Smart Moves for 2026: Fresh Food for Thought in Farm Planning

Economic Pressures Test Farm Resilience, But Recovery Emerges

Australian farmers are navigating one of the most challenging interest rate environments in two decades, yet profitability is staging a remarkable recovery in some parts of Australia. The RBA cash rate has been as high as 4.35%, which was up 0.8% from 3 years earlier. Currently it sits at 3.8%, showing it’s volatility. fundamentally reshaping farm business economics. Interest expenses now consume 12% of gross cash income, up from just 8% directly impacting every financing decision from seasonal operations to equipment purchases.

Despite this pressure, average broadacre farm profit is forecast to recover to $163,000 in 2025-26, a dramatic turnaround from the $49,000 loss in 2023-24. This recovery, driven by stronger livestock prices and improved seasonal conditions, demonstrates the sector’s resilience. However, total farm debt has climbed to $131.4 billion a 6% increase as producers manage elevated input costs while investing for future productivity.

The stakes are high. With gross value agricultural production forecast at $94.7 billion for 2025-26 (the second-highest on record), understanding how interest rates and input costs interact determines which farm businesses thrive and which struggle. This analysis examines the real-world impacts on grain, livestock, and mixed operations—and what farmers can do about it.

How higher interest rates reshape farm business decisions

The RBA’s aggressive tightening cycle fundamentally changed farm finance. Between May 2022 and November 2023, rates rose from near-zero to 4.35% in one of the fastest increases in modern history. For Australian farmers, this translated to immediate impacts on variable-rate debt and longer-term implications for expansion plans.

Interest expenses now represent 12% of gross cash income for the average farm, up from 8% pre-2022. For a typical broadacre operation generating $1.5 million in gross income, this means an additional $60,000 in annual interest costs, equivalent to buying three new headers worth of financial pressure.

The distribution of debt matters significantly. ABARES data shows that 5% of broadacre and dairy farms account for 52% of total farm debt, while approximately half of all farms carry no debt. This creates a two-speed agricultural economy where highly leveraged operations face severe cash flow pressure while debt free farms maintain flexibility.

Working capital finance has become particularly expensive. Overdrafts that once cost 5-6% now run at 8-9%, forcing farmers to draw down operating reserves or delay purchases. Equipment finance deals that were 4% in 2021 now exceed 7%, making machinery upgrades harder to justify.

Consider an Australian wheat farmer who borrowed $2 million in 2021 at 3.5% to purchase additional land. That $70,000 annual interest bill has ballooned to $130,000 at current rates, an extra $60,000 that must come from operating margins. With wheat prices down 22% from peak, margins have compressed simultaneously from both directions.

Smart operators are responding strategically. Farm Management Deposits (FMDs) can now offset interest costs on business debt, providing tax-effective ways to manage volatility. Farmers with strong equity positions are refinancing into fixed-rate products where available, locking in rates before potential future increases.

Input costs remain elevated despite easing from peaks

Input costs peaked dramatically in 2022-2023 following supply chain disruptions, the Ukraine war, and energy price spikes. While costs have moderated, they remain structurally higher than historical averages, fundamentally resetting farm cost structures.

Fertilizer costs total $31.7 billion across the sector, up 4.3%, though this masks significant regional variation. For example, although urea prices on the eastern seaboard that spiked above $1,000/tonne in 2022 have settled to around $800-900/tonne, that is still 40% higher than 2020 levels. By comparison, Western Australian farmers benefit from earlier imports, with CSBP pricing around $835/tonne ex-Kwinana.

The weak Australian dollar compounds import costs. With the currency at 22-year lows against the USD, imported fertilizers remain expensive despite global price normalisation. For grain farmers who typically apply 100-150kg of nitrogen per hectare, this translates to $120-180/ha in fertilizer costs alone, a significant portion of total input expenses.

Feed costs paint a different picture, down 6.2% to $68.6 billion as grain supplies improved following strong harvests. This creates opportunities for livestock producers, particularly feedlot operators who benefit from the inverse relationship between grain and cattle prices. Wheat at $360/tonne supports profitable beef finishing margins that were impossible 18 months ago.

Diesel and fuel costs remain elevated though off 2022 peaks. While crude prices have moderated, the Australian dollar’s weakness keeps on farm diesel costs 20-30% above pre-pandemic levels. For grain farmers running large machinery fleets across thousands of hectares, fuel represents 15-20% of total operating costs.

Chemical and herbicide prices have also remained stubbornly high, with glyphosate and other key crop protection products holding at elevated levels due to supply concentration and regulatory factors. Precision agriculture technologies that reduce application rates deliver genuine ROI in this environment.

