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Record rainfall a setback to record agricultural production

Record rainfall for October in Southern New South Wales and Northern Victoria continues to cause flooding in tributaries to the Murray River and the river itself.

Of the 28 agriculture credit loans in the Merricks Capital Partners Fund and Merricks Capital Agriculture Credit Fund, we have classified one loan (representing 0.5% weighting in the portfolio) at risk of any sustained damage.

Two other borrowers are indicating an impact on normal business activities and crops, which will reduce earnings expectations from what was shaping up as a record year.

In terms of the impacted businesses and assets, the recurring feedback from borrowers suggests that these conditions are expected to exacerbate existing logistical constraints across the food supply chain and reduce crop quality.

For cropping businesses, we anticipate downgraded grain quality will be partially offset by above-average production and higher commodity with wet conditions driving up domestic premiums for cattle, grain, oilseeds and milk with prices in some cases at new record highs.

While the challenges of floods should not be understated, particularly for agricultural operations in Northern Victoria, the combination of widespread above-average rainfall and high prices means agriculture producers are expected to continue generating near-record farm revenue, which underpins the underlying fundamentals (and ability to refinance) for the sector over the next 12-24 months.

The off-farm supply chain is expected to fare worse. High input costs, logistical inefficiencies, higher financing costs and persistent labour shortages remain major headwinds for the sector to carefully navigate through this cycle.

To date, the impact of recent weather has been minimal on our Commercial Real Estate assets with no reported exposure to flooding and only minimal weather delays impacting Sydney and Melbourne development projects.

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