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Wednesday, 27 April 2022 12:55

F is for farm inflation!

Written by  David Anderson
Overall farm inputs rose 7% in 2021 - led by fuel, which leapt 44% and fertiliser which rose 29%. Overall farm inputs rose 7% in 2021 - led by fuel, which leapt 44% and fertiliser which rose 29%.

The three f's - namely fuel, fertiliser and feed prices - led the pack in double digit on-farm cost increases over the last year.

According to the BNZ's latest monthly agriculture review Rural Wrap, while much of the talk in the primary sector is about the current strong meat, dairy and grain prices, overall farm inputs rose 7% in 2021. This was led by fuel, which leapt 44%, fertiliser rose 29% and feed costs were up by 6%.

"There has been a lot of focus on primary product prices of late," the report says. "It is good news, albeit driven by a range of factors from tight global supply, disrupted logistics and supply chains, to buoyant demand."

However, it warns that the war in Ukraine - on top of an already distorted global supply chain - has led to rapid cost escalation on farm.

"Recent increases in energy and fertiliser prices offshore suggest there is more upside to Stats NZ data showing that the cost of farm inputs rose 7% last year."

BNZ says volatility and uncertainty remain significant.

"We think the commodity price outlook generally remains solid, but with uncertainty very high, now is not the time to make big bold calls about the outlook."

The bank adds that it is not a "one way bet" ahead.

It points out that a range of commodity prices offshore initially spiked higher on military action in Ukraine, but then backed off their extreme highs, with forward price curves for many commodities in "backwardation".

"That means prices agreed today for product supplied later (say in a year or two's time) are lower than current spot prices," the report explains.

"Markets seem to be pricing-in a premium today for one reason or another - be it a military risk premium, a short supply squeeze, a trade distortion factor or some combination of the lot."

The report says factors remain significant sources of price risk.

"Further supply side and trade disruption and associated cost escalation appear the key sources of upside risk of prices (and costs)."

The report adds that one major downside risk to monitor is shaping up to be a significant tightening of monetary policy in various parts of the world.

"It may well dent demand more than expected in key markets and, in the process, remove some heat from (commodity) prices."

Meanwhile, the Rural Wrap also suggests keeping an eye on China's slowing economic growth, which will have a huge impact of NZ's primary sector and prices.

"Recent Covid related lockdowns [in China], coming on top of weakening momentum into the end of last year, raises the prospect of weaker than anticipated demand for a period ahead," it warns.

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