Honest conversations will be needed between farmers and their advisors if their margins continue to be squeezed by high input prices and other business-related costs.
Those conversations need to be front-footed because if farmers are not making money everybody is affected, Rabobank senior agricultural analyst Emma Higgins said at the NZ Institute of Primary Industry Management conference in Hamilton.
A consultant told Higgins the operating costs for his farmer-clients have jumped from $5.35/kg milksolids in 2020-2021 to $6.15/kg MS in 2022 and are now heading towards $6.75/kg MS.
She said the margin squeeze is looking scary.
“The risk is that we see these stubbornly high costs of production and then we see a sliding farmgate milk price.”
This risk is starting to occur with Fonterra revising its milk price by 25 cents to a new mid-point range of $9.25/kg MS.
Higgins said the bank’s view is that the price will stay around $9/kg MS for the season and that input costs will stay high for longer.
She said farmers need to budget for a higher cost of production. Input costs are going to be higher for longer and farmers will need to be more efficient.
“We need to be future-proofing our businesses for this new normal.”
Key commodity goods were already in short supply coming into 2022. Gas right through to grains and oil seed have all been affected by the war in Ukraine, she said.
“It’s not surprising that the cost of living has risen substantially across the globe. It’s not just you facing these challenges. It’s a global problem.”
Pressure around energy costs – particularly in Europe – is huge and will have ramifications for New Zealand, she said.
NZ is an island nation, but it imports a lot of inflation and there are some reports of some fertiliser manufacturers overseas deciding not to make their products because of the costs involved.
“There will be some impacts come through in this space globally and New Zealand won’t be immune to that,” Higgins said.
“The cost of living crisis is real, whether it’s energy, whether it’s food price inflation.”
However, lately, prices have eased after a broad pullback on commodities since June.
“The question we have now is whether that worm will turn again given some of the challenges around the supply side,” she said.
For NZ, there are some big structural challenges. Things are going to be more disruptive for longer and the sector needs to plan in case inputs such as fertiliser do not return to pre-2019 price levels and global disruption worsens, she said.
Higgins questioned what this would do to sustainability goals, which are more likely to be met when people are well fed and they have money in their pockets.
“What happens if we start to pull back on that and the commitments that those companies in those countries have made to 2030?”
Higgins said NZ is the best country to be in despite all of the uncertainty. The world is being re-ordered around who can produce commodities and who can buy them.
“When it comes to food security, we’re in the absolute best position,” she said.
