Te Puke farmer Blair Linton says some of his costs have escalated.
Soaring costs and a “profit squeeze” hitting the agriculture sector have prompted warnings that farmers will continue to slash their budgets this year.
DairyNZ chief executive Dr Tim Mackle said the rising costs hitting the sector were driven by interest expenses (up 39 per cent) feed (21 per cent) and fertiliser (28 per cent) over the past 12 months.
Most farms would be feeling the “profit squeeze” and it was important farmers identified must-haves and nice-to-haves to find areas to trim costs, he said.
This included pausing non-essential capital projects and sharing budgets with trusted advisors, bankers, accountants, and other farmers.
“It’s great to get ideas from others about how they manage costs on their own farms.”
Total expenses for the 2022/23 season were forecast to jump to about $9 per kgMS up by 11 per cent compared with last season.
In contrast, earlier this month Fonterra revised its Farmgate Milk Price range from $8.20 - $8.80 per kgMS to $8.00 - $8.60 per kgMS.
“Farmers with big loans who previously had low interest rates will be feeling the impacts of an increase to a high interest rate. We may see an increase in overdrafts due to lower cash availability with the increased interest rates.”
The dairy sector also had a workforce shortage of about 4000 people nationwide and was focused on recruitment.
Last year dairy exports hit $22 billion to June 2022 and the sector contributed about $50b in direct and flow-on income to New Zealand’s economy.
The dairy sector was relatively well-placed leading into high global inflation and domestic economic downturn, he said.
“Currently, New Zealand exports continue to remain competitive, and there are expectations of recovery of China’s demand for Kiwi dairy products which will help offset recession impacts.”
Federated Farmers Bay of Plenty provisional president Brent Mountford said some farmers had “hardcore overdrafts” and were not spending money.
“I know of a few farmers who are in that situation and working with the banks. Some had put loans on interest only and there is a bit of that going on.”
Overall farmers were being pretty cautious but “we will survive”, Mountford said.
Beef and Lamb New Zealand chief economist Andrew Burtt said inflation and lower farm-gate prices would have an impact this year with “reduced income on farm when compared to last year”.
Reduced demand in key markets, higher interest expenses, and uncertainty around environmental regulation were driving factors.
“Prices and expenditure have increased more rapidly than revenue. Overall farmers will be less able to pay down debt... farmers tend to go into overdraft, too, as cash flow throughout the farming year is variable, making interest costs high.
“An example of going into overdraft is holding off on selling animals to add weight but needing cash for expenses.”
Burtt said there were fewer farmers coming into the industry than the number exiting.
Some farms had been consolidated to increase efficiency, some had been purchased for forestry. Farm numbers and land areas were reduced as the size of cities increased.
Beef and sheepmeat exports were forecast to be worth $5b and $4b respectively in 2022-23 (year ending September) alongside $400m of wool.
“In general, the farming industry in New Zealand is quite resilient during recessions.”
Te Puke calf and bull-rearing farmer Blair Linton said costs had escalated which had a big impact.
He took over the family farm in July and said meal had jumped by 30 per cent last year compared with 2021 and fertiliser was $120 more per hectare compared with 2020.
“You hope the calves are going to be worth more at the end of it.”
Linton said, unlike some other farmers, his operation allowed for a bit more certainty as it could fairly accurately predict its budget.
“We can get an idea of how much it is going to cost to rear the calves before the year starts. At the end, we might not be financially there but it is nice to know because if you don’t know what is going to happen that is what people get worried about.
“We are price-takers so we focus on watching things we can control.”
Rural Contractors New Zealand chief executive Andrew Olsen said he had not heard of any members not being paid and he hoped the 50 services it provided were considered essential.
“The whole industry has seemingly accepted the fact prices have changed and gone up but won’t change is a broken relationship. Contractors just don’t want to be turfed off because they are too expensive.
“I think it is a case of ready, aim fire rather than fire, aim, ready as to what cost services will look like as the recession takes hold.”
Federated Farmers Bay Rotorua/Taupō provisional president Colin Guy said he was aware rural bank lenders were busy extending overdrafts.
“That has been happening and I think it’s because costs have outstripped the dairy payout and some have got a little bit caught out.”
Unlike previous cycles, farmers had been more cautious when interest rates dropped and paid down debt instead of going “nuts”, which was good.
Guy said most farmers were still happy but cautious and in his view, farming was still the backbone of New Zealand.
“I’m proud to be a farmer because of that even though we still get a bit of flak.”
Caleb Graveson from Trimax Mowing Systems said business had slowed and while customers were still buying equipment they were looking more closely at the total cost of ownership.
“Customers want to make sure their money is going a lot further and that they’ll see a return on it. They want mowers that last with a higher level of service and support.”
He said the company had diversified which had stood it in good stead for the future. It also had manufacturing, assembly, and warehousing facilities in Australia, the United Kingdom, and the United States and was looking at emerging technologies such as automation and electrification in its production facilities.
“Having local facilities, both here in New Zealand and overseas, allows us to quickly service our customers and develop products faster to suit each market’s changing needs”.
ANZ agricultural economist Susan Kilsby said as the Reserve Bank attempted to rein in inflation, interest rates had risen quickly off the back of some of the lowest rates in history, and farmers were not immune to that.
“We acknowledge that farm costs have risen in a short space of time, and farmers have had to adjust, but we also saw many of our customers pay down significant amounts of debt while interest rates were low, while investing in their assets. This will ensure they remain resilient in the coming months.”
Global economic growth was weak and while there would always be demand for food products during downturns it was harder to sell at higher prices.
Agriculture directly accounted for more than 10 per cent of our GDP and indirectly contributed even more.
“The agricultural sector does tend to be quite resilient in terms of production during periods of economic downturn, whereas other sectors can be more volatile so if other sectors shrink then agriculture has the potential to become more important.”
The economy as a whole was slowing and was expected to enter a recession later this year, she said.
ANZ business banking managing director Lorraine Mapu said it encouraged anyone facing any difficulty or needing support to get in touch sooner rather than later.
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