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Fixed Rates for Farm Finance

Mark Bracegirdle FCCA FMAAT
Published in Farmer Trader
Issues 136, 137, 138 & 141
June – Aug 2007

Hindsight, it is said, is a wonderful thing. Even better would be a crystal ball so we could all know the way interest rates are going to go. It seems that base rate is in an upward trend and where it will peak is ……. a crystal ball job, so is it right to think about fixed rates now?

There is nothing magical about fixed rates. In the market there are those speculating on interest rates going up or down and making or losing money in the process because this is what they do. Then there are those who are hedging – no this is nothing to do with an environmentally friendly policy from Brussels, to be implemented under sub clause 4 of rule 99,350, but refers to the person who does not want the risk of rates going UP and thus fixes his rate of interest.

I have emphasised the word UP because most people, I discuss fixed rates with, express some concern that if the base rate goes down they will lose out. This is not what a fixed rate of interest is about. The speculator is a gambler who looks to make a gain but is prepared to take the losses on the beak – he expects fluctuations and depends on them to make money. The hedger wants certainty and to avoid LOSS because his business is not speculation.

To a degree, it all comes down to the type of person you are. People like me (well I am an old accountant after all) are risk averse so I like the idea of fixed rates to give me certainty. If you will take a bit of a punt, then variable rates may be for you but then you have to ask yourself whether you already have enough business risk without taking the financial risk as well.

For me, I reckon fixed rates should always be considered. The trick is to find a good intermediary who might be able to find you a deal where the fixed rates are below the current variable rate – they are out there and you need to review all your existing borrowing to look at the big picture. Don’t forget the overdraft either, because your rate on these will be variable.

When you have found the right rate and lock in then is the time to forget about it until the end of the fixed rate period. You have fixed because you want certainty and to avoid loss and if the rates were to go down in the fixed rate period simply confirm in your own mind that the decision you made was the right one you made at the time and don’t beat yourself up about it.

There’s no such thing as success or failure – only results. Fix her and forget her!

Mark Bracegirdle FCCA FMAAT

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