LAST week, the Reserve Bank of Australia raised interest rates 0.5 percent to 0.85pc to combat high inflation, which currently sits above 5pc.
This rate rise followed an upwards adjustment of 0.25pc in May. Together, these two adjustments mark the first time interest rates have increased in Australia in more than 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?
Meat & Livestock Australia’s Stephen Bignell recently looked into the topic.
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 93pc and 91pc 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 81pc 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 4cpc since May, from US69¢ to US72¢ by this time last week. (Editor’s note: the currency has since fallen to around US68.7c today). The earlier 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.