Inflation - Double-Edged Sword for Farmers

Will the soaring costs to dairy farming completely out-weigh increases in payouts?

Recent forecasts indicate a record payout for milksolids of $9.10 per Kilogram for the 2021-22 season. While this is a great reason for celebration it also comes with caution as for many dairy farmers it may simply provide a bit of extra breathing room.

Impact of Global Forces

A strange combination of global forces over the past few years has lead to a very interesting and unique current situation. Inflation is rampant worldwide and it is estimated global food prices are a third higher than a year ago. Increasing demand and limited supply for dairy products is driving the high milksolid prices and will likely continue to do so.

But inflation has its downside too, with some claiming an increase of a whopping 30-40% in agricultural costs. Statistics NZ released a report last year showing that between 2019 and 2021 farming costs have increased more than 10% in 4 key areas.

Fertilizer saw a 15.9% increase. The price of urea increased by 67% since August 2020, largely due to increased demand and China protecting its domestic supply from exports. Cultivating, harvesting and animal feed costs have increased by 18.9% Electricity costs have increased 21% and stock grazing costs are up hugely at 36.9%

It is estimated global supply chain issues have increased costs of freight up to 600% from the pre-covid era. Higher fuel prices, clogged ports and staff shortages all play a part here.

Impact of Domestic Forces

On top of these global forces, changes in domestic environmental legislation are increasing pressure and costs for Dairy Farmers.

Many dairy farmers are likely to be feeling overwhelmed with so many fluid and challenging factors coming from all directions. However the outlook is far from doom and gloom!

What this Means for Farmers

Relatively high payouts coupled with low interest rates mean the dairy sector has been able to reduce debt by $3.58billion in the past couple of years. Although the cost of borrowing is set to increase as the reserve bank takes measure to reduce the rampant inflation.

Technological advances are helping to increase farm efficiency. An example is Fonterra’s funding of Levno’s efficiency increasing and problem reducing Milk Vat Monitoring Systems across the country. This allows farmers to access vital information from their phone wherever they are. Also Bovaer a methane reducing feed additive has been approved for trial in Chile and Brazil with the potential to dramatically change the industries’ environmental footprint.

Plan to Succeed (aka Failure to Plan is a Plan to Fail)

This is an ideal time for farmers to step off the farm for a minute and partake in some careful planning both to increase efficiencies across the board and to ensure budgets, financial planning and future positioning are in the best shape possible. This will not only help costs but very importantly reduce stress.

Rural Accountants farm advisors as well as many other rural professionals are just a phone call or email away.

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