RBA holds rates — but rural Australia faces an interest rate problem of its own

 

The Reserve Bank has left Australia's cash rate unchanged at 4.35 per cent, avoiding another immediate increase in borrowing costs.

For rural Australia, that matters.

Farms and rural businesses are frequently capital-intensive operations.

Land, machinery, livestock, sheds, irrigation equipment, vehicles, fuel and seasonal working capital can require substantial financing.

A seemingly small movement in interest rates can therefore become a significant expense when applied to millions of dollars of debt.

The August decision provides some breathing space.

It does not mean the pressure has disappeared.

Rural businesses experience interest rates differently

A home mortgage is relatively straightforward.

Agricultural finance can be considerably more complicated.

A farming enterprise may simultaneously carry property debt, equipment finance, livestock finance and working-capital facilities.

Income can also be seasonal and unpredictable.

Rainfall, drought, floods, commodity prices, disease, international demand and currency movements can substantially change revenue from one year to the next.

Interest payments, however, still fall due.

That makes high interest rates particularly significant for leveraged rural businesses.

The cost of machinery

Modern agriculture requires expensive equipment.

Tractors, harvesters, earthmoving machinery, irrigation equipment and specialised vehicles can represent enormous capital investments.

Financing costs therefore influence decisions about whether equipment should be purchased, replaced, repaired or retained for another season.

Higher rates can encourage businesses to postpone capital expenditure.

That may help cash flow in the short term but potentially creates another problem if ageing equipment reduces productivity.

Fuel and inflation

Rural Australia also experiences the inflation problem differently.

Fuel is not merely something purchased for the family car.

It is a fundamental business input.

Diesel powers agricultural machinery and trucks and is embedded throughout the transport system carrying agricultural products to processors, ports and markets.

International oil-price increases can consequently feed through rural supply chains.

The RBA cannot manufacture diesel or determine the international oil price.

It can attempt to prevent those price increases from spreading into persistent Australian inflation by restricting demand.

For rural businesses, that can produce the uncomfortable combination of expensive fuel and expensive finance.

Banks do not lend at the RBA rate

The 4.35 per cent cash rate does not mean farmers are entitled to borrow at 4.35 per cent.

Commercial lenders establish their own interest rates.

Agricultural lending rates can depend upon security, equity, cash flow, commodity exposure, repayment history, the purpose of the loan and the lender's assessment of risk.

The RBA cash rate influences funding conditions throughout the financial system, but it is not a government-mandated retail lending rate.

That distinction becomes increasingly important as debt grows.

Even relatively small differences between lenders can become substantial when applied to large rural loans.

Land values and interest rates

Interest rates can also influence rural property markets.

Cheap finance can increase the amount buyers are capable of paying for land.

Expensive finance works in the opposite direction.

But agricultural land is not valued solely as a financial asset.

Productivity, water availability, location, commodity prices, farm scale and expectations about future agricultural returns also matter.

Higher rates may nevertheless change the calculations of buyers who require substantial borrowing to complete an acquisition.

Cash-rich buyers are placed in a very different position.

What happens next?

The RBA's next decision is due on 29 September.

Inflation will remain central.

So will consumer demand, employment, wages, fuel prices, international conditions and evidence about how strongly previous rate increases are affecting the economy.

Governor Michele Bullock has not ruled out another increase.

Rural borrowers should consequently be wary of constructing budgets around the assumption that rates have peaked.

The Rural Times View

For rural Australia, the RBA's decision is welcome primarily because things did not become more expensive.

That is a modest victory.

Agriculture is capital intensive, exposed to international commodity markets and heavily dependent upon fuel and transport.

Interest rates add another variable to an already complicated business equation.

The prudent approach is therefore to treat 4.35 per cent as today's reality — not as a guarantee of tomorrow's direction.

The RBA has paused.

For farmers and rural businesses carrying substantial debt, what happens next still matters enormously.