Rate rise will hit farmers

09 Mar, 2005 10:00 PM

FARM finances, already reeling from the strong Australian dollar, have been hit by a 0.25pc rise in interest rates.

With debt averaging about $370,000 per Australian farm, the rise is expected to cost the rural sector $120 million.

It is the first change to rates since December 2003, but economists believe it could be followed by another rise.

Farm lobby groups attacked the Reserve Bank of Australiaís (RBA) decision.

WAFarmers president Trevor De Landgrafft said it had raised rates for the sole benefit of the housing market, to the detriment of export industries such as agriculture.

ìWool and grain prices are currently depressed.," Mr De Landgrafft said.

"The impact of interest rate rises on our exchange rates will only exacerbate the situation."

He said interest rate rises hurt export competitiveness in both the cost of money and the currency exchange rate.

ìThis is exaggerated for the agricultural industries, with input costs increasing as the price they receive for their product falls," Mr De Landgrafft said.

He said 20pc increases in input costs from last year, and extremely low commodity prices, had left farmers with no choice but to reduce essential farm inputs like fertiliser.

National Farmers Federation economics chair Charles Burke said about 10pc of total farm cash was spent on servicing debt.

He said the economy was slowing, the housing market had improved, and farm incomes were expected to fall by 12pc in 2005-06, which meant the RBA should have waited to put up rates.

The rise came on top of one of Australiaís worst trade performances on record, with the current account deficit at $15.2 billion.

ìWe need to boost exports to address the record current account, which means that ideally, our interest rates should be falling relative to our major trading partners,î Mr Burke said.

RBA governor Ian MacFarlane said the rate rise was required because the Australian economy faced capacity constraints, which was resulting in inflationary pressures. National and world conditions were likely to encourage spending, and commodity prices were rising.

National Australia Bank (NAB) has predicted the Australian dollar could depreciate from US78c to US70c by harvest this year, but NAB agribusiness and treasury management head Tim Keith said predictions were unreliable.

ìThe Australian dollar is actually the sixth most traded currency in the world behind the US dollar, the euro, the yen, the pound and the Canadian dollar, so youíre always going to have that volatililty,î he said.

He said that exchange rates had a direct and profound effect on the price of wheat and canola paid to Australian farmers.

For commodities such as wool and beef it had the indirect effect of making them uncompetitive internationally.

ìThe difference between 82c and 70c is quite pronounced, youíre talking 120c/kg or 130c/kg difference in the price of wool,î he said.

ìA 1pc positive movement in the currency strips $115m from Australian agriculture, so every year thereís a $2.3b change in what Australian agriculture is worth, simply because of the volatility in the currency.î

The dollarís current strength was due to doubts about the twin deficits in the US. Australiaís own deficit problems could see its value fall.

Mr Keith said there were ways farmers could minimise the effects of currency fluctuations, including locking in the currency on forward exchange contracts, or locking in commodity prices.



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