A New South Wales mixed cropping-livestock farmer summarises the challenge: “We’re spending $220 per hectare on inputs compared to $160 three years ago. Wheat prices came back to earth, but our costs didn’t follow. You manage by farming smarter—variable rate application, split nitrogen applications, being strategic about every dollar.”

Commodity price shifts create winners and challenges

Commodity price movements determine whether elevated costs translate to profit or loss. The divergence between grain and livestock sectors creates markedly different financial outcomes for 2025-26.

Wheat prices have fallen 22% from peak to $360/tonne, reflecting abundant global supplies and strong Australian production. The 2024-25 winter crop reached 59.8 million tonnes 27% above the 10-year average and third largest on record. This volume keeps domestic prices subdued despite reasonable export demand.

For grain farmers, this price decline squeezes margins but doesn’t eliminate profitability. Strong yields from favourable seasonal conditions partially offset lower prices. A wheat farmer achieving 3.5 tonnes per hectare at $360/tonne generates $1,260/ha gross income. With total costs around $800-900/ha including inputs, machinery, and interest, profit margins of $300-400/ha remain achievable—though well below the $600+/ha seen in 2021-22.

Cattle prices tell a different story with forecast up 11% to 675c/kg carcase weight. Strong global demand, particularly from Asian markets, supports premium pricing. The EYCI (Eastern Young Cattle Indicator) recovery reflects herd rebuilding dynamics and improved feed availability. Beef, veal and live cattle production value is expected to reach $18.4 billion in 2025-26.

This creates significant opportunity for livestock producers. Cattle farmers who retained breeding stock through the tough 2023-24 period now benefit from both higher sale prices and increased stock values. The combination of improved cattle prices and lower feed costs (wheat down, hay more affordable) delivers strong margins.

Mixed operation farmers can strategically balance these dynamics. Retaining more grain for livestock feeding when grain prices are low maximises total farm returns. A Queensland mixed farmer explains: “When wheat is $360, I’m better off feeding cattle than selling grain. The arbitrage works in my favour—I buy grain at production cost and sell at beef’s premium price.”

Sheep meat producers also benefit, with gross production value forecast to rise 8% to $6.2 billion, driven by strong demand and favourable seasonal conditions supporting lamb production. Wool remains challenged by subdued global textile demand, though prices have stabilised.

Dairy farmers face a mixed outlook. While farmgate milk prices received support, dairy profitability fell in 2023-24 from record highs, with further moderation expected in 2024-25. Higher feed costs and labour expenses pressure margins despite reasonable milk prices.

Regional variation creates different economic realities

Australian agriculture’s geographic diversity means interest rates and input costs hit regions differently based on enterprises, soil types, and seasonal conditions.

Southern regions emerge from difficult conditions. South Australia and Victoria experienced exceptionally dry 2024-25 seasons, leading to below-average farm performance. However, improving seasonal conditions for 2025-26 offer recovery prospects. Western Victoria and South Australian grain farmers who maintained financial reserves through the dry year can capitalize on better rainfall and soil moisture heading into winter cropping.

Northern NSW and Queensland benefit from favourable conditions. Above-average summer and autumn rainfall supported strong winter crop establishment in these regions. Combined with solid cattle prices and improved pasture growth, northern operations are experiencing strong financial performance. Queensland’s diversified agricultural base—grain, cattle, cotton, and horticulture—provides natural hedging against single-commodity exposure.

Western Australia maintains competitive advantages. The state’s large-scale, efficient grain operations benefit from good seasonal conditions and strong export positioning. WA’s direct access to Asian markets and relatively lower land costs per hectare support profitability despite input cost pressures. The state saw a 12% increase in agricultural lending, reflecting continued confidence and expansion.

Irrigation districts face unique pressures. Water costs add another significant input expense. Irrigators in the Murray-Darling Basin manage water allocation uncertainty alongside interest rates and other inputs. Permanent water entitlement prices reflect these pressures, with financing costs on water purchases adding to operational expenses.

Dairy regions in Victoria, Tasmania and coastal NSW experience higher per-hectare input costs due to intensive production systems. Interest expense impacts are amplified for dairy operations carrying debt for land, irrigation infrastructure, and herd purchases. The capital-intensive nature of modern dairy farming means interest rate increases hit particularly hard.

A South Australian grain farmer notes the regional reality: “Our farm made a small loss last year in the dry. This year with better rain and reasonable prices, we’re looking at $150,000 profit. That volatility is agriculture—you need financial buffers to ride out the tough years.”

Practical strategies for navigating the squeeze

Australian farmers are responding to higher rates and input costs with sophisticated business management strategies that separate thriving operations from struggling ones.

