Friday, April 12, 2024

On-farm cost inflation has calmed down

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Unbridled increases ended their wild ride in 2023, latest data shows.
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On-farm cost increases have moderated and quickly returned to the aggregate economy inflation rates, Westpac economists say.

They are forecasting around 3% in 2024 and 1.9% in 2025, slightly higher than the CPI this year and slightly lower next year.

Westpac said that recent data shows on-farm cost inflation normalised in 2023 and came close to its prediction of 2.4%.

For comparison, the average pre-covid cost inflation rate on farms was 2%, blowing out to 7.5% in 2021 and 15% in 2022.

“Last year we anticipated a significant reduction after a couple of years of very strong increases,” chief economist Kelly Eckhold said in an Agri Update note following the latest Global Dairy Trade auction.

“It will be pleasing for farmers to see on-farm inflation moderating and it may be a partial offset to weaker farmgate prices.”

Eckhold said the main categories of farm costs are debt servicing, fertiliser and fuel.

While the effects of higher debt servicing are still being felt, the other two categories have turned from strongly inflationary to negative.

“I wouldn’t say that on-farm costs are now falling, but the rate of increase has certainly returned to normal.

“Debt servicing costs remain elevated and are expected to remain high over 2024 as the Reserve Bank brings inflation under control.

“A saving grace is that interest rates currently look to have peaked. 

“Wages costs are expected to moderate from the very high levels seen in recent years as the labour market continues to ease.

“As most cost categories have now normalized, we now see on-farm inflation trending close to aggregate economy inflation rates in the coming couple of years.”

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