Interest Rates and Your Farm Business

Mike Krause: (00:03)
My next guest is Darryl Gobbett. Now a visiting fellow at the South Australian Centre of Economic Studies at the University of Adelaide, Darryl is an eminent economist, and has had many roles in his successful business career. Darryl and my paths crossed actually back in the late 1980s, so a long time ago, when the State Bank existed, the predecessor to BankSA. Notably, back in those times, interest rates hit the giddy heights of 22%. Darryl is a rare commodity when it comes to the economic community, as he is a good communicator, helping us understand these issues in complex economic times. Welcome, Darryl, to Your Farm Business podcast.

Darryl Gobbett: (01:10)
Thank you, Mike.

Mike Krause: (01:12) Long-Term Interest Rates
Darryl, I'd like to kick off with… A lot of farmers ask me about the high interest rates in the 1980s. Can they forget these as we'll never get there again, or is there a possibility we could get back there?

Darryl Gobbett: (01:26)
I think say saying ‘never’ lasts a long, long time. We may well see those types of interest rates again, but I think the likelihood of it is very low, particularly over the next couple of years. The Reserve Bank has set a target of inflation of 2 to 3% and doesn't even see that target being reached until probably well into 2023, 2024 on a sustainable basis. The cash rate's now 0.1 of a percent. You've seen variable rate loans out there as the base rates in the order of 2%, 3%. The Reserve Bank, in its monetary statement in May, sort of suggested that most market participants, in fact, don't see the cash rate starting to move up probably until at least no earlier than late 2022, 2023.

But I think there's also a broader issue here, and that's since the 1980s, we've been globally in a situation of declining interest rates. Australia's interest rates peaked a lot later, in 89, 90, than they did globally, such as in the United Kingdom and United States. And so we've had this long-term trend of falling interest rates now for the best part of 30 to 40 years. And that followed, and some of your listeners, they talk to mum and dad about tis, that followed what was an 80-year rise in interest rates from the 1890s through to the 1980s.

Mike Krause: (03:10)
So it's a really slow moving wave, then.

Darryl Gobbett: (03:14) Demographic Changes and COVID Effect on Interest Rates
That's right. And so there's this very long-term trend. And one of the reasons that the academics put for that is demographic change. The population growth has been slowing down since the eighties and nineties. In fact, some of your listeners may well be aware that China's working age population is now falling and their total population is likely to peak, probably within the next five to 10 years, and then start falling. Same thing's happening in Japan and Korea. So a lot of the countries where we had strong population growth which helped drive the Australian and global economies, are now are going into these long population declines, or have been in them for a couple of years. And so there's this view that in fact interest rates on a long-term trend are going to stay low for a lot longer. And then there's also been more work coming out about the impact of COVID and pandemics on interest rates.

Mike Krause: (04:13)
Well, that's interesting because we've just come into COVID. It's made the economy quite complex. So what's the outcome there?

Darryl Gobbett: (04:20)
We've got a sort of a short-term issue, short-term in two to three years for the Reserve Bank, to try and get inflation back up. We've got this COVID issue now affecting us, which having had a look at previous pandemics, could play out for 20 years in terms of its economic and interest rate impact. And we've also got this long-term global drop in interest rates. So I think people could be seeing low interest rates, perhaps not as low as we've seen today, because these interest rates are now the lowest the world has ever seen, and I'm not talking about this century or the last century. This is data that the Bank of England has put together, going back 3000 years. We are in the very lowest interest rates we've ever seen. And I think we're, yes, we might well start to see some lift, but it would be in the order of perhaps 1 to 2% over the next three to four years.

Mike Krause: (05:15)
Well, Darryl, does that then raise the question... I know farmers are saying, "Oh, should we fix interest rates? Because the RBA is thinking of interest rates coming up." But if we're at such low levels, that decision of fixed versus variable is a non-event. They'll all be staying at low levels. Is that what you're...?

Darryl Gobbett: (05:35)
Well, my view is you'd have a mix of variable, for your working capital and probably fixed, for that longer term stuff. Because I think the issue's not going to be so much about being able to service the interest rate - it's as you've spoken to with your previous podcaster: are people concerned about the current valuations they're having to pay for land?

Darryl Gobbett: (05:59)
So I think that probably becomes more of the question relative to the cash flow issue of whether interest rates are going to go up. But yes, my recommendation would be, you'd probably stay on variable for that type of finance that's going to be going up and down, in terms of volume, your working capital-

Mike Krause: (06:15)
Like your overdraft.

