Central banks are trying to bring inflation back on target, although most predict this will take time. For agriculture, the challenge is particularly important as higher-for-longer interest rates puts further pressure on already squeezed farm margins and borrowing capacity.
Interest rates
- Waiting with fingers crossed. The RBA followed market expectations and left the cash rate unchanged at 4.35% in August. June quarterly inflation came in marginally below expectations at 3.6%, versus 3.7% forecast. The headline number does little to disguise the bigger issue, that inflation remains stubbornly elevated.
- Even the RBA does not expect inflation to return to the midpoint of its 2–3% target until mid-2028. High wage growth, a resilient labour market and elevated oil prices continue to complicate the outlook, and that’s before opening the productivity box (or lack thereof).
- For now, policy inertia appears to be the game, but don’t be surprised when the RBA’s hand gets forced to lift rates higher.
- Economic growth remains sluggish, but inflation risks are winning the argument. In New Zealand, the RBNZ lifted its cash rate by 25bps to 2.50% in July. The cash rate remains relatively low by global standards, while the steepening yield curve suggests markets are increasingly pricing in higher rates ahead.
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What we’re hearing
The case for agriculture: HALO (Heavy Assets, Low Obsolescence) was front and centre at the recent Global Ag Investing conference in Brisbane. The concept refers to assets that are difficult to disrupt through technological change and retain clear, tangible value over time.
Bare farmland is one of the clearest examples. Its durability is a major reason farmland has historically preserved value through economic cycles. Total returns for agriculture across New Zealand, Australia and the US have delivered a solid 8-9% over the past 10–15 years.
The US remains a global powerhouse and continues to influence Australian and New Zealand agriculture through funding costs, policy changes, equity sentiment and US-dollar-denominated commodity prices.
The challenges facing agriculture are increasingly familiar with rising input costs, moderating commodity prices and global trade disruption squeezing margins. This makes productivity increasingly important. The era of ultra-cheap money doing much of the heavy lifting on capital growth has passed. Technology that reduces inputs, improves yields and increases labour efficiency is becoming an investment imperative.
For agriculture to maintain its HALO status in investment portfolios, margins need to hold and long-term, risk-adjusted returns remain attractive.
Connecting Agriculture: Our fandom of Starlink continues to grow. We are increasingly connected and more efficient, regardless of where we travel across regional areas. The frustrating days of finding a spot where you can make a decent phone call or dial into a meeting are disappearing.
Starlink is rapidly becoming an important piece of digital infrastructure for agriculture. It enables precision farming, improves labour and operating efficiency, and ultimately supports better decision-making across the farm. Live location tracking and emergency communications also lift safety in remote operating environments.
Putting the hype around SpaceX’s IPO and subsequent share price movements to one side, the company’s longer-term ambition is more interesting. Its focus on deploying larger, more efficient satellites through the reusable Starship rocket has the potential to dramatically reduce the cost of putting infrastructure into orbit.
If that translates into faster and cheaper connectivity, near-real-time data could become the norm rather than the exception across the farm economy.
Managing upside risk: For borrowers, the priority remains protecting the business against higher costs including the cost of debt. Those on variable rates or under-hedged on term debt, are increasingly considering fixed-rate coverage to manage the impact of higher rates on cash flow.
Fixed rates have risen since the start of the year, but the balance of risk remains skewed towards the upside. In a volatile and inflationary environment, fixing a portion of debt takes risk off the table.
The US continues to dominate global markets and locally we are not immune. New US Fed Chair Kevin Warsh takes the hot seat with challenges aplenty. He needs to navigate persistent inflation (US inflation has remained above the Fed’s 2% target since 2021) while protecting Fed independence and managing a fiscal deficit approaching $1.9 trillion in 2026, with annual interest costs consuming a significant share of the federal budget.
All of this is playing out in a world where political and economic decisions are increasingly made over days and hours rather than quarters and years.
The yield curve emphasizes the challenge central bankers are facing.
Short-term rates: The 2-year US Treasury yield (using treasuries as a proxy for interest rates) acts as a forward-looking gauge for the Fed’s cash rate. It typically rises before the cash rate and falls before the Fed begins cutting.
We saw this clearly in late 2021 when the 2-year yield moved higher before the Fed began its tightening cycle. It is climbing again and now sits 0.75% above the cash rate, suggesting markets are increasingly pricing in higher cash rates. The message is similar locally. Australia’s 2-year Treasury yield sits around 0.35% above the cash rate, while New Zealand’s is a sizeable 1.15% higher.
The short end of the yield curve is pointing in the one direction, upwards.
Long-term rates: The same story is evident further out the curve. The US 10-year Treasury yield continues to sit at some of its highest levels this century. At 4.72%, it carries a material 1.09% premium to the cash rate. The differential is around 0.48% in Australia and 2.52% in New Zealand.
Markets are increasingly concerned that inflation remains too high and that central banks appear reluctant to move aggressively enough to bring it under control. The result is a growing expectation that interest rates will need to remain higher for longer.
Quote of the update
“It’s tough to make predictions, especially about the future” – American baseball player Yogi Berra.
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