Rising Interest Rates: What does it mean for Agriculture?
Last Tuesday, the Reserve Bank of Australia (RBA) raised interest rates by 50 basis points (bp), placing the nation’s official cash rate at 1.35%. This decision comes after two previous hikes in the immediately preceding months (50bp in June and 25bp in May) and growing expectations for future increases, likely to drive interest rates up to 2.5% by the end of the year or even 3% at their highest peak .?
The RBA’s announcement comes at a time when the whole world is concerned about the steep rising trajectory of inflation which is affecting global efforts to boost economic activity after the Covid-19 pandemic. Given the inverse relationship between interest rates and inflation, it’s not surprising that reserve banks around the globe have taken matters into their own hands through monetary policies since the early days of May 2022.?
Furthermore, the uncertainty permeating the oil market, due to fears of recession and sanctions against Russian oil exports, added to the prevailing disruptions in supply chains associated with the Covid-19 pandemic; for example, China’s Zero Covid-19 strategy seems to indicate that inflation will keep rising in the coming months.??
But what does this mean for Australian agriculture?
NAB senior interest rate strategist, Ken Crompton, points out that, despite the uprising trend, Australia’s rates are and will probably remain relatively low in absolute terms. This economic climate most probably won’t impact demand in the rural market, although it might slow down the urgency to buy agricultural properties, according to rural land valuer Tim Lane. Moreover, “demand for agricultural and specialised infrastructure assets remain strong, as investors seek inflation and interest rate-linked opportunities through turbulent markets,” according to non-bank lender, Merricks Capital.?
This data seems to suggest that agriculture can potentially serve as a safe haven for investors despite volatility in the markets, climate change-related events, disruptions in supply chains and health, as well as geopolitical crises.?
But why is agricultural land seen this way?
Most probably because of agriculture’s crucial role in economy and its generally stable long-term returns.?
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According to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), the gross value of agricultural production is forecast to reach $80.4 billion in 2022–23. This is a 3% fall from the $83.1 billion recorded in 2021-22, but still appealing for farmers looking to expand their business and for investors to park patient capital delivering an approximate of 8% net return, taking Merricks Capital's information as an indicator.
?The “Australian Farmland Values 2022” report, published by Rural Bank, states that “the longer-term growth in farmland values has performed incredibly well compared to other asset classes”, driven by the strong growth in 2021 which “lifted the 20-year Compound Annual Growth Rate (CAGR) to 8.4%”. Although the CAGR is lower compared to the 12.5% recorded in the last 5 years, it exceeds the 5.4% growth rate of residential property prices in Australian capital cities over the last 18 years and the 4% CAGR of the ASX200 over the last 20 years.?
Regarding crop production, its gross value is forecast to reach $45 billion in 2022–23, the second-highest value ever documented, only below the $48 billion recorded in 2021–22. The aforementioned, paired with an “excellent start and a favourable outlook for the winter cropping seasons” supports the expectations of the fourth-largest and second-most valuable winter crop on record (50.9 million tonnes). On the side of livestock, the gross value of production is forecast to rise by 1.2% to $35 billion in 2022-23 and livestock prices are expected to ease from all-time highs.
Despite the encouraging data presented by ABARES, the increasing interest rates are worth tracking since they may present challenges for agricultural stakeholders. “A lot of enquiries are now coming through from savvy farmers and business owners who are seeking guidance or understanding as to why their interest rates are rising much faster than the RBA announcements”, states a recent post published by Robinson Sewell Partners. This could potentially be a sign to watch out for continued outsized rises in commercial lending rates and any other move that might trigger changes in refinance and other financial instruments in the farming community.?
The ups and downs of the economy, especially during the past two years, have exposed the tremendous amount of risk that countries undertake in order to gain access to highly interconnected supply chains and markets. This, coupled with the increasing demand for transparency and practices aligned to ESG standards, is inviting governments and investors worldwide to learn from the past and better prepare for upcoming challenges. For agriculture, this may mean “diversifying markets and trading relationships, as well as equipping farm businesses for future droughts and climate change”.?
Taking this into account could be the key to offsetting external and domestic challenges in the future, particularly while Australian agriculture production estimates remain strong for the back half of the year and the overall agricultural overview remains positive, as showcased by Rural Bank in its document “Australia agriculture mid-year outlook 2022”.?
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