On-farm inflation is set to ease but it will be a gradual reduction rather than a sharp dip, AgFirst economist Phil Journeaux says.
Statistics New Zealand’s primary producers index has on-farm inflation sitting at 16.5% for 2022 – twice the level of the CPI over the past five years.
“That’s a serious issue for farms in general in terms of on-farm inflation,” Journeaux told a field day organised by the Small Milk and Supply Herds group in Waikato.
Inflation is driven by tradable and non-tradable factors. Tradable factors included external inflation imported from overseas, such as the impact of the Ukraine war. Non-tradable factors are those that affect the domestic economy.
“The NZ domestic economy is not very competitive so our internal inflation always tends to run high and I think it will start to drop, but it’s going to drop very slowly.
“I hate to say it … we’re going to see these levels of inflation drop away but it’s going to take at least a couple of years.”
Asked what it could drop down to, he said with the CPI it could fall from 7% to 5-5.5% by the end of this year.
But it could take up to three years to reach the Reserve Bank’s target of around 3%.
Working expenses on farms have rocketed up over the past few years.
Debt servicing climbed from 4.5% last year to 6% this year and is expected to increase to as much as 8% if on a floating mortgage.
The biggest farm working expense is feed costs and consistently sits at 30-35%. But getting a lid on costs is difficult.
Journeaux said farmers need to ask themselves what the marginal profit is on putting extra supplementary feed into the farm system.
“You need to work that through.”
The increase in those expenses is unsustainable, he said.
Beating inflation could be achieved by farmers getting a higher price for their product – which farmers have no influence over – or improving their productivity.
Another, more tongue-in-cheek, option is to get economies of scale by expanding the size of the farm. This is a trend in NZ where over the past 50 years farms have grown, he said.
While farmers have no control over price, they can control volume, which farmers can keep in mind when making purchases.
He also urged farmers to draw up an annual budget to monitor how they are tracking between now and the end of the year.
He predicted Fonterra’s final payout for this season will be at least $8/kg MS, but China will have the biggest influence on that.
“They are our biggest market by a country mile and they generally pay more than most other markets. Their economy in the past two years has been a shambles in terms of covid and their internal construction industries.”
The positive news for NZ is that its economy is picking up again and this will hopefully drive demand, he said.
“This year has tightened up significantly compared to last year.”
AgFirst’s annual financial survey, released last year, of 26 Waikato and Bay of Plenty farms showed a break-even payout of $8.44/kg MS.
DairyNZ’s Phil Irvine said the milk price has managed to stay ahead of rising costs, but this is changing.
“The reality is that milk price is off its peak and is going down. Inflation costs are going up sharply and so all of a sudden we have come into a more uncomfortable space.”
In comparison, an analysis using data from 130 Waikato farms from farm data service DairyBase found that its break-even milk price for this season is $8.88/kg MS and $8.68/kg MS for 2023-2024.
The data showed that overall costs have lifted $2.47/kg MS in the past two years, or by 38%.
