There's no shortage of hysteria from the media and economists in the wake of Liberation Day. Our favourite was comparing the US to policy by drunk uncle! While headlines grab attention it's important to separate the real issues from the noise.
The reality is that the underlying economic challenges predated Liberation Day. Markets did what markets do and responded irrationally to the tariffs. As the dust settles, we expect markets to soon recalibrate and renew focus on economic fundamentals.
Interest rates
- It already feels like a distant memory, but back in February the RBA cut interest rates for the first time since 2020. The cash rate was dropped from 4.35% to 4.10%. Our view remains this cut was not driven by economic data
What is even more surprising is the growing chorus of calls for up to 4 more rate cuts this year. The Australia Dollar is already falling to equalise out the tariff impact and with our reliance on imports, inflationary pressures are rising- If anything, we think the bigger risk is the RBA being forced to reverse course and lift rates later this year. Concerns around persistent inflation are reflected in the yield curve
- The recent volatility has pushed credit margins wider from historically tight levels as investors demand compensation for increased risk. The costs will flow through to borrowers.
Note: Foundation Agri Finance price loans based on the current Australian Dollar Interest Swap Rate plus a customer margin. Please contact the team to discuss our competitive fixed-rate options.
What we’re hearing
Navigating Global Uncertainty: Last week in Melbourne, we brought together a group of farmers and foresters to explore how best to navigate an increasingly unpredictable global landscape. This was no small task given it was just a few days before Liberation Day!
Seth Palmer, Global Head of Agricultural Debt Origination at PGIM Real Estate, spoke about customers getting on with the business of farming despite the political noise.
He highlighted that the country was divided on Trump’s agenda – 1/3 of the population are fearful of where this all ends (mostly Democrat voters), 1/3 think it’s about time that an America first approach was taken (the Trump supporters), and a 1/3 in the middle are uncertain and waiting to see how it plays out (including many farmers). He reinforced that Trump would shore up his supporter base by helping them through any short-term tariff pain.
With operations in both Australia and the US, Cobram Estate Co-Founder and Chair Rob McGavin, was optimistic about their continued expansion in the US, which PGIM has supported. He spoke about focusing on long-term fundamentals rather than short-term noise. Demand for quality, fresh olive oil remains robust and Cobram would keep pursing their US investment strategy. An interesting insight was the pro-business sentiment and ease of doing business in California, as opposed to the red and green tape of Australia. For those familiar with the US, California is often lamented as being one of the most difficult states to do business in.
Kicking off in New Zealand: Ever since launching, we’ve had steady interest from across the ditch and we decided the timing was right to officially expand into New Zealand. We recently visited farmers and forestry businesses on the North and South Islands to introduce our offering.
The feedback was like what we hear from 
Australian borrowers (no surprise, given the major NZ banks are owned by Aussie banks). Lending is becoming too short-term, bank appetite is increasingly cyclical and staff turnover is eroding long-term relationships.
After a few tough years, there’s a renewed sense of optimism, especially amongst dairy and kiwifruit producers, who are benefiting from strong tailwinds. We’re excited to bring long-term lending solutions to support New Zealand’s leading primary producers.
Good assets still trading: The adage that it’s easy to sell quality remains relevant and we’ve seen a solid market for productive assets. Values are under pressure for second tier assets however quality assets are trading at strong values.
Corporate investors, benefitting from a favourable exchange rate, have been more active this year. The Mormon Church’s Alkira Farms purchased over $100mln in row cropping land in NSW, Lawson Grains secured a neighbour in southern NSW for +$40mln, Wilga Farming acquired a three-property aggregation in a high rainfall region north-east of Albany WA.
Family farms have also been busy buying land including Connawarrie in WA for $35mln (split between fixe local farmers) and Stranraer in northern NSW achieving $6,480/acre and total of $16.4mln.
In New Zealand the headline sale was The Rohatyn Group’s USD710mln acquisition of a 77% interest in Rayonier Matariki Forest and over 116,000 productive hectares. The sale reflects EBITDA multiples of 30 times (three-year average) timber only or ~18 times including carbon credit income.
The markets have now entered an irrational phase with a level of panic that we have not seen since the Global Financial Crisis. Just like in the GFC, the fuel for the market sell off preceded the trigger event which was the Liberation Day tariff announcement.
Since March 2020 excessive financial liquidity and fiscal expansion, introduced to combat the impact of the pandemic lockdowns but remaining long after the economy recovered, pushed all asset prices up to extremely overvalued levels.
So, when Trump surprised some with the size of the tariffs on April 2 a few market participants determined that an economic contraction would occur and began to unwind their positions rapidly. This has brought about a widespread panic, particularly in the equity markets.
No legitimate economist would claim that these tariffs are good economic policy for the US, but the real impact is not likely to be as dire as the markets are indicating. Markets will not remain irrational for very long.
When the smoke clears, we expect the tariffs will have inflation implications for the US in the short term as higher import prices unavoidably feed into the supply chain. This inflation will be diminished by free floating currencies adjusting to offset the tariffs and China devaluing its fixed exchange rate.
Longer term the diversified US industrial base can substitute the imports with domestic production, but this is unlikely to be as efficient an outcome so it will have some inflationary implications.
Australia
The impact of US tariffs on Australia will be inconsequential because:
- Our free-floating rate currency will fall and offset the tariff impact. Since Trump was elected in November 2024 the Australian dollar depreciated 10% from US67c to US60c. This offsets the 10% tariffs and in the washup, the landed price of Australian goods in the US is about the same.
Australian exports to the US are almost entirely high-quality minerals and agriculture. They will either continue to be purchased by the US at a higher cost or sold elsewhere. This includes Australian beef which was singled out by Trump.- Trump’s focus is on rebalancing trade deficits. The US has a trade surplus with Australia and the value of goods imported from Australia to US is small in comparison to other countries.
Overall, expect no real impact of US tariffs on the Australian economy. The main caveat is a severe economic contraction in China that reduces demand for our key exports.
Quote of the update
‘Never catch a falling knife’
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