in the last year. This has grown regardless of the drought conditions experienced through this time. So, many farms’ balance sheets, and hence farm business wealth, have significantly benefited from this increase in land values. This is a two- edged sword, as while high land values have increased wealth, they have also meant that farmers have to look more closely at their next land purchase, as this has now become more expensive.

So the advice is similar to hay making – ‘Make hay while the sun shines’!

As usual, be careful with your business planning and spend wisely. If you find yourself with significant farm profits, look to decrease debt or deposit in Farm Business Deposits (FMD), as these good times will change! Put away savings in the good times to be better prepared for the poor times when rural banking can be challenging.

If you feel a need to further improve your farm business financial knowledge and control, we would be happy to help you at P2PAgri. Our software has been getting great user reviews and we are currently providing training and support freely within the licence fees of the P2PAgri software. Contact us today for a no obligation discussion or visit our www.P2PAgri.com.au website and look at the free DEMO.

If you are looking for an P2PAgri Accredited Adviser, check out our advisers on our website.

Mike Krause is one of Australia’s leading Farm Business Management consultants with significant experience in providing farm business management support, training and consulting to Australia’s agricultural and agri-business industries.