Just as one swallow doesn't make a summer, one piece of data doesn't determine the market. This wisdom from Aristotle was forgotten when markets panicked over the recent US jobs data. More ups and downs are likely ahead, but with that uncertainty comes opportunity.
Interest rates
Long-term interest rates have dropped due to worries about a global economic slowdown. The yield curve is now inverted up to 15 years, meaning fixed rates for 1-15 years are lower than short-term rates (less than 12 months)- The June quarterly inflation matched expectations, easing some pressure on the RBA, which kept the cash rate at 4.35%. However, they gave “very serious consideration” to a rate hike as inflation remains too high
- In an interesting shift, the RBA dived headfirst into the dark arts of forward guidance saying they were “unequivocal” there would be no rate relief for at least 6 months
- Long-term interest rates are now the cheapest they have been against short-term rates in over a decade
- In 2022, the gap between short-term and long-term rates reached a high of about 3.00%. Currently, the 3-year fixed rate is 0.70% lower than short-term rates, the 5-year rate is 0.49% lower, and the 10-year rate is 0.23% lower. This means a borrower could reduce their annual interest costs by 16% by switching from a 3-month rate to a 3-year fixed rate
Please contact the team to discuss our competitive fixed-rate options.
What we’re hearing
What’s Been Happening at Foundation? The best way to understand an agricultural business is by being on the farm, and since we began in September 2023, our team has visited over 100 farmers. These visits are not just about building relationships; they also provide valuable feedback. As a mentor reminded us, success comes from listening to smart people. Farmers are some of the smartest people we’ve met, so we take their feedback very seriously.
Farmers appreciate having a competitive alternative to bank financing, especially one that offers a longer-term approach to structuring loans. They see the value in our straightforward long-term, fixed-rate loans, which provide certainty and reduce both refinance and interest rate risks. Our on-farm presentations, where we discuss who we are, the interest rate landscape, key economic trends, local rural property sales, and indicative loan terms, have also been well received. If you’d like us to present to your business, please reach out.
The constructive feedback we’ve received highlights the need for more education on our product, which is new to most farmers. They want to understand how it fits into their business, how easy it is to bring us in, and the benefits of fixing rates long-term in the current market. Based on this feedback, we’ve refined our approach and product offerings:
Advance Fixed Rate Option: After credit approval, borrowers now have the flexibility to lock in the interest rate up to 60 days before settlement. This allows them to secure favorable rates leading up to settlement
Rate Reset Product: This option secures the debt and loan conditions for a period longer than the initial fixed rate. For example, a borrower can have a 15-year fully committed loan term with an initial 5-year fixed rate. When the 5-year fixed period ends, the borrower can choose another fixed rate period lasting until the loan matures in 10 years. This provides the certainty of a long-term loan commitment while allowing flexibility to take advantage of favorable shorter-term fixed rates
Collaboration with Other Lenders: We now offer a variety of security structures to meet different funding needs alongside existing or working capital lenders. This includes split banking setups (with separate loan documents and security for each lender) and club/syndicated banking arrangements (with common loan documents and shared security among all lenders)
All Things Cotton: The Foundation team recently attended the Australian Cotton Conference and has been regularly visiting cotton-growing regions. There’s a strong sense of confidence among cotton farmers, and here’s what we keep hearing:
1. Recent performance has been outstanding: cotton farmers have experienced a period of high production and strong prices. Water availability for irrigation, a key factor in production, has been particularly favorable. In New South Wales, which produces about two-thirds of Australia’s cotton, General Security allocations (a good indicator of water availability) have been well above the long-term average since 2020-21. This, combined with high cotton prices, has led to strong farm profitability. With water already secured for the next crop, production levels are expected to remain solid for the next 1-2 years
2. Challenges on the Horizon: Farmers anticipate lower profitability due to declining cotton prices as global supply increases and demand weakens. Cotton prices have fallen below USD 70 per pound for the first time since 2020, and rising costs due to inflation are squeezing gross margins
3. Market Activity to Increase: With the spring selling season approaching, there is already nearly $1 billion worth of irrigation farms on the market in NSW and QLD. This isn’t distressed selling but rather an opportunity for cashing in and realizing gains, especially for corporate investors and families undergoing succession. Based on recent sales in the region, demand is expected to be strong, and property values are likely to remain high
Rethinking Farm Strategies: After a period of volatility, many farmers are reassessing their business strategies to align with current conditions. This could mean selling non-core assets and reducing debt to minimize risk. Others are reevaluating growth plans and making careful decisions about investments in acquisitions (both on-farm and off-farm) and the development of existing assets to boost productivity. A common focus is on improving operational efficiency and cutting costs to maintain profitability.
Olympic Fever: How exciting are the Olympics! The recent gold rush got us thinking about where Australia excels globally in agriculture. Just like the Olympics we punch above our weight!
The last 2 weeks have certainly been exciting! It started with growing concerns of a US recession and then the Bank of Japan increased rates prompting warnings around the JPY-USD carry trade. This snowballed across global markets before things took a breather and briefly recovered some of the lost ground. That was until concerns over the economic outlook re-emerged. Strap in for the bumpy ride to continue.
Locally the key recent data was the June quarter CPI which came in as the market had expected. The RBA trimmed mean quarterly reading was 0.8% and a 1-year rate of 3.9%. The market had expected 4%, feared 4.1% and hoped for 3.8%. It was the slight drop in the core CPI reading that our banks and a few others leapt upon as evidence that inflation was still declining.
Even with the RBA remaining hawkish we doubt that the RBA will increase rates again unless it sees inflation (RBA trimmed mean) on a quarterly basis increasing above 4% per annum. There is a real chance that the RBA will not increase rates even if inflation continues to climb, at least initially, because it does not want to risk pricking the housing price bubble and the political difficulties of increasing rates ahead of a federal election that is increasingly likely by the end of 2024.
Inflation concerns remain around pre-election spending splurges by federal and state governments. Already we have the federal government announcing a wage subsidy paid to childcare centres to supplement what looks like a 25% wage increase that won’t appear in either wages price data or childcare costs prior to the next Federal election because of a backroom deal tied to the subsidy. This follows the Federal energy rebates sugar hit that artificially pulls down the inflation rate in the short term but does not solve any of the longer-term power issues.
Most farmers benefited from a significant rise in rural commodity prices, which kept pace with inflation. While the price outlook remains generally positive, it’s a step down from the peak levels seen in 2022. The main challenge now is dealing with tighter profit margins as prices decline, along with managing costs in an inflationary environment.
Quote of the update
“A silver medal gets you as many free beers as a gold medal does.” – Russell Mark, Australian Olympic clay shooter.
We do not include specific commodity price or seasonal updates as this is not out expertise. If you would like to be added to the mailing list to receive the updates directly to your inbox, please fill in the form on the contact page and we will be in touch.
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The information provided in this document is intended for general information only. It has been prepared and issued by Foundation Agri Finance Pty Ltd ABN 57668249250 which operates under the SA CAPITAL FUNDS MANAGEMENTLIMITED ABN 26123016553 Australian Financial Services Licence 320797 as a Corporate Authorised Representative 001305527. This information is general advice.
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