Inflation will see the prices of far inputs such as fertiliser, fuel and labour rise, biting into profits despite the decent prices farmgate returns, Steve Wyn-Harris says.
Just when you thought there were enough things to trouble you and worry about, an old foe has reemerged from the woodwork.
Inflation is back and back quickly.
For younger folk, it will be their first time becoming acquainted with this thief in the night.
Indeed, even my age group must think hard back to the times when it was a constant and dangerous presence, given it has been absent for so long.
New Zealand’s annual inflation rate has tracked between 0-5% since the early 1990s and for the last decade only broke above 2% briefly a couple of times.
That’s because world inflation was around these levels and because the government in the late 1980s gave the Reserve Bank the tools to be able to keep it at these low rates.
But those of us longer in the tooth can remember that from the mid 1970s until the early 1990s it spent most of its time in double digits and often between 15-20%.
That was when at the start of my farming career the interest rates on my debt were 20%
What is inflation then, I hear you millennials ask?
The Reserve Bank tells us that inflation is the term used to describe a rise of average prices through the economy.
It means that money is losing its value.
The underlying cause is usually that too much money is available to purchase too few goods and services, or that demand in the economy is outpacing supply.
In general, this situation occurs when an economy is so buoyant that there are widespread shortages of labour and materials.
People can charge higher prices for the same goods or services.
Inflation can also be caused by a rise in the prices of imported commodities, such as oil.
However, this sort of inflation is usually transient,and less crucial than the structural inflation caused by an over-supply of money.
Governments all around the world, including our own, have been printing money like crazy or as they prefer to put it, undertaking quantitative easing. They’ve had to do this because their main tool of being able to lower the price of money became ineffective when interest rates got close to 0% so the only other instrument they had to keep economies chugging along was to increase the amount of money available.
That has worked admirably during these troubled times.
However, we are now awash with the stuff and it’s looking for somewhere to be spent and hence demand has gone through the roof.
It looks like our next annual inflation figure is going to be around 7% which will be the highest in thirty years.
That rate is similar to the many countries we like to benchmark ourselves against.
But spare a thought for Venezuela running at 1200% making Sudan’s 340%, Lebanon’s 201% and Syria’s 139% not look so bad.
Now central banks have two new tools in the toolbox.
Stop printing money and raising interest rates to try and hose down the economy.
We are already seeing the effects of this rapid rise in inflationary pressures.
Farm inputs such as fertiliser, fuel and labour will bite into profits despite the decent prices we are seeing for the food we produce.
Consumers of the food we serve up are seeing a rapid rise in their grocery bills along with most other daily costs.
Spare a thought for the poor who are hit harder by inflation given they spend a much higher proportion of their income on food, and it will only increase the growing problem we already have with inequality.
Russia’s war on Ukraine is not helping this inflationary problem as it is driving up both energy and food prices.
Central banks will continue to raise interest rates as they now attempt to stifle demand for goods and services.
These increased interest rates in turn will put pressure on business and household budgets and the first signs of a fall in asset values are starting to be seen.
No one knows if this will be a short-term problem or be with us for several years.
A sudden drop in inflation would also be a bad thing as well as that would be caused by a recession which we certainly do not want.
However, we have been in this territory before and got through it as we will this time.