With new farmland price records set every week, some advisors are concerned that farmers are being tempted to take on dangerous levels of debt, just as interest rates seem set to rise.
On the weekend, Reserve Bank of Australia governor Philip Lowe said, "we can be sure there will be another shock", referring to large mortgages.
"Rising interest rates on higher debt with higher asset prices - you can see the fault lines here," he said.
The RBA governor might have had residential mortgages in mind but, with double-digit growth in farmland prices over the last three years, agriculture could also take a hit as interest rates rise.
As demand for everything from housing to fertiliser outstrips supply, the big banks and financial markets are already working on the assumption that the RBA will lift rates to dampen inflation.
Bendigo and Adelaide Bank Group head of economic and markets research David Robertson said the first rise in the RBA's official cash rate was likely to come in August and perhaps as soon as June.
"We don't expect a move really until August but, nevertheless, they're going to be talking about the move for rate hikes, probably preparing us for five to six increases over the next 12-18 months," he said.
Asked if there was still time to lock in low fixed interest rates, Mr Robertson said they had already begun to lift over the last three months.
"The horse has bolted a little bit, I'm afraid," he said.
"There are still some good opportunities to buy fixed rates but they were lower last year prior to the inflationary pressures coming through."
Mr Robertson said that, while the Rural Bank Farmland Values report detailing farm prices for 2021 was yet to be released, they had certainly continued to surge.
"The 2020 number was up by 13pc," he said.
"We'd expect higher again. The 20-year compounding average growth rate is 7.6pc, so it'll probably be double or triple that number in 2021."
"Higher interest rates are going to moderate that, but it needs to be in the context of just how far it's risen over the last few years and, really, over the last couple of decades."
Last year's Australian Farmland Values report showed the once-strong correlation between commodity price and farmland values in Australia came to an end in 2016. Since then, property prices have accelerated even more quickly than the booming commodities.
More than equity
The uncoupling of productivity from land prices was something to be mindful of, National Australia Bank Horsham agribusiness manager Tristan Monti said.
NAB took responsible lending seriously, he said, which meant taking the likelihood of rising interest rates into account so repayments were affordable long term.
"We work really hard with our customers to help set them up for long-term success, including helping them understand how to service debt," Mr Monti said.
It meant bankers sometimes had to turn down applications, even for those with strong equity levels.
"Saying no is the hardest conversation in the world," Mr Monti said.
"I'm not here to tell people how to spend their money. I'm telling people whether they can afford it or not."
Those who could afford high land prices, he said, were often farming families with large holdings acquired over time.
"You have to have 10 or 15,000 acres behind you to carry it through and that's what we're seeing; people who are buying these big areas for big prices have a lot of generational land that's been passed down to them to carry this debt," Mr Monti said.
FOMO factor
Mr Monti said he had come across successful farmers buying land for children as young as seven, fearing land would be unaffordable when the next generation matured.
The growing interest of large corporate and institutional buyers in agriculture only amplified those concerns, he said.
He had worked in the bank's farm debt mediation service, an experience that Mr Monti said might have made him a little more risk averse but he encouraged farmers to direct some resources now towards preparing for more difficult years.
"I'm trying to educate my customers to be prepared for different environments, higher rates, drought, other unforeseen issues because we've had five good years out here and everybody knows we're due for a bad year," he said.
"The key is to be prepared. I'm thinking obviously not just 12 months ahead, but 5, 10 and 15 years, because this debt will be carried forward now for generations, not just a lifetime, but actually generations to pay down some of this debt."
Long memories
The lag between overconfidence and financial difficulty is something Rural Financial Counselling Service Southern Queensland chief executive Ross Leggett knows first hand.
Although most new clients were now approaching the service to prepare for the next downturn, he said the RFCSSQ was still working with clients going through financial challenges, including debt mediation, in the aftermath of the drought.
"We're keenly watching the current activity in the rural market, both with rising land prices and low interest rates," Mr Leggett said.
Rather than a fear of missing out, he said, the market was being driven by very high levels of optimism and urged farmers to take a long-term view.
"Don't have too short a memory," Mr Leggett said.
"We've had higher interest rates with lower land prices and commodity prices over the course of the last 10 years.
"If we only ever looked at the worst coupled with the worst, coupled with the worst, we'd talk ourselves out of getting out of bed in the morning.
"But I'd advise farmers to ask themselves how they would cope should one of those things return?
"There has never been a better time to prepare for future challenges than now."
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Marian Macdonald
Writing for farmers in the Stock & Land, The Land, Queensland Country Life, Stock Journal and FarmWeekly, farming in Gippsland.
Writing for farmers in the Stock & Land, The Land, Queensland Country Life, Stock Journal and FarmWeekly, farming in Gippsland.