Financial management priorities

Lock in certainty where possible. Fixed-rate lending options, while limited, provide protection against further rate increases. Even if fixed rates seem high, certainty in budgeting and cash flow management can often justify the premium.

Optimise Farm Management Deposits. The updated FMD scheme allowing deposits to offset interest on business debt creates tax-effective income smoothing. Depositing $800,000 in a strong year generates tax deductions while the earned interest reduces net financing costs. Accessing FMDs in lower-income years maintains cash flow without additional borrowing.

Refinance strategically. With total Australian farm debt at $131.4 billion, even small interest rate improvements matter. Shopping between lenders can secure 0.25-0.5% reductions—saving $2,500-5,000 annually per $1 million borrowed. Regional banking specialists often offer better terms than major banks for established farming families.

Input cost optimization

Precision agriculture delivers measurable ROI. Variable rate fertilizer application based on soil testing and yield mapping reduces input costs by 15-20% while maintaining or improving yields. The technology investment pays back within 2-3 years at current input prices.

Strategic purchasing and forward contracts. Buying fertilizer during off-peak demand periods (typically Q4) secures better pricing. Locking in key inputs through forward contracts provides budget certainty and potentially captures price improvements.

Review every expense ruthlessly. In tight-margin environments, a zero-based budgeting approach questions every cost item identify savings: Contract harvesting might be cheaper than owning equipment and shared machinery arrangements reduce individual capital requirements.

Marketing and risk management

Stagger grain sales rather than selling all at harvest. On-farm storage provides marketing flexibility to capture price rallies rather than accepting harvest-pressure pricing. With wheat volatility, spreading sales across the year often improves average realised prices.

Use futures and options strategically. Locking in minimum prices through put options or forward contracts provides downside protection while maintaining upside opportunity. This matters particularly for livestock producers who can lock in feed grain costs and cattle sale prices simultaneously.

Diversification buffers volatility. Mixed farming operations weather commodity price swings better than single-enterprise farms. The grain-livestock combination provides natural hedging—when one struggles, the other often strengthens.

Actionable takeaways for farm businesses

Australian farmers facing elevated interest rates and restructured input costs need clear priorities:

Run comprehensive scenario analysis. Model your 2025-26 budget at multiple commodity price points and input cost assumptions. P2PAgri Understand your breakeven, cash flow requirements, and profit potential under realistic scenarios. Identify which variables matter most to your operation’s profitability.

Know your cost of production precisely. Calculate per-hectare costs for each crop and per-head costs for livestock enterprises. This informs marketing decisions—knowing your breakeven price determines when to sell versus when to hold inventory or livestock.

Maintain adequate working capital buffers. Target 30-40% of annual operating expenses in readily accessible reserves. This provides flexibility to capture input buying opportunities, weather price volatility, and avoid forced sales during unfavourable markets.

Invest in productivity improvements. Higher costs make efficiency gains more valuable. Soil testing, precision agriculture, improved genetics, and better agronomic management all generate strong returns when margins are tight. These investments often deliver better ROI than land expansion.

Review insurance and risk management. Multi-peril crop insurance, livestock price insurance, and income protection products warrant fresh evaluation. In volatile environments, paying premiums for downside protection preserves business viability.

Engage professional advisers regularly. Quarterly meetings with accountants and farm financial advisers identify optimisation opportunities and ensure you’re leveraging all available tax concessions, schemes, and support programs. The instant asset write-off, FMDs, and other mechanisms deliver genuine value when used strategically.

Plan your strategy with P2PAgri

The 2025-26 agricultural landscape demands sophisticated business planning. Interest rates and input costs won’t return to pre-2022 levels—smart farmers plan for higher base costs as the new normal while capitalising on the sector’s underlying strength.

P2PAgri’s farm business planning software helps you model these complex economics. Easily import Xero data and Run scenario analysis on different commodity price outcomes. Calculate precise costs of production by enterprise. Model debt servicing under various interest rate assumptions. Track actual performance against budget in real-time to catch issues early.

Farm business in Australia generates $94.7 billion in output value annually, indicating sophisticated commercial operations. P2PAgri provides the business intelligence tools that match this commercial reality. Whether you’re managing interest rate exposure on $2 million in debt, optimising fertilizer applications across 5,000 hectares, or timing livestock sales to maximise returns, P2PAgri gives you the data and analysis to make confident decisions.

Start your free P2PAgri trial today and discover how integrated farm business planning transforms economic pressures into competitive advantages.

Mike Krause is one of Australia’s leading Farm Business Management consultants with significant experience in providing farm business management support, training and consulting to Australia’s agricultural and agri-business industries.

Contact Mike for a chat to find out more