Saturday, December 2, 2023

Farm costs to fall quickly, Westpac expects

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Westpac expects farm and orchard margins to widen again as much lower cost inflation comes along with higher farm gate returns.
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Rural cost inflation doubled in the past year to be 15.3% in December 2022 but Westpac economists expect it to fall rapidly to 4% by December 2023.

In 2024 they predict a return to pre-covid farm cost inflation rates around 2%.

Senior economists Nathan Penny and Satish Ranchhod base their predictions on much lower feed, fertiliser and fuel costs.

Continual wet weather during spring and summer left most farmers with ample pasture and substantially reduced the likely demand for imported feedstuffs, they said.

Fuel prices have fallen about 20% since the middle of 2022 and local fertiliser prices have fallen considerably and are likely to fall further. The global price for urea is down 66% from its peak.

“Rural cost inflation has peaked, but that is not to say the picture isn’t still ugly,” Penny and Ranchhod say.

Debt servicing costs rose 45% over 2022, fertiliser was up 33% and fuel 28%.

Feed cost inflation was 13.5% and was expected to remain high during 2023 and 2024 until the effects of the widespread wet weather were known.

“With feed costs the largest component of most livestock farm budgets, this is a welcome development on the inflation front.”

Wage costs will remain high and most measures are at or near record highs, including low unemployment figures and increases to minimum wage rates.

The Westpac economists think the rate if cost inflation will slow dramatically but they don’t expect  the cost structures on farms and orchards to decline.

“We don’t expect costs will fall back to previous levels – in other words cost structures are likely to remain permanently higher.”

For example, Dairy NZ said dairy farm working expenses were in the low to mid-$4 range between 2017 and 2021 but were now in the low to mid-$6 range.

For good news, Westpac expects farm and orchard margins to widen again as much lower cost inflation comes along with higher farm gate returns.

These returns have already risen for meat prices and should go up for the smaller kiwifruit and apple crops this year.

Additionally, Westpac holds a very optimistic view on the 2023-24 milk price of $10/kg milksolids.

Agricultural economist Phil Journeaux was not as optimistic about falling farm inflation as Westpac economists.

“The non-tradable components of inflation remain high – wages, debt servicing and food prices.

“And I am less optimistic about fertiliser coming down until Ukraine has won its war.”

Journeaux agreed that the cost structure of farming is now permanently higher than a couple of years ago.

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