What the interest rate rise means for producers
09 June 2022
Key points:
- On Tuesday 7 June the Reserve Bank of Australia (RBA) increased the cash rate 0.5% to 0.85%.
- The May and June interest rate rises have caused the Australian dollar to appreciate.
- Sheep and beef farms in Australia have equity ratios above 91%, making them less reliant on debt and therefore less reactive to interest rate rises than other industries.
This week, the Reserve Bank of Australia (RBA) raised interest rates 0.5% to 0.85% to combat high inflation, which sits above 5%. This rate rise on Tuesday followed a rate rise of 0.25% in May. These two rate rises mark the first time interest rates have increased in Australia in over 12 years.
There is commentary that the recent rate rise will impact mortgage holders as the RBA rate rises are passed on by the banks – but what do these rate rises mean for producers?
Equity ratios reduce reliance
An equity ratio measures how leveraged a business is. The higher a businesses’ equity ratio, the more of its assets it owns outright. Meanwhile, a low equity indicates that the business relies more heavily on debt funding for its operations and asset purchases.
As shown in the most recent data from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), sheep and cattle farms have extremely high equity ratios at 93% and 91% respectively. For the Australian red meat sector, this means farmers are less reliant on debt and therefore less likely to be impacted by the interest rate rises than some other industries. By comparison, Australian cropping farms have an equity ratio of 81% on average.
Capital value stays strong
Further demonstrating the strength of the industry and its ability to deal with interest rates is the capital value of Australian livestock farms, which had increased 6%/annum to nearly $6 million when last recorded in 2020. Off-farm income and liquid assets of farm businesses are also performing well, according to the latest ABARES data.
Australian dollar appreciates
The other impact of the rate hikes has been that the Australian dollar has appreciated 4% since May, from US69¢ to US72¢. This rise in the Australian dollar is linked to the rate rises and may impact the competitiveness of Australian exports on the global stage, including red meat.
Into the future
The interest rate rises will not ease. However, while not all farming businesses will be able to weather the increase in rates, the recent ABARES figures indicate the red-meat sector is comparatively well placed to cushion some of the rises.
