As the weather warms up, it feels like the run to Christmas has well and truly begun. There’s still plenty to do with harvesters rolling, summer crops going in and livestock farmers making the most of the spring flush.
Interest rates
- Central bankers across the world have been busy, with most easing rates but doing so cautiously. Ongoing global uncertainty has made forecasting inflation, growth, and interest rates a tricky business, so most are waiting for clear data before making big moves.
- New Zealand’s central bank however likes to be a front runner and lead the rate change charge. After hiking rates by 5.25% in under two years post-pandemic, it’s now moving just as decisively in the other direction, delivering a bold 50 bps cut in October to bring the cash rate down to 2.50%.
- Weak economic data in NZ, with GDP shrinking to 0.90% in the June quarter, was apparently enough to justify the aggressive rate cut, even though inflation remains at 2.7%.
Meanwhile, the RBA continues to take a cautious approach, keeping rates on hold at 3.60% in September after a modest 25 bps reduction in August. Slow and steady remains the game.- For borrowers, the big question is how much further rates might fall. Our view is that the pace and depth of this cutting cycle will likely disappoint. Three of the four major Australian banks have now pulled back their forecasts to just one more cut. New Zealand may have already reached the bottom, while upside risk to rates is getting more airtime.
The steepness of the interest rate yield curve reflects expectation of a robust economic outlook and the likelihood of higher inflation persisting. In New Zealand, the 5-year swap rate now sits 49 bps above 3-month bank bills, with the 10-year gap a sizeable 108 bps. In Australia, the comparable spreads are 28 bps and 66 bps.- As rates approach the bottom, borrowers on variable loans may want to consider shifting gears and exploring fixed-rate options to manage potential upside risk.
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
Open for business in New Zealand: We recently settled our first long-term, fixed-rate loan with a generational New Zealand farming family. They wanted to rebalance their capital structure away from increasingly short-term bank debt, gaining greater certainty around both debt and interest costs for the business.
Feedback from the market confirms that New Zealand borrowers are eager for longer-term debt options to help navigate a highly cyclical agricultural lending landscape. Like Australia, the market is highly concentrated, with over 90% of agri debt controlled by the big four banks and Rabobank, all with similar loan offerings.
Capital regulations are a headwind for banks, forcing them to hold up to twice as much capital for an agricultural loan as for a home loan. The result is higher margins for farmers and limited access to competitive long-term debt. Banks prioritise more lucrative short-term lending and home loans over long-term agricultural lending.
We’re excited by the opportunity in New Zealand and pleasantly surprised by the positive reception so far.
Take advantage of volatility: With uncertainty comes opportunity. In a world bouncing from one headline to another, interest rate markets can overreact, both up and down. Typically, fixed rates move by less than 5 bps a day, but unexpected economic data or global events trigger larger swings. A recent example was Trump’s Liberation Day tariff announcement.
Following Liberation Day, long-term fixed rates dropped 20–25 bps in New Zealand and Australia. Markets soon recalibrated, pushing rates higher once they realised tariffs are inflationary.
Borrowers need to act quickly, as these temporary dislocations rarely last. The key is having a clear interest rate strategy. Locking in rates without understanding your objectives can backfire. A well-designed plan aligns your overall business goals with optimising borrowing costs and managing risk effectively.
Spare a thought for US farmers: Profitability for US croppers have fallen to its lowest levels in 15 years, as high production, falling prices and trade uncertainty take their toll. With harvest well underway, farmers are facing a third consecutive year of low or negative profits across every major row crop. Early indications for 2026 don’t look much better, particularly in high-quality Midwest farmland running a 50/50 corn/soybean program.
Federal support is likely to increase. Historically, subsidies have ranged from 8–46% of net farm income and averaged 19%. The current administration is likely to step in to help farmers weather the low-profit cycle exacerbated by ongoing trade tensions.
Soybean producers are bearing the brunt. During the previous Trump administration, the US-China trade war led to USD 9.4 billion in annual soybean losses in 2018–19 alone. This year, soybean harvests are forecast to be 10–15% above long-term averages, yet China, the world’s largest consumer, is not buying US soybeans and pushing prices down.
History appears to be repeating itself, but with potentially lasting consequences for US row cropping. Many farmland experts see cropland values entering correction territory.
Increased borrower power: There’s always competition in agricultural lending, sage advice from a mentor that still holds true. The difference now is the intensity dial has been turned up. Farm profitability is strong, debt is being repaid, and interest rates have eased, making agricultural lending more attractive than it has been for some time.
Lenders on both sides of the ditch are working hard to get and keep money out the door. Several banks are aggressively chasing market share, driving competition higher. Achieving growth often means offering highly competitive pricing and, in some cases, taking on more risk.
Borrowers should take advantage of the stars aligning and use the heightened competition to negotiate loan terms that work in their favour.
Global: There’s plenty happening around the world. Markets are closely watching the US-China relationship, which has recently shifted focus to rare earths. New export controls require Chinese government approval for exporting rare earths or products containing critical minerals.
China has strategically chosen a market it dominates. As Chinese leader Deng Xiaoping famously said in 1992, “The Middle East has oil; China has rare earths.” Today, China controls 70% of rare earth mining and 90% of processing. The (now) unsurprising response from the US was more tariffs, adding to the tit-for-tat dynamic which will go on creating economic uncertainty and market volatility.
Meanwhile, the US government has been in shutdown since 1 October, with Republicans and Democrats at an impasse over the next funding bill. This stalemate raises the possibility that the US Federal Reserve could make its next interest rate decision without the latest key economic data, including jobs and CPI. Their recent Beige Book indicates conditions remain weak, suggesting further easing may be likely. Markets are now pricing in two 25 bps rate cuts for the remainder of the year.
Locally: All eyes are on the Australian and New Zealand September quarter CPI releases due in late October. The data-dependent central banks are waiting for this information before deciding their next rate moves.
Hotter than expected monthly inflation figures in July (2.8%) and August (3.0%) hint at resurgent inflation in Australian. If this trend carries through to the more reliable quarterly data, it’s likely the RBA will hold rates steady in November, waiting for a clearer picture in February.
In New Zealand, markets expect September quarter inflation to land at the top of the 2–3% target band. This presents a challenge for the RBNZ, which has front-loaded rate cuts to stimulate a weakening economy. During our recent trip to New Zealand, sentiment outside of agriculture was overwhelmingly bearish, leaving the key question of whether the current stimulatory rates are enough to lift the economy out of the doldrums.
Quote of the update
“I think tariffs are the ice cream on the cake of a perfect storm” – Arkansas farmer Scott Brown.
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