Rural cost inflation at a whopping 15.3% in the December quarter

Rural cost inflation at a whopping 15.3% in the December quarter – Westpac | Insurance Business New Zealand

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Rural cost inflation at a whopping 15.3% in the December quarter – Westpac

That’s down 0.3% from the prior quarter but “that’s not to say the picture isn’t still ugly,” economists say

Insurance News

By
Mina Martin

Rural cost inflation has already peaked and will cool rapidly from here, but not enough to return to previous levels, Westpac economists said.

In a Westpac Economic Bulletin, Nathan Penny (pictured above left), senior agri economist, and Satish Ranchhod (pictured above right), senior economist, said annual rural cost inflation stands at a whopping 15.3% in the December 2022 quarter – down 0.3% from the September quarter.

“That’s not to say the picture isn’t still ugly,” Penny and Ranchhod said. “At an annual 15.3% rate, rural cost inflation is more than double the rate of a year ago. And the comparison is even starker with the pre-COVID average of around 1.8% annually.”

By farm type, dairy farms saw the biggest spike in input costs, with prices up by more than 17% over the period. This was followed by sheep and beef farmers and cropping farmers, with prices lifting around 15%; while for horticulture, prices rose to nearly 12% for the year.

The chief drivers of rural cost inflation have also changed, the economists noted.

“Debt servicing costs have risen on average by 45% over the past year,” they said. “Fuel and fertiliser prices are up 28% and 33%, respectively, over the past year. While those are still large increases, price growth in these areas has slowed sharply from the 40% to 70% increases that we saw in the year to June. Meanwhile, feed cost inflation has remained firm, up 13.4% in annual terms in both the September and December quarters.”

From the 15.3% reading for December 2022, Westpac expects rural cost inflation to descend relatively rapidly to around 4% by December, then to around 2% by December 2024.

“Surprisingly and importantly, we expect feed costs to fall steeply from here,” the economists said. “Wet weather, associated with the summer floods and Cyclone Gabrielle, has supercharged pastures over autumn, heading into winter at a time when many farmers often struggle for feed. Instead, farmers now have ample feed for winter, and this is putting downward pressure on feed prices. In addition, falling farmgate prices mean that farm incomes have fallen and with it demand.”

Providing additional downward impetus were the ongoing declines in fuel and fertiliser inflation, which have fallen by around 20% and 66%, respectively, in mid-2022.

However, the Westpac economists expect wage inflation to buck the overall trend lower.

“Most current wage measures are at or near record highs,” they said. “Moreover, with the labour market still very tight – the unemployment rate is at 3.4%, just 0.2% shy of the record low – workers still have negotiating power. In addition, workers are seeking compensation for high inflation. Ongoing increases to the minimum wage are also adding to the pressures.”

Despite the cooling cost inflation, it was unlikely that costs would fall back to previous levels, Penny and Ranchhod said.

“In other words, farm and orchard cost structures are likely to remain permanently higher. Dairy farm costs are case in point,” they said.

That said, farmer and grower margins were generally expected to widen once again, as commodity prices lift over the remainder of 2023 and into 2024 at the same time cost inflation is falling, Westpac reported.

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