Big seasons and a flush of big farm commodity earnings have put farmers in a handy position to defend themselves in the face of an inevitable rebound in interest rates this year.
However, as farm businesses also juggle mounting supply chain cost pressures aggravated by Russia's war on Ukraine, bankers are warning them to plan for various inflationary risks and cost-price margin pressure on their balance sheets in 2022-23.
A rising Australian dollar also threatens to make farm exports less competitive in what is already set to be a volatile year for global market values.
To date the official Reserve Bank of Australia cash lending rate has been on a 12-year downhill run since hitting 4.75 per cent in 2010.
Now financial markets are factoring in a full percentage point rise in official interest rates, possibly by year's end, plus another percentage point jump next year.
Three-year government bond yields at 2.4pc are at their highest point since 2014.
The RBA rate has lingered at a record low of just 0.1pc for 15 months, but the US Federal Reserve has just lifted its rates for the first time since 2018, from zero to 0.25pc, with more hikes to come.
Fed chairman Jerome Powell flagged US official rates would climb to almost 2pc by December, followed by another three increases in next year, making it almost inevitable Australia's will also soon return to levels not seen for five years.
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Commercial lenders have been anticipating the rise for six months.
Five-year home loans have jumped at least a full percentage point in the past year - up from an average 2.6pc in March 2021 to 3.8pc this month.
The most recent federal government assessment of Australia's total farm, forestry and fishing sector debt totalled more than $91 billion in June 2021.
Agricultural borrowings alone were worth almost $84b the previous year - up from $73b in 2019.
Rates on the rise
"Long term interest market rates have already moved so there is a realistic expectation that lending rates can't remain as low as they have been," said Commonwealth Bank of Australia's agribusiness executive general manager, Paul Fowler.
Fortunately, however, he said many in the rural sector had banked at least two seasons of good or very good returns which had shored up farm balance sheets and seen loans paid down.
A lot of investment spending has been largely covered by the good crop and livestock earnings which have flowed in
- Paul Fowler, Commonwealth Bank
Mr Fowler noted even the surge of spending on new farm equipment and infrastructure, livestock and rural property in recent years had not undermined strategic borrowing habits learnt in the wake of the global financial crisis and during recent drought years.
"A lot of investment spending has been largely covered by the good crop and livestock earnings which have flowed in," he said.
"Farmers are enjoying a tremendous period at the moment, but I think they are also mindful of keeping their loan growth at a responsible level and paying careful attention to cash flow and costs."
Mr Fowler said significant input cost rises in the past six months, as well as the cost of restocking and securing new equipment, appeared very much top of mind for CBA customers contemplating the year ahead, particularly croppers.
Fert index up 40pc
National Australia Bank's fertiliser index jumped 40.5pc on a year-on-year basis in February, or a whopping 119pc compared to the same time in 2020.
Meanwhile, diesel last week averaged above $2.22 a litre in regional Australia - up about 60c/l since mid January.
NAB's senior agribusiness economist, Phin Ziebell, said while bullish prices and good production levels had largely shielded Australian agriculture from the past year's rising farm input values, cost-price pressures were now growing fast because of global volatility.
Although NAB's Rural Commodities Index has risen to be more than 20pc higher than the same time in 2021, Mr Ziebell said inflation was a rising concern yet to hit Australia to the same extent as some countries were already feeling.
The RBA has forecast underlying inflation to increase to around 3.75pc in coming quarters, but to settle around 2.75pc in 2023.
NAB expected the Reserve Bank to start raising the cash rate in August and the dollar would be about US77 cents by December.
Mr Ziebell said Russia's invasion of Ukraine had sent shockwaves through global farm commodity markets, exacerbating the rise in fertiliser prices seen since the onset of the COVID-19 pandemic.
Senior Rabobank commodity analyst, Wes Lefroy, noted Russia supplied 14pc of global urea exports and 21pc of potash, which made global supplies much tighter than usual.
Focus on margins
Fellow commodity analyst, Cheryl Kalisch Gordon, warned while higher commodity prices were a boon for Australian farmers, record input prices meant graingrowers would need to have a strong focus on margin control in the 2022-23 season.
"Growers will need to keep doing the sums to make sure they are pricing according to an outlook for higher input prices and potentially softer grain prices - even though we expect grain to still be well above average prices," she said.
For example, returns from urea application in wheat crops had fallen from nearly 10:1 in 2019 to 2.5:1 at current prices.
CBA's Mr Fowler said while Australia was fortunate to have an "incredibly savvy farmers" whose resilient business models had withstood a lot of challenges in recent years and were well attuned to risk, it was important to be having "good conversations" with their bank managers and accountants to protect their business and their earnings.
"There's a lot of very sound cash flow and financing strategies happening in agriculture at the moment, but it's important not to rest on our laurels."
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