Tackling rising input costs

By Dwayne Cowin

The original version of this article appeared in Country-Wide Magazine in May 2022

Despite enjoying strong product pricing for beef and lamb, farmers’ bottom lines aren’t budging. Though earnings have increased, so have the costs of key farming inputs.

The reasons these price rises are myriad and complicated, but a significant factor is the pressure on global and local supply chains. Due to port delays and Covid-19 closure relate, shipping prices are around 600% higher than they were two years ago. The prices of ocean freight out of Asia have also grown substantially, increasing by 15 times between March and August last year.

Inflation also plays are part. With the annual rate of inflation recently released at 7.3% for the June 2022 quarter, few costs have escaped recent price increases.

There are two approaches farmers can take. Simply write out cheques with a ‘just suck it up attitude’ or see this as an opportune time to review the financial performance of the farm businesses. Part of that review could include implementing changes to deal with the rising costs.

Lowering the cost of fertiliser

Since the fertiliser cost on most farms is between 15 to 30% of total working expenses, farmers are understandably feeling the pinch from recent price hikes. The cost of some high analysis fertilisers has more than doubled in the last 12 months.

As a result, farmers are being forced to make difficult decisions about what product to use and how much to put on.

While the current prices could be a temporary spike, they’re unlikely to return to the levels they were 12 months ago. Rather than withhold fertiliser applications to ride out the price rise, a better strategy is to lower fertiliser costs. Even a 10% reduction in fertiliser expenditure through targeted fertiliser applications can reduce total farm working expenditure by 2%.

Cost-reducing strategies could include:

  • Start back at the start – have we got soil transect lines in the right place to best represent different areas of the farm?
  • Develop a more tailored fertiliser application strategy. By obtaining accurate soil test results, tools such as variable rate spread technology can be used to target more productive areas of the farm, or areas which will yield the greatest response.
  • Is there an area of the farm with a nutrient status above the optimum range? Can a sub-maintenance rate be applied over this area without reducing pasture production?
  • Don’t have a short-term fertiliser strategy that mines soil fertility to a level where pasture production becomes adversely affected.

 Lowering the cost of feed

While some sheep and beef farms operate a simple all grass system, other farms which are reliant on either conserving, growing or importing supplementary feed should be understanding the cost of doing so, and carefully considering this against the relative benefits.

Feed costs have increased in three main areas – nitrogen fertiliser costs, fuel costs (which affect cropping and supplement conservation costs), and chemical costs (affecting cropping costs).

The spike may be temporary, but prudent farmers would do well to consider the following cost-lowering strategies:

  • Review the current on farm stock policy – are we using a lot of supplements in our system? Is this still economic at higher prices?
  • Have a strategy to fill the feed gap. This could either be reducing feed demand (by selling some trading stock) or increasing feed supply (by feeding out or importing supplements).
  • Know the costs of conserving feed on farm (through cropping, silage conservation etc.) compared to importing feed. Most methods of conserving feed on farm cost between 13 – 20 cents/kg DM, whereas importing feed costs start at 30 cents/kg DM (applying nitrogen) and go as high as 50 cents/kg DM (importing palm kernel or baleage on farm).
  • If supplementary feed is grown/imported as part of the farming system, explore options to contract in product schedule pricing. This way the trading margin can be locked in, given we know the feed cost.
  • Be disciplined in the selling decision if the cost of supplying feed is going to be more than the return from retaining the stock.

Lowering the cost of repairs and maintenance

Unlike fertiliser and feed prices, the material costs for fencing, water reticulation etc. are unlikely to come back down. But there are measures farmers can take to minimise the impact of repairs and maintenance.

  • Decide ahead of time what is necessary expenditure (i.e. the business will fall down if the cost is not incurred) versus discretionary expenditure (the nice-to-do job list).
  • Decide which jobs are time critical (cannot be delayed) vs flexible. Prioritise the job list based on the time constraints.
  • Develop ‘if statements’ for when discretionary repairs and maintenance expenditure can be incurred. Is it when we know our average lamb sale price? Is it when we hit our target pasture covers pre-winter and don’t need nitrogen to boost feed supply?
  • Consider the above points as part of a whole farm budget – e.g. Since we didn’t achieve budgeted lamb sale value, is it more important to get all the fertiliser on and leave roofing the back docking yard for another year?
  • Get quoted pricing for materials.

 It all adds up

Although gains at an individual cost level may seem small, ten small wins can add up to a reasonable saving over your total farm working expenses bill. The key is to isolate each of the three key areas (fertiliser, feed, repairs) and systematically work through them to find the gains.



Lee Matheson

Managing Director
Principal Consultant

B.Appl.Sc (Hons), FNZIPIM (Reg)

Lee came to agribusiness consultancy via the unlikely pathway of a suburban Wellington upbringing, an Honours degree in plant science and a six-year career in the financial markets. In his role as the firm’s MD, Lee doesn’t get out on-farm as much as he used to but makes the most of it when he does. While having swapped the paddock for the boardroom, Lee continues to provide advice in the areas of farm business strategy, farm system innovation, corporate governance, investment analysis and economic research.

