Thursday, August 11, 2022

Full impact of costs yet to hit farming

The world is facing a food crisis, but how can New Zealand farmers help? Rising costs mean producers here are struggling to maintain margins and production. Over the next few days, Farmers Weekly will cover key challenges within the primary sector and how some are navigating it.
AgFirst economist Phil Journeaux says that to the year ending March, on-farm inflationary costs on dairy farms hit 12.7%.

New Zealand farmers are in for a tumultuous 18 months as they face a level of cost inflation not seen since the 1980s.

Those cost increases are hitting all things that are critical to running a farm – fuel, fertiliser and feed – and all of these inputs have had double-digit price lifts over the past 12 months.

AgFirst economist Phil Journeaux said that to the year ending March, on-farm inflationary costs on dairy farms hit 12.7%, compared to a CPI of 6.9%. 

“If the CPI was at 12.7% two things would happen, the media would be in a frenzy and the Government and Reserve Bank would be hiding in a cave. But they’re not, because they couldn’t give a s*** about what happens down on the farm,” he said.

On farm cost inflation has always been ahead of the CPI. Over the past five years for the dairy industry, the primary producer index (PPI) has averaged 5.7% for dairy and CPI, 2.7%, Journeaux said.

“In other words, the on-farm inflationary costs for dairy farms is twice that of inflation.”

The cost increases are something the agricultural consultancy company is well aware of as it tries to help farmers formulate a budget for the new season.

Farmers should be in a reasonable position economically after the season that has just finished. The pressure is going to come on over the new season.

“My pick is that we’ll get an increase in on-farm inflationary costs for the coming season and as long as we can hold onto that $9 payout, we’ll get through,” he said.

“The issue is, what happens if the payout drops to $8 or less?”

“Last year our break-even milk price from the farms that we monitor was around $6.40-$6.50/kg MS. This year I’ll be picking $7.”

These inflationary pressures come as farmers grapple with new regulations around freshwater, greenhouse gases, biodiversity and the ongoing impacts of covid-19.

“It’s just going to add to the pressure. Now they are facing a significant financial issue,” he said.

“At the moment we’re being cushioned. The payout is good, and for sheep and beef farmers the schedule is very good, so at the moment we’re handling it – the issue comes when the payout drops.

“The shock has started to happen but it has not fully hit.”

Interest rates are also on their way up and will keep going up too. If farmers’ average debt is $20/kg MS and interest rates lifted 3%, then around 60 cents per kilogram of milksolids will go into debt servicing.

“It’s going to have immediate cashflow implications. If you’ve got these cost pressures in fuel, fertiliser and labour which you’re writing out a cheque for. There’ll be cashflow challenges that people haven’t thought through,” he said.

Banks are also pushing farmers hard to repay their principal debt rather than just the interest, he said.

There was still a small minority of farmers carrying high levels of debt. These new cost pressures could make them extremely vulnerable.

Fuel and fertiliser have lifted 41 and 46% respectively since last season, but Journeaux believes those prices should ease once the Ukraine conflict ends.

But those reductions may be as far as 18 months away.

Farmers needed two things to be able to manage those costs: farmgate returns must remain high; and/or they have to increase their productivity.

AgFirst consultant and director John Hall said farmers were also feeling a little rattled at how fast costs had moved, while those in Waikato grappled with the after-effects of the drought.

Feed was still a priority and many were trying to get that resolved now with the season soon to get under way.

“It’s just the magnitude of the jump from the middle of last year to now that’s been a bit of a shellshock.” Hall said.

Journeaux said what it will mean is that farmers will have to be more efficient. Some of this will come through technology and the rest from better management.

Those costs are only starting to flow through the economy, which is why he believed inflation will continue for the next 12 months at least and will take a few years to work their way through the country.

Hall said high labour and interest costs will be with farmers for a while and farmers will have to examine their businesses to ensure they are operating as efficiently as possible.

It was easy to get despondent, but he believed farmers still wanted to do the right thing in managing and improving their farm, and both Journeaux and Hall are confident farmers will get through it.

“We’re not saying we’re buggered, we’re saying life is becoming interesting,” Journeaux said.

Failing to plan is planning to fail and Hall urged farmers not to use the input price volatility as an excuse to do nothing.

“You should be looking at your options and if the option is not comfortable, at least you know it’s not going to be comfortable,” Hall said.

“Not doing anything will cause a whole lot of other problems.”

The budget might change, but doing a budget will mean at least farmers know where they stand, Journeaux added.

Read more articles in the Food Security special report series here.

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