What does this mean for farmers?
Interest rates bottomed out at the start of this year but for individual borrowers, that timetable may vary. Farmers today tend to have a mixture of maturities among their loans, with some going back to rates fixed two to three years ago at 5 per cent.
Because of this mix, the effect of rising interest rates on farmers will be variable, and in some cases somewhat delayed.
We’re very aware of the changeable landscape farmers’ face and ANZ builds in buffers to ensure debt is manageable in a higher interest rate environment.
For farmers, interest rates aren’t the only challenge to maintaining healthy financial performance - the operating environment also plays a big part.
By way of example, if we go back to the 2008 Global Financial Crisis interest rates were around 8 per cent.
Back then, the milk price was $7.50 per kilogram, similar to the past 12 months, so on a debt of $2m, this would cost $160k in interest.
Fast-forward to today if you take an average interest rate of 4 per cent; that same debt servicing cost is halved to $80k, with pay out remaining similar or higher.
While the current interest rate environment is better than in previous years, such as the average 8 per cent seen during the Global Financial Crisis, we need to remember that the door can swing both ways.
The environment can change dramatically over the course of time – and that uncertainty needs to be factored in by farming businesses.
ANZ’s milk price forecast recently increased to $8.20 per kilogram – a higher milk price means a lower portion of income is being used to service debt - but those higher commodity prices are also absorbing higher costs elsewhere.
The Covid-19 pandemic is impacting the availability and price of farm equipment and consumables, continued pressure in the supply chain is driving up input costs, and the labour shortage isn’t going away.
Most farmers are also investing in infrastructure to mitigate environmental risks and, in turn, work towards meeting environmental standards.