Ag readies for year of inflation, high rates, drought, and more

As further rises loom after Australia's central bank interest rate hit 4.1 per cent this month and inflation hovers at levels not seen since the 1990s, financial analysts warn plenty of economic potholes are ahead for the farm sector.

Farm tax shocks; labour shortages and rural input cost pressures; lower agricultural commodity prices, and the heightened risk of drought were adding to an awkward outlook for producers in 2023-24.

Up to three more increases in the Reserve Bank of Australia's benchmark cash rate were anticipated as it attempted to contain and cut inflation.

Economists have also indicated rates were unlikely to subside noticeably - if at all - for 18 months.

Overseas benchmark interest rates have already hit 4.8pc in Canada, 5pc in Britain, 5.25pc in the US and up to 5.5pc in New Zealand.

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"There is definitely going to be a bit of a squeeze for a while and there are definitely more than one or two potential traps out there to be thinking about," said RSM Australia's national agribusiness leader, Ross Paterson.

"Many farmers have seen some really good times of late, which set them up quite well, but it's hard to see those good times replicated for a year or two.

"It's a bit of a perfect storm brewing."

Latest data on Australia's consumer price index measure of inflation showed a rebound to 6.8pc for the year to April - well ahead of the reserve bank's 2pc to 3pc target range.

"Inflation looks like it might drop back to 6pc fairly soon, but we don't expect it down near the 3pc mark until the end of 2024," said Bendigo and Adelaide Bank's head of markets and research, David Robertson.

"The RBA can't be expected to cut interest rates until core inflation is back down to 3pc."

Mr Robertson said long term borrowers needed to factor in a lengthy period of interest costs at current inflated levels which were now, on average, four percentage points more than they paid 14 months ago.

That meant rural borrowing costs were probably double what farmers had budgeted for a year ago.

Most living and farm input expenses had escalated, since then, too.

"Unfortunately, unlike previous big economic shocks such as the global financial crisis, the Asian economic crisis, or the COVID pandemic, the RBA doesn't have the option of cutting interest rates to help us deal with this quantum shift," he said.

"The only lever the RBA has against inflation is raising rates to quell spending activity across the economy, so the new reality is a higher rate environment for some time."

Compounding the inflation and interest rate challenge was the forecast of lower farm productivity because of drying seasonal conditions, and a retreat in many farm commodity prices due to weaker local livestock trading activity and live export uncertainty in the sheep sector, plus the global recession's impact on export demand.

At the RSM rural accounting group, Mr Paterson, said farmers buying new gear would not only need to budget more for equipment finance or overdraft costs, but also for smarkedly bigger machinery-related tax bills in 2023-24, after previously enjoying several years of instant asset depreciation write-offs.

"Two years ago equipment finance was down to 1pc interest, or even less. Now it's 7pc-plus," he said.

While solid earnings in the past few years had helped farm bank balances, farmers had to be strict about maintaining cash flow and monitoring how much debt they could afford, especially if seasonal conditions deteriorated.

"I think the experience of the past decade will see people weigh up drought options fairly carefully and quickly to avoid carrying livestock for too long and paying big money for feed or water," he said.

Also worth weighing up was the value in investing in energy generation or energy saving technology, particularly in energy and labour intensive enterprises such as dairies.

"Unfortunately labour shortages continue to be a challenge everywhere," Mr Paterson said.

"That means you must think about technology options to better utilise available labour resources, and how to be more flexible and attractive with employment packages.

"That might include more holiday time for workers, better accommodation, or extra training, which could also entitle you to a 120pc tax deduction on your training program spend."

However, Bendigo Bank's Mr Robertson noted the Australian economy was fortunately benefiting from more overseas visitor numbers, including a helpful revival in potential backpacker labour available to agribusinesses.

He also observed while interest rates on loans were now at decade highs, many farmers were making the most of recent earnings with funds in term deposit accounts attracting good interest, including farm management deposits.

"Unfortunately, inflation is eroding some of the real term value of those saved funds at the moment, but when you look through the economic cycle the inflationary cost should not be so bad by this time next year."

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