Interest rates hikes poses potential headache for farmers in expansion mode

Authors: John Moclair and Sean Farrell

The supportive monetary policies implemented by global central banks since the last economic crisis have provided us with strong growth impulses in recent years. With unemployment rates continuing to fall, at a global level, and forward looking indicators pointing to continued economic expansion, 2018 looks favourable for the global economy. Most notably, with economic growth the strongest since 2010, the Eurozone looks primed to continue its outperformance.

At a domestic level, growth and employment gains have continuously surpassed expectations with economic growth forecasts for this year, in GDP terms, now at 4.4%. With recent forecasts by the Central Bank showing that continued growth is in store for the economy; employment levels are actually set to surpass the 2007 peak of 2.3 million people in the workforce and so, full employment is likely fast approaching.

Against a positive economic backdrop investors have moved to take advantage of further growth prospects by pouring money into European assets. The subsequent result of this movement of capital into the Eurozone is a stronger Euro currency. Over the past year, the Euro has risen sharply in value relative to the British Pound and the US Dollar. The rise in the value of the Euro throughout the year has been widely acknowledged as a significant headwind to the farming sector. At the beginning of 2017, the appreciation was largely a function of exogenous factors, mainly Brexit uncertainty in the UK and the lack of policy implementation in the US. While towards the latter end of the year, the improving economic backdrop in Europe likely provided further impetus.

When it came to managing such currency fluctuations at farm level, farmers were by in large at the mercy of the currency markets. Given the speed and ferocity of the euro’s appreciation, large corporations were forced to undertake prudent measures with regards to currency movements. With Brexit uncertainty remaining as well as Euro strength failing to abate as of yet, currency movements are being watched intensely by those involved in the agri sector.

At the same time, Irish farming is undergoing both a significant expansion as well as transition, notably so in the dairy sector. By in large, such a move has been driven by the removal of milk quotas as well as the increasing difficulty in generating sufficient income from both tillage and beef enterprises. Dairy farming appears to offer a more viable and secure income but, for those in expansion mode and new entrants, they must likely bear a significant cost before reaping such rewards. Once up and running, for many farmers a low milk price may be seen as a key factor that will affect their income.

With that in mind, many Dairy Co-Op’s now offer fixed milk price schemes whereby farmers can avail of a fixed price for a certain percentage of their milk output for an approximately three to five year period. This aims to reduce the risk and volatility associated with milk prices throughout the year. However, milk price volatility is not the only source of volatility that can affect farm incomes. With significant borrowings often required to fuel these expansions and transitions, the potential variable costs of borrowing can be often overlooked.

John Moclair is head of Global Customer Group, Global Markets at Bank of Ireland. Sean Farrell is head of Agriculture at Bank of Ireland.

First published in Irish Independent 13.02.18.