Cost inflation in agriculture notched a record 13.7% in the 12 months to the end of June but may have come off the boil and be merely simmering now, Westpac economists say.
Prices for some imported farm inputs such as fuel and fertiliser have eased back in recent months, according to senior agri economist Nathan Penny and senior economist Satish Ranchhod.
“Even so, farmers are likely to see sizeable increases in their operating costs over the coming years,” they said.
The Westpac economists predict that farm cost inflation will be 6% and 4% respectively in the years ending June 2023 and 2024.
Input costs across all farm and orchard types, excluding livestock values, rose by 13.7% in the year ended June 2022, after costs rose 9.9% in the year ended March.
Penny said both these numbers were records set since Stats NZ started keeping on-farm costs in 1994, but farmers with longer memories will recall the 1980s when on-farm inflation was very high.
The leap in costs is in stark contrast to the decade from 2010 to 2020, when inflation stayed under 4% annually, and actually dipped into negative during 2015-17.
Recent strong growth in agricultural incomes has caused strong demand for inputs and that will exert ongoing pressure on operating costs.
The demand will continue and therefore suppliers will pass on price increases for farm inputs, Penny and Ranchhod said.
But the drivers of cost increases are going to shift more to those onshore, such as wage and feed prices, and away from imported goods.
Oil prices have dropped from US$120 a barrel in June to $95 currently and worldwide urea prices have fallen US$300/tonne or about one-third from their peak in April.
In the year to end-June fuel costs had the biggest increase, at 70%, followed by fertiliser at 40%.
Smaller category increases, nonetheless significant, were debt servicing costs up 21% and feed costs up by 12%.
There were increases below the headline rate of inflation for repairs, maintenance and vehicles, for animal health and breeding, local and central government rates and fees, rent and hire charges, and wages and salaries.
Electricity was the only category to reduce in cost during the year.
Going by farm type, dairy farms experienced the biggest jump in input costs, with prices up nearly 16% over the period.
Sheep and beef farmers and cropping farmers experienced the next biggest lift, with prices lifting about13%, while for horticulture, prices were up close to 10% for the year.
Stats NZ reported that the business sector as a whole experienced 10% inflation, so the farming industries exceeded that nationwide rate.
Although wages rose 2.8% in the year to June, the forecasters said they believe wage pressures will be a big factor in the year ahead.
The national unemployment rate is close to an all-time low at 3.3% and all farmers and growers know how hard it is to recruit workers.
“Signs of wage pressures have already bubbled to the surface, with the June quarter showing the highest wage increases since 2008,” they said.
The note to bank customers on farm cost inflation ended with a general warning to be vigilant on all types of input costs for the months ahead.
