NZ's rural cost inflation hits a boiling point

  • By Zilla Efrat

New Zealand’s rural cost inflation has hit boiling point over the year to June and is expected to remain uncomfortably high over the coming years, according to a Westpac report.

Input prices across all farm and orchard types (excluding livestock costs) rose by a whopping 13.7 per cent in the 12 months to June. That rise came on top of the 9.9 per cent annual change recorded in March, which itself was also a record high.

While Westpac’s economists Nathan Penny and Satish Ranchhod,  expect cost inflation to moderate over the year ahead, they say farmers are likely to see sizeable jumps in their operating costs over the coming years.

Operating costs have been rising for businesses right across the economy. However, the rise in farm costs has been particularly large, with input costs for businesses more generally rising by “only” 10 per cent over the past year.

From here, Westpac’s economists expect cost inflation to come off the boil. “In other words, we anticipate that the 13.7 per cent spike in annual terms will market the peak rate of inflation in this cycle,” they say.

Indeed, some of the key inflation drivers are already coming off their highs. Oil prices, for example, have dropped from over US$120/barrel in June to around US$95/barrel currently. In addition, global urea prices have fallen over US$300/metric ton, or by around a third from their peak in April.

“However, we still expect sizeable increases in prices over coming years. By June 2023 and June 2024, we expect annual cost inflation to slow to between 4 per cent and 6 per cent,” say Westpac’s economists.

“While that’s a material slowing, it is noticeably higher than the 1 per cent and 2 per cent average prior to the COVID-19 outbreak.”