Farm inflation set to plummet

Westpac says the annual rural inflation rate has peaked and will drop from the 15.3% as at last December to a low of 4% at the end of 2023. It says it will drop another 2% during 2024.

The report by senior agri economist Nathan Penny says the reason for the drop will be lower feed, fertiliser, and fuel prices.

However, there are quite a few 'buts' in the report. One of these is the news that farm and orchard cost structures are likely to remain high. A big one, and not good news for farmers, is that wage inflation will buck the positive trends and remain high. This is due to high employment and a very tight labour market and the fact that workers still have negotiating power.

Penny says in the report that while cost inflation may cool, he doesn't believe that costs will fall back to previous levels and that farm and orchard cost structures are likely to remain permanently higher.

The report notes that dairy farms experienced the biggest spike in farm costs with prices up 17% - well ahead of sheep and beef farms and orchards. But against that, Westpac reports that feed costs will fall steeply from now due to pastures which have been super-charged by the rains of Cyclone Gabrielle and the mild summer and autumn weather. Farmers they says have ample feed for winter, putting downward pressure on feed prices.

So it's a mixed bag in some respects, but the promise of lower rural inflation will be a sweetener in the light of a testy and sour year.

Fed Farmers president Andrew Hoggard says, if the predictions translate into reality, it will be helpful for farmers who are spending less on the farm with commodity prices coming back a bit. But he says there will still be pain out there on dairy farms.

"One would hope that the Reserve Bank is listening to this and stops ramping up interest rates. They should have a breather and wait to see what impact the rate rises have had and hopefully will look to soften things up as inflation starts to come under control, because those interest rates are still high," he says.

In the light of the squeeze, Andrew Hoggard says he's made some important decisions on his own farm to hold off doing some things until the situation settles down. He says, like many, he's conerned at the geopolitical situation with the war in Ukraine which he says has impacted grain and energy prices.

Hoggard says we then have to look at the US/China issue, which paints a challenging picture for us because China, one of our major export markets, is locking horns with one of our traditional allies.

"That is a massive challenge for the NZ Government to balance all that up and it would be easier if the US would offer us an FTA. They expect us to be friends but don't want to trade with us," he says.