Rising interest rates will see farmers with debt allocating more than a fifth of their farm incomes to finance payments, on average, this year.
And it's Australia's biggest farmers and corporate agricultural businesses who are the most likely to feel the rate rise pain, especially if seasonal and market conditions slide further in coming months.
According to the Australian Bureau of Agricultural and Resource Economics and Sciences, total farm business debt grew 22 per cent in the three years to the end of last December as many producers took advantage of good seasonal conditions and commodity prices to expand and upgrade assets.
However, despite a 10th consecutive increase in the nation's official central bank rate this month, and total farm debt nearing $100 billion, rural borrowings were actually less vulnerable to interest costs than they have been for about two decades.
Part of the reason had been a 47pc jump in average Australian broadacre farmland values in the past two years - well above the 4pc average over the previous two decades.
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Even landholders with significant debt saw big rises in the equity levels they hold in their farmland.
Average farm borrowings per farm hit an estimated $1.45 million at the end of last financial year - up from about $1.25m two years earlier.
Property purchases were the main reason for that debt growth.
However, ABARES research showed while business debt levels had leapt of late, farmers' debt to equity ratios stayed relatively unchanged because of the strong uptick in land values.
Thanks to upbeat seasonal and market conditions the past few years of improved farm earnings also meant many farmers had more capacity to repay borrowings in the short term.
Today's interest rates, as a proportion of farm income, were also much lower than in the mid-2000s.
In fact, a third of Australian farm enterprises now had no debt at all, according to ABARES' farm performance assistant secretary, Peter Gooday.
Big guys, big costs
"It's the big end of town which is most likely to be impacted by rising rates," Mr Gooday said.
"The relatively large family farmers and corporates, who make up about 15pc of the industry, have two thirds of the debt and hold less than 85pc equity in their land."
He told the agricultural Outlook 2023 conference, this category had borrowed the most, had relatively high debt servicing burdens and would also feel the impact of lower profits as record high commodity prices fell and seasonal conditions inevitably dried out.
Typically, these bigger enterprises also enjoyed limited off-farm income support.
After three good seasons, conditions are changing - it's not such a good time to be watching interest rates rise
- Peter Gooday, ABARES
They had relied on relatively high cash flow which tended to be reinvested back into extra land purchases or upgrading equipment, and to service interest rate costs which had been at record lows until a year ago.
"After three good seasons, conditions are changing - it's not such a good time to be watching interest rates rise," Mr Gooday said.
Meanwhile, at the other end of the ownership spectrum about half the farmers in another category, representing about a third of all landholders, held more than 85pc equity in their land.
"They've built up a buffer against market and seasonal volatility and typically also have relatively good sources of off-farm income," Mr Gooday said.
This year the average proportion of Australian farm income consumed by repayments on borrowings was projected to grow to around 21pc as interest rate rises continued to flow through beyond the latest Reserve Bank of Australia's benchmark cash rate increase to 3.6pc.
"Because circumstances vary, some farms will be more adversely impacted by this than others," Mr Gooday said, noting 10pc of broadacre and dairy farms actually recorded cash losses in 2021-22, despite the industry's record averages.
That proportion of farms with negative earnings could rise to 13pc during 2023, especially as forecasts suggested agricultural prices and seasons would not stay as good as they had been.
"Over the long term it's productivity growth that provides for growth in farm incomes," he said.
Farm income forecast
ABARES tipped Australia's average farm cash income should land at around $327,000 in 2022-23, after deducting business costs.
That's about 46pc higher than the 10-year average, but 7pc down on last year's bumper average result, given most commodity prices were slipping and farm running expenses had grown significantly.
However, cropping and mixed farm cash incomes were set to lift slightly this year to average $665,000 a farm, which was 75pc above the 10-year average, thanks largely to big results in South Australia and Western Australia.
Too much rain and floods had diluted mixed farm incomes in NSW, Queensland and Victoria, with up to 8pc of NSW's crop planting area lost to flooding and 3pc in Victoria.
Despite wet conditions and floods and falling milk output, dairy farm incomes were projected to increase to average $391,000 each, reflecting a significant jump in farmgate milk prices.
Lower livestock prices were likely to trim average results for sheep and beef enterprises to $168,000, but that would still be 18pc above longer term averages.
However, Mr Gooday noted in regions dominated by smaller livestock farms such as Tasmania, South West Victoria and NSW's Central and Southern Tablelands, incomes remained below the longer-term average.
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