Darryl Gobbett: (06:17)
Do look to fix at least some of your term interest rates, particularly as you'd sort of say, even if they went to zero, you might save yourself 2 or 3%, whereas they could well start to move up. I think move up in a very sort of slow fashion.

Mike Krause: (06:37) Impact on Rural Land Values
Darryl, you also mentioned to me when we were preparing for this, that you felt the low interest rates were encouraging our rural land values to continue to grow, as we've witnessed quite significantly over the last 20 years. What's your take on that?

Darryl Gobbett: (06:55)
Well, there's two issues here. One is for farmers themselves, that they're looking to expand, these interest rates have never been lower, so there's a demand there. But there's also a demand from outside the sector and there's increasing interest, and I am an investor in agriculture, there's an increasing interest from outside investors in agriculture, both land, but also the services and the products that are being produced by Australian agriculture. And I think this will continue to grow. So then the question is: If in the past farmers might've been making perhaps a 3 or 4% capital growth on their properties and you'd say, "Well, when interest rates were 15 to 20%, we're not going to invest in that from outside."

Darryl Gobbett: (07:46)
Now they're looking at interest rates of perhaps 0% on deposits. You’ve got dividend yields now, probably no more than 2 to 3%. Farm land, if it's continuing to grow, and it does grow long-term to a value of 3 to 4%....

Mike Krause: (08:02)
It's actually a bit higher than that. I think it's actually even as high as 7 or 8% over the last 10 years in some areas.

Darryl Gobbett: (08:10)
Yeah. And some of that might well reflect low interest rates. But if you've got what is a very long-term capital growth, long-term productivity growth, and we know the agriculture sector is one sector which actually shows strong ongoing productivity growth, then it's a good place to invest. And I think that's going to continue to see land prices go up and probably see also water prices on a long-term trend upwards, even though we've had very good rains this year.

Mike Krause: (08:45) Asset Values in Farm Land and Water Resources
So effectively what you're saying then, Darryl, we're in an environment where interest rates are low, which is encouraging our asset values in our farm land and water resources to be higher. So farmers, I guess, can look at investing in growing their businesses in this different context and take some more confidence perhaps in having to live with these high asset values. Because they're not going to fall. They're going to go up.

Darryl Gobbett: (09:13)
That's right. On my expectation that we're seeing this continued long-term trend in lower interest rates, that's going to attract outside investors in particular into Australian agriculture, because there is still going to be growth in the Asian economies. There's growth in the middle classes. I think we're also going to see, as we're seeing in the United States and other areas, climate change, where they haven't become as adapted to the vagaries of climate like Australian farmers had to adjust to over the last 150 years. It could well be that our ability to grow high-quality food stuffs and fibres and energy crops in more variable climates may well put us in good standing versus farmers in other countries, who've had much more moderate, less variable climates.

Mike Krause: (10:15)
Okay. So I guess the point is then, for farmers who are listening to this podcast, if you're looking at buying and expanding, yes land values are high, you'd have to consider. One thing's in your advantage, interest rates are low and projected to stay low, but I guess there's confidence that the asset you're buying will maintain its value, if not increase. And so, expanding is a challenge from a cashflow and profit activity, but from a balance sheet activity, it's quite a strong thing still to do.

Darryl Gobbett: (10:48)
Yeah. I mean, I look at the almond industry in Australia, which is one of the most rapidly growing and changing, and the main competition probably comes from California. They're running out of water. Whereas our crops are probably going to have water issues in years to come. But I think we are managing those water resources, both at a public level, but particularly at a private level with the farmers. I think we're managing those water resources a lot better, and you look in California, rivers are drying up and they have a lot more competition from people wanting to grow golf courses and lawns than our almond farmers or our olive farmers do. I think we're now seeing the return of dried apricot growing to Australia, after being principally a crop coming in from-

Mike Krause: (11:40)
From Turkey.

Darryl Gobbett: (11:41)
... Turkey and the Mediterranean. And as I said, I just think there's huge opportunity there, particularly because Australian farmers probably have managed these climate issues better than others because of what we've had to deal with for 150, 200 years.

Mike Krause: (11:59)
So well done, Australian farmers, in doing that. Darryl, thank you very much for your insight in these complex times, particularly on interest rates and land values and water rights. And thank you for your contribution. We look forward to catching you again sometime.

Darryl Gobbett: (12:18)
Okay. Thanks, Mike. Bye.

Mike Krause: (12:18)
See you mate. Bye.