Outside of Perrin Ag, Lee loves to spend his time coaching rugby, watching his three kids play sport and gardening with his wife Haidee.

“I love the challenge of empowering people in our primary sectors and the excitement of seeing clients achieving their aspirations. If we can encourage farmers to engage with their consumers, take a more active involvement in their supply chains and view their businesses through a wider lens, then I think our industries have a great future.”

Abbey Dowd

Consultant

B.Ag.Sc (Hons), MNZIPIM

Abbey joined Perrin Ag in February 2023 as part of the firm’s graduate recruitment programme, Empower.

Abbey grew up surrounded by dairy farms in a close-knit community in South Waikato. She saw first-hand how local farmers supported her community, which is what inspired her to study at Lincoln University.

Growing up in a rural community Abbey has always been impressed by how much local farmers contribute to the community. She wanted to help give back to the industry and play a part in helping our primary sector continue to produce quality food in a sustainable way.

In 2022, Abbey spent the summer as an intern on one of New Zealand’s first commercial deer milking operations. Her Honours project was researching deer milk alongside other more traditional milking operations and assessing the deer milking industry’s future production possibilities.

“Growing up I didn’t live on a farm, but I always knew I wanted to work in the farming sector. I wanted a role where there was a balance between working on and off farm and where I could support farmers to get the best out of their businesses.”

Sam Gray

Consultant

Sam grew up on a dairy farm in the Far North. After graduating from the University of Otago in 2005 with an Honours degree in molecular biotechnology, he spent several years working in medical research in New Zealand and Scotland. Upon returning to New Zealand in 2012, he spent four seasons dairy farming in Northland before purchasing a 56 ha block in Taupо̄, where he was first exposed to farming under a nitrogen cap. Sam joined Perrin Ag in 2023 and brings his strong analytical skills that are grounded by a pragmatic approach to problem solving. Outside of farming and consultancy, you’ll likely find him fly fishing, hunting or snowboarding.

“A lot of farmers feel overwhelmed in the face of a rapidly changing regulatory landscape. I strive to help farmers understand what these environmental regulations mean for their business, and offer practical solutions that allow them to keep doing what they do best, whilst remaining compliant”.

Danni Armstrong

Finance administrator

Danni grew up on a life style block in Atiamuri and spent five seasons as a relief milker in the area. During this time, her full time roles were in various fields including the rental car, health care and marine industries. Danni has had a focus on administrative and accounting duties, but is also proficient in looking after customers especially well, social media and website operation, running a rental car fleet and the associated tasks like training, rosters, H&S and organising repairs! Danni joined Perrin Ag in May 2021, to be part of a business in an industry she is passionate about.

During her spare time Danni can be found reading a book with her cats or out enjoying the walks in Rotorua’s Redwoods.

“What motivates me each day is knowing that I will be challenged with a range of problem solving tasks. I love to see all the figures adding up and knowing that my role makes a difference to the team.”

Duncan Walker

Director
Principal Consultant

B.Appl.Sc, MNZIPIM (Reg)

Coming from a drystock and dairy farming background, Duncan has always been passionate about growing primary sector businesses. Whether it’s pastoral farming, forestry, horticulture or investments outside the farm gate, sustainably optimising business performance is Duncan’s passion. After graduating from Massey University with a Bachelor of Applied Science in Agribusiness, Duncan’s first opportunity to optimise a farm business was by undertaking a dairy conversion. Duncan project managed the conversion and continued to run the dairy farm for a further three years.

Since joining Perrin Ag in 2011 Duncan works with a wide range of clients including those ‘outside the farm gate’. With his strong background in investment analysis, business strategy and project management, Duncan is increasingly working with clients to analyse and integrate horticulture and forestry investments into their farm businesses.

“I enjoy helping clients navigate through the complexities of today’s operational, financial and environmental challenges. Seeing clients achieve their goals is very rewarding”

Lee Matheson

Managing Director
Principal Consultant

B.Appl.Sc (Hons), FNZIPIM (Reg)

Lee came to agribusiness consultancy via the unlikely pathway of a suburban Wellington upbringing, an Honours degree in plant science and a six-year career in the financial markets. In his role as the firm’s MD, Lee doesn’t get out on-farm as much as he used to but makes the most of it when he does. While having swapped the paddock for the boardroom, Lee continues to provide advice in the areas of farm business strategy, farm system innovation, corporate governance, investment analysis and economic research.

Outside of Perrin Ag, Lee loves to spend his time coaching rugby, watching his three kids play sport and gardening with his wife Haidee.

“I love the challenge of empowering people in our primary sectors and the excitement of seeing clients achieving their aspirations.  If we can encourage farmers to engage with their consumers, take a more active involvement in their supply chains and view their businesses through a wider lens, then I think our industries have a great future.”