Past performance is no guarantee in the future

As I write this, I remember that the headline above this article applies to every entrepreneur and certainly to farmers in 2018. Issues such as the drought, low yields and phosphate rights are currently keeping farmers busy and interest rates are always a topic of discussion.

The low interest rates of recent years have been a pleasant development for land-based companies, with substantial financing on average. The fall in interest rates had a positive effect on the profit and loss account. So we already have that return.

CBS recently reported: "Good news in the Netherlands. The production of the industry has never been as high as in September 2018." Het Financieele Dagblad wrote the following headlines: "The Fed sees strong growth and is on track with rate hikes", "Brussels and Draghi push up Italian interest rates", "Inflation in the eurozone rises to 2,2%" and: "The ECB stops in January 2019 with its buy-back program."

The majority of interest rate experts, analysts and bankers expect interest rates to remain low in the coming years. However, nobody does it for sure and the question is: when will the long-term interest rate rise, how fast will it rise and what influences me to make the right choice when fixing my interest rate? To make this choice, the following 5 questions are relevant.

1. How much risk do I want to run and what do I sleep well with?
This question is the simplest question, because for this you have to make your own assessment, largely based on your own feelings and risk acceptance.

2. What is my view on the interest rate market? Do I see long-term interest rates rising, or is it not going like this speed?
For this it is mainly good to delve somewhat into the interest rate market. This can be done through various media and various analyses.

3. How much do I repay and to what extent does my margin depend on the interest costs?
Redemption is the best means against interest rate risk. Now that a number of banks have opted to repay part of the financing on a linear basis over 10 years and to provide part as interest-only, it is also important to make the right choice in rate. In addition, it is essential that there is a good picture of one's own abilities. Will the margin still be sufficient if the interest rate or the repayment changes?

4. What benefits can be gained from the various loans?
At the moment there are several types of loans that can be applied for if you distinguish yourself in the field of sustainability, nature, biological, et cetera. Examples are: the green loan, EIB loan and impact loan. It is important to know how and when you can qualify for these loans with interest discount.

5. What surcharges does my bank charge today?
Choosing a fixed interest rate also means choosing a surcharge to which you are tied for 5 to 10 years. The question then is: is your company now in the good light of the bank? Are you currently in a counseling process? In other words: is the bank's magnifying glass at your risk? Then it is likely that you will not receive the best offer.  

Many questions, but also great challenges to manage your risks. Because let's be honest: returns in the past were nice, of course, but your future is in your own hands!

Arjan Ausma

Arjan Ausma is senior relationship manager at Farmers Funding & Advice and he is a steward/broker. He also has his own farm.