High commodity prices but also high input costs for NZ agricultural sector

New Zealand commodity prices have been on the rise over the last year. Global dairy prices have increase by 14% this year with beef and lamb prices setting record highs. Some economists have said that it is the perfect storm of supply and demand factors.

Supply
As it does every year, the weather has influenced the price of dairy prices especially. A wet start to the dairy season accompanied by a very hot summer has reduced the supply of milk and therefore increasing its price. Also Covid has impacted the supply chains especially that of sea freight (see below) which in turn have impacted feed, fertilisers which has reduced supply. Although the NZ inflation rate has hit a 30 year high at 5.9% this is nothing compared to the costs down on the farm. This year farming cost have increased by:

  • Fertilisers 200% (breakdown in the graph below)
  • Chemicals 50%
  • Sea Freight 500%
  • Diesel 40%
  • Electricity 21%
  • Winter grazing 36.9
  • Cultivation, Harvesting & Animal Feed Cost 18.9%

Fertiliser price inflation

Source: Westpac Economic Overview – February 2022

Demand
The Chinese recovery has mainly been responsible for the rebound in demand as well as other countries coming out of Covid restrictions. Another factor helping the primary sector is the weaker NZ$. It is now trading around the US$0.66 from over US$0.70 in late 2021. Remember that a weaker dollar makes it cheaper for consumers overseas to buy our currency and therefore more price competitive goods

Carbon Prices influence farmer’s investments
In the past year the recent doubling of carbon prices to around $85/unit has encouraged some farmers to focus their attention on tree plantations to the detriment of sheep and beef supply. What is noticeable about investment is that with the high returns on commodity prices farmers are repaying debt rather than re-investing back into their business – although still very high agricultural debt fell from $64bn in July 2019 to $62bn today.

Source: Westpac Economic Overview – February 2022

For more on supply and demand view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

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