The more things change, the more they stay the same. Volatility has been high in markets but not much has really changed.
Everyone got excited the inflation beast was tamed before realising that most of the structural issues driving inflation remain. Strap in as the market continues to move from one data release to the next.
Interest rates
The RBA remains the outlier of central banks. Most central banks have started cutting rates whilst the RBA is keeping rates on hold. At the last meeting they were still discussing the upside risks to inflation and potential need to increase the cash rate
- Recent interest rate volatility has reinforced that the market really has no idea where the economy is going. This is reflected in long term rates trading in a close band over the last few years
The market has woken up and optimism around a goldilocks soft-landing have fallen. Long term rates fell 50-80bps before a realisation the economic outlook was stronger than expected. This led to rates clawing back most of the falls to now sit around the 2-year averages- The yield curve remains inverted however the inversion is shorter and shallower. Most interest in fixed rates are now around 3-6 years
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
Green shoots for almonds: Australia, much like the ‘Duel in the Pool’ enjoys comparing itself to the United States in terms of almond production. We closely monitor fundamentals in California, which is the world’s largest producer at 75-80% of global almond production. California is undergoing a shift, with the general belief in the U.S. that bearing hectares have peaked at 560,000 hectares. The change is driven by uncertainties surrounding water availability, poor farm-gate returns in recent years and high costs of capital, which make it less likely for ageing trees to be redeveloped.
The challenges are having a large influence on Californian orchard values which have seen a pullback in value over the past three years. While sentiment has improved recently, water access remains a key factor driving orchard values. The profile of growers in the U.S. is also vastly different, with some 8,000 farmers involved. In Australia the top 10 growers (all well capitalised institutional investors) control 73% of plantings. The concentration means very little orchards transact locally. Since 2017 only 15 commercial sales (50ha+) totaling nearly $1 billion worth of orchards transacted. Further analysis of these sales by age is depicted in the chart below:
The outlook for values in 2024/25 is positive although buying opportunities are expected to remain limited and investment interest to mostly focus on greenfield development.
Agri lending 5 years on: The New Zealand Inquiry into Banking Competition got us reminiscing about Australia’s 2017 Royal Commission into Banking Misconduct. The Commission had 76 recommendations but has much changed for farmers? Anecdotal feedback is that the focus on responsible lending and banking culture are positives however overall satisfaction with banks has not improved. The increased regulation and stricter compliance standards are making it increasingly difficult for borrowers. Farmers complain it now takes longer and requires more information to access bank debt.
New bank capital requirements are also adding costs and forcing banks to focus on lending to borrowers that require less capital to be set aside i.e. lower risk sectors (residential), shorter loan tenors and lower risk borrowers. Borrowers unable to meet the stricter lending requirements are out of favour and looking for alternative capital sources.
A big crop and spring ahead (for some): The Foundation team has toured all the cropping regions in recent months and it’s a story of the haves and have nots. Big winter crops are being harvested in northern/central NSW and southern QLD, and despite some rain delays remain on track for record or near record yields. Good soil moisture is also providing a favourable start for summer crops and pasture growth for livestock producers. After a dry start Western Australia is tracking for another good year.
The losers are southern NSW, most of Victoria and South Australia. Minimal in-crop rain and a late frost have smashed winter crops and wine grape producers in the Murray, Barossa and Clare Valleys.
Strong recent economic data in the US has cast doubt on more Federal Reserve rate cuts this year and fears of a large fiscal spend post the upcoming election. All this rekindles inflation fears and driven long bond rates higher.
US employment growth remains at levels consistent with an economic recovery not even a stable outlook. The unemployment rate will remain above ‘full employment’ (measured as unemployment @ 4.4%) and with wages growth significantly higher than a level consistent with inflation sustainably falling back to the 2% target there is a risk of cost push inflation emerging. Higher inflation has stressed household consumption, but workers are still able to find extra employment to supplement the household budget. At this stage there is a significant risk that the transitory pandemic impacts are exhausted, and wages growth is feeding into higher inflation for longer.
A growing risk is the Chinese economy. The market’s reaction to the Chinese government’s stimulus package was extraordinary. Greed may overcome fear, but it is remarkable that rational investors believed this response would solve the underlying economic problems. China may now be trapped in a period of secular stagnation not dissimilar to what Japan suffered for 30 years from 1989. The implications for Australia are significant.
Australia
Last week’s Australian labour force data was much stronger than expected but that did not stop some bank economists trying to downplay it by pointing out that a great deal of the employment increase came from government related services (Education, Health and Administration). We view these jobs as a lot more permanent than private sector jobs. This has implications for inflation at two levels:
- It will not enhance labour productivity
- It will increase aggregate demand at a time when supply is constrained
The RBA’s messaging and rhetoric remains largely unchanged, with recent speeches reaffirming its’ stance. Continued concern around upside risks to inflation and recognising that wage levels are generally still too high, has inflation expectations to only reach the middle of the target band in 2026. Optimism around monthly CPI data faded very quickly with the realisation the decline in August CPI to 2.7% was all smoke and mirrors (political electricity subsidies).
Quote of the update
“Never trust a forecast with a decimal point” – Barry Ritholtz
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