Sharp rises in commodity prices have strengthened farmers' and horticulturalists' businesses – and now is an excellent time to start planning for the new future.
That's the advice from ASB's rural banking General Manager, Ben Speedy, following one of the advantageous consequences of the Covid-19 pandemic: the importance of, and demand for, healthy and sustainable food grown in reputable and trusted countries...like New Zealand.
"To continue to capitalise on this, we need to keep investing and improve the way we grow our food and fibre, and be unwavering in the need to listen and adapt to evolving consumer demand," says Speedy.
"Fortunately for New Zealand, we have some amazing role models and leaders, from The New Zealand Merino Company to Lewis Road Creamery."
The demand for healthy whole food, grown sustainably, will continue to hold commodity prices at strong levels, he says. The prices will ease at some point because supply chain pressures are contributing to high values on the demand side; high input prices are constraining the supply side.
But demand for quality protein will not abate, especially with the rising middle class worldwide.
A global supply response will continue to be constrained by climate change limitations and growing dissatisfaction with 'factory farming', over-tilling soil to increase inputs, and concern over animal welfare.
Speedy says the demand for healthy and sustainable food is best seen in China's demand for kiwifruit, given its Vitamin C properties. In the past two years, horticultural export volumes have grown more than 40 per cent.
That's resulted in increased demand for horticultural borrowing, with lending rising 30 per cent in the past two years, while dairy lending has decreased by 8 per cent.
Food prices in New Zealand increased 6.8 per cent year-on-year in February from a 5.9 per cent rise in the previous month - the highest reading since July 2011.
Costs rose the most for fruit and vegetables (17 per cent), meat, poultry, and fish (7.1 per cent), and restaurant and ready-to-eat foods (5.2 per cent). On a seasonally adjusted monthly basis, food costs edged 0.1 per cent higher from a 1.1 per cent gain in January, largely due to restaurant and ready-to-eat meals.
Speedy says: "While we are currently seeing record prices for many commodities, input costs have also risen sharply – driven by inflation, constrained supply chains and reduced supply of some materials. However, most producers will have a strong year, especially those with lower fixed costs."
Asked how the labour shortage impacts the rural sector, Speedy says dairy farming is 4000-6000 workers short while the horticultural sector is missing tens of thousands of seasonal workers to pick fruit.
"Even as the border opens, we expect labour availability to remain tight with unemployment expected to stay below 3.2 per cent until mid-2023. The rural industry is working hard on this problem – which includes automation.
"However, in the medium term, it's not as simple as just paying people more. Farms are remote, the work is physical and, in horticulture, the work is typically seasonal."
Recently the government moved to ease the labour shortage by increasing the cap to 16,000 workers from the Pacific under the Recognised Seasonal Employers (RSE) scheme. This will benefit the apple, kiwifruit and wine grape harvests over time.
The way forward
How can rural businesses prepare for the year ahead? Speedy says: "I was recently speaking to a dairy farmer in Horowhenua and he was commenting that, given the labour challenges, he was torn over whether to expand the farm or accelerate debt repayment to be in a better position to capitalise on future off-farm investments.
"These are everyday conversations right now, so it's essential to speak with rural professionals to understand the medium- and long-term implications of inflation and constrained labour – and make an informed plan for the future.
"When we think about inflation, you have to remember the Reserve Bank's setting of managing inflation at 1-3 per cent. This means inflation is effectively 'banked' each year meaning, if we get inflation back to 3 per cent next year, it is still 9 per cent over two years (inflation is currently at 6 per cent).
Farmers, therefore, must think through what costs within their business are likely to permanently increase, what are transitionary and driven by temporary supply challenges, and what are variable costs linked to income decisions.
Because of the workers' shortage and rising cost of living, labour costs will continue to increase with some certainty, says Speedy. Fertiliser, on the other hand, is hard to get a line on – how much of the price increase is because of logistic challenges and how much is due to increased production costs or protectionism in countries of origin.
"Fortuitously, inflation has come at a time of high commodity prices, providing the opportunity to cash flow higher interest rates, repay debt or invest in productivity and performance of the business to lift incomes," says Speedy.
"As we embrace 2022, our reputation of feeding the world with healthy whole foods and clothing the world in sustainable fashion garments continues to provide the most significant opportunity in the rural industry.
"What is critically important is to get engaged in the environmental and social influences which shape our ability to meet evolving consumer demand."
For more rural business insights, tips and tools visit the ASB Business Hub asb.co.nz/businesshub