What to look out for in 2025?

1. Inflation remains

The inflation genie has escaped the bottle and is running amok.

A cautionary tale is the pattern of US inflation from the oil shock in the 1970s (blue line). The initial phase was driven by the oil price impact and the second phase by cost push inflation as wages rose in response. The current outbreak is following a similar pattern (red line) and if a wage-price spiral develops it should begin rising again soon.

In Australia the inflation outlook is much worse. Unlike the US, which benefits from a strong currency to lower import prices and solid labour productivity at 2.6%, Australia faces a weakening currency and stagnant labour productivity.

For farmers, inflation is an insidious beast. While commodity prices inflate, input costs often rise faster. A Grains Research & Development Corporation Research study of grain farmers from 20213-2023 revealed input costs soared by 139%, while commodity prices managed to only lift by 35%.

With inflation still above 3%, managing costs is critical to maintaining farm profitability. The key takeaway – keep a close eye on your cost base.

2. Interest rates stay higher

Let’s face it, predicting when the RBA will cut the cash rate is a bit like trying to guess next year’s weather. The market chatter about a February rate cut seems overly optimistic, especially considering:

• Inflation is the RBA’s main game and despite trimmed mean inflation, the RBA’s preferred measure, falling to 3.2% in November it remains above the RBA target range of 2-3%. The drop was also driven by non-recuring government electricity subsidises
• November’s unemployment rate of 3.90% is still well above the RBA’s measure of full employment benchmark of 4.75%
• Wages are growing at 3.5%, a pace incompatible with taming inflation
• A weak Australian Dollar is now at a 22-year low against the US Dollar. This increases the price of imports and Australia, with its small manufacturing base, has little capacity for import substitution.

Add in geopolitical tensions (Middle East, Ukraine, Taiwan…), deglobalization (Trump tariffs, EU carbon emissions equalisation tariffs), and continued government spending, and the case for a rate cut anytime soon feels shaky at best. Even if politics overrides economics to deliver rate relief, it likely won’t happen until later in 2024.

The interest rate yield curve (see graph) signals the markets clear expectation that any cuts to be temporary and leading to then higher rates later to control inflation.

Given the upside risk to rates, borrowers should consider fixing interest rates. This is going against the tide for many borrowers who, up until COVID-19, sat on variable rates and enjoyed decades of falling or low interest rates.

The yield curve is inverted, meaning medium-term fixed rates (e.g. 3 years) are cheaper than short-term rates. For example, a borrower could fix a 3-year rate at 3.95% (excluding customer margin), immediately reducing interest payments by 0.43% (against the cash rate) while shielding against variable rates coming down slower (blue line) or further hikes (orange line).

The downside risk is rates dropping aggressively like the current RBA forecast (green line), noting the RBA has repeatedly pushed back rate cut forecasts.

Fixed rates could offer both cost savings and peace of mind in an uncertain environment.

3. Banks outsource account management

As banks tighten their belts, traditional account management is increasingly being outsourced. Regional branch closures, call centre reliance and high turnover of account managers leave many customers feeling overlooked and under serviced. Farmers value relationships where their lender truly understands their business.

The main winners in this shift – non-bank lenders and agri-brokers. The RBA reports that banks’ dominance in agricultural lending has slipped from a 97% market share to 93% in 2024. Expect this trend to continue as non-bank lenders step up with tailored financing options and fresh value propositions.

Brokers are also gaining traction. Currently, they originate 70% of new home loans in Australia (Mortgage & Finance Association of Australia), and while agri-brokers might not reach those heights, their role in agricultural lending is growing rapidly.

Historically, brokers were the go-to for higher-risk deals. Now they’re engaging with a broader spectrum of farmers, positioning themselves as trusted advisors in a space once dominated by banks. This shift is effectively the banks outsourcing their relationship management to brokers (and farm consultants) and reducing their role to just a funds provider.

Farmers are also increasingly savvy about their financing options. Many feel the pinch of a “loyalty tax,” where long-term customers pay more while new clients snag the best deals. Agri-brokers are stepping in to confirm these suspicions and secure better financing, whether it’s from traditional banks or new non-bank lenders.

The takeaway – as banks continue to scale back investment in relationships, farmers are finding new ways to ensure their financial needs are met, often with more competitive and tailored outcomes.

4. A patchy 2025 for rural property

The rural property market in 2025 is shaping up to be highly variable. After a noticeable slowdown in farmland sales during 2024, the pace in 2025 is expected to remain cautious. With the balance of power shifting from sellers to buyers, capital growth will likely moderate and some regions may see land values dip due to poor seasons or commodity-specific pressures.

Interest rates continue to weigh on the market, cutting into farm income and reducing appetite for acquisitions. This follows a mixed 2024, where regions like southern QLD and northern NSW enjoyed bumper winter crops, while others like SA struggled with record-low rainfall. These uneven fortunes will affect farmers’ ability to manage debt loads and fund new purchases, creating significant regional variation in market activity.

Inflating farm costs will also see emphasis on a property’s productivity and cash flow potential. Fully developed assets with a history of performance will be well sought after.

There will be opportunities amidst rising financial stress. While financial stress was relatively low in 2024, rising costs, falling equity buffers and tighter serviceability ratios will likely prompt more lenders to push for debt recovery actions. For well-capitalised buyers, this could mean expansion opportunities in a market where some are forced to sell.

Despite these challenges, Australia’s farmland market continues to attract institutional capital, both local and international. Offshore investors are particularly interested, with the weaker Australian Dollar enhancing opportunities. The growing focus on “natural capital” is now a key theme, drawing significant allocations of capital into the sector.

The outlook for 2025 – a patchy market with pockets of opportunity.