Rising costs and the impact on your farm business | Ep. 122

Global conflict can feel a long way from the farm gate until it starts showing up in your fuel bill, freight costs and next season’s budget.

In this episode, you hear from DairyNZ economist Mark Storey and farm system specialist Mark Speight about what the escalation of global conflict could mean for your farm business over the months ahead. They share insights into why fuel and freight costs are rising, how long higher costs could stick around, and what that means for inflation, interest rates and farm working expenses.

Most importantly, they share practical steps you can take now that are within your control such as stress‑testing budgets, planning for different cost scenarios, keeping cashflow front of mind, and maintaining strong farm system fundamentals.

You’ll also hear why New Zealand dairy remains resilient through periods of global volatility, and how your pasture‑based system gives you an advantage compared with many overseas competitors.

Links mentioned in this episode and more:

• Managing higher fuel costs on-farm
• Pasture assessment
• Budgeting
• Strategies to improve body condition score
• Team communication

Have feedback or ideas for future episodes? Email us at talkingdairy@dairynz.co.nz

Connect with DairyNZ

Stay up to date with advice, latest research, tools and resources. Read, browse, scroll, listen, or be there in person. Visit dairynz.co.nz/get-connected 

Transcript

Introduction

SPEAKER_00 0:01

Kiora and welcome to Talking Dairy. I'm your host, Jack McGowan from DairyNZ. Global events can feel a long way removed from us here in New Zealand and our day-to-day farm decisions. That is, until they start showing up in our fuel and freight bills, affecting supply or in conversations with your bank or accountant. The escalation of conflict in the Middle East has brought renewed volatility to global energy markets. We've already seen fuel prices respond, and naturally this raises questions about costs, budgets, and how much uncertainty to factor into planning for next season. In this episode, we talk about the unfolding situation, what it could mean for dairy farmers, and how to think about navigating uncertainty in the months ahead. Joining me to unpack it all are Mark Story, who's head of economics at DairyNZ, and Mark Spate, who's a farm system specialist at DairyNZ. Let's get into it. Kiora Korua, how are you both?

SPEAKER_02 0:58

Great, thank you, Jack. Super good.

SPEAKER_00 1:00

Okay, Mark One and Mark II, we've had you on the podcast before, but for those who haven't heard you, tell us who you are. Mark Story first.

SPEAKER_02 1:09

Okay, I'll take the Mark One label as I'm going first. So, yes, Mark Story, I'm head of economics at DairyNZ. I have responsibility for the Dairy Base team, our wonderful team collecting dairy data and dairy farm data across the country, and the economics team who are predominantly based in our Newstead office. And I am based in our Wellington office, sort of having connections to people in the Wellington area and the government. So yeah, that's my role here at DairyNZ.

SPEAKER_00 1:37

Great. Thank you, Mark. And Mark Spate.

SPEAKER_01 1:40

Thanks, Jack. I'm a farm system specialist. I've been with Dari and Z for just over three years now and based now in Canterbury. I work quite a bit with regional teams, latterly quite a bit on the West Coast and top of the south, with events related to genetic gain, benchmarking, and wearables. Also at adverse events, which are usually climatic. What is happening at the moment could be described as an extreme climatic event.

SPEAKER_00 2:08

Okay, Mark Story, let's start with the big picture. From an economic point of view, how does the conflict in the Middle East affect New Zealand?

What Farmers Notice On Farm

SPEAKER_02 2:17

Thanks, Jack. From an economics perspective, the current situation or the situation that's been unfolding in the Middle East in recent weeks or even months introduces a lot of uncertainty into global markets, particularly around energy shipping and inflation. One of the most immediate channels we see this effect coming through is higher oil prices, which of course have been a point of concern for not only New Zealand, but um most countries in the world, actually. And that feeds into fuel and freight costs worldwide. So for New Zealand in particular, we're a small trade-dependent economy and we're a long way from our markets. So any changes in fuel prices and transport costs matter quite a bit to us. When these costs rise, they can add pressures across the economy, lift inflation, and ultimately influence things like interest rates and consumer confidence. If we're thinking about the impacts on the economy and the New Zealand dairy sector, not so long ago with the Russian invasion of Ukraine in the early 2020s and supply disruptions during the COVID pandemic, global demand for dairy, as in reflected in global dairy prices, showed itself to be pretty resilient through that period. Dairy is not a standard commodity like gold or silver, it is a food product. And as such, maintaining access to dairy products for other countries is a food security issue for many countries. So it's a bit different to other commodities and doesn't necessarily react in quite the way that you would possibly expect. There's nothing currently to suggest that demand for dairy products will decline as a result of this crisis in terms of the current situation. That said, the impacts of most concern for myself and the dairy sector are mostly related to the cost of the inputs, especially inputs for which prices are strongly correlated to energy prices, such as fuel, fertilizer, feed, and transport costs. Those will come back, and Mark will talk about those in the next couple of questions, I think. But um, while these inputs are most immediately and obviously impacted by rising fuel costs, further down the track at some of the other expense line items which come into play. And those are costs such as consultancy, veterinary costs, your financial services, etc., they also tend to creep up with inflation and unfortunately don't come back down as quickly, if at all. Overall, what the situation does reinforce is the importance of keeping an eye on risk and resilience, and we'll talk about resilience many times. While the global picture is uncertain and largely outside of our control, understanding how these pressures flow through to the economy and on onto farmers is all part of making informed decisions.

SPEAKER_00 4:49

And Mark Spate, you obviously work directly with a lot of farmers. What are some of the impacts farmers are noticing right now?

SPEAKER_01 4:56

Generally speaking, Jack, across New Zealand, farmers have had a pretty good season, which is a relief going into a period of uncertainty. Already with the increase in fuel prices, especially for the higher input system four and five farmers, there is immediate impact. Some farmers have planned ahead in terms of purchasing diesel, which is helpful. I actually think there's going to be more of an impact in the spring, with crops going back in and high use of key inputs like fuel and fertilizer. Like I said, I do some work on the West Coast, top of the south. Those regions do get hit with high freight costs all the time. This whole situation now will take it up to another level, and along with the likes of fertilizer and supplements increasing, will have a direct impact on farm working expenses. The other thing I'd say is the fuel assessment factor