Farm input costs pinch profits

High export prices are not necessarily translating into high farm profits.

Added 2 years ago

By Brenda Newth

Infometrics Senior Economist Rob Heyes provides this update for HBFFT readers.

Agricultural commodity prices have been trending upwards for some time, resulting in five years of broad-based profitability for the sector. Prices have accelerated in the past year, particularly for meat and dairy and a weak New Zealand Dollar has further underpinned high export returns.

Covid lockdowns in China, our biggest trading partner, are making it increasingly difficult to move refrigerated goods inland which is affecting New Zealand’s horticultural, meat, and dairy exports. Challenges in China are indicative of logistical upheaval elsewhere with erratic supply chains having become a hallmark of the Covid-19 pandemic.

Unfortunately, high export prices are not necessarily translating into high farm profits. Shipping costs and farm costs are currently elevated. Farm input costs in the March 2022 quarter were 9.7% higher than a year age, which is the highest annual increase since reporting began back in the early 1990’s. Current growth is being driven mainly by fertiliser prices up 37%, and fuel up 51%. Costs are skyrocketing across all farm types, with input costs for dairy farmers up 11%, crop farmers 11%, sheep and beef farmers 9%, horticulture and fruit growers 8%, and poultry, deer and other livestock farmers 8%.

Add to this, the economic headwinds brought about by widespread labour shortages with anecdotal reports of bumper fruit harvests and no one to pick the produce off the trees. Wage costs in the sector have yet to take off, but unless labour shortages and broader consumer price inflation are addressed quickly, it is only a matter of time before agricultural labour costs begin to accelerate, too.

For dairy farmers, much of the increased cash flows of recent years have been used to reduce debt levels, which positions the sector well to meet whatever challenges the future brings – rising interest rates being the most pertinent.

The short-term outlook is for commodity prices and costs to remain high, for supply chain disruptions to continue, and for availability of labour to remain constrained. The Government’s immigration rebalance has included border exemptions for a number of agricultural sectors. But it’s too early to say how this new approach to immigration will play out in the agricultural sector.

Longer-term, the farming sector is facing increased pressure to contribute to emissions reductions.

The Government’s recently announced Emissions Reduction Plan includes plans to introduce emissions pricing into the agriculture sector by 2025 and a $340m injection from the Emissions Trading Scheme fund set up a Centre for Climate Action on Agricultural Emissions which will research ways technology can be used to cut farm emissions.

All this at a time when farmers are being required to change how they manage their effluent in response to the National Policy Statement for Freshwater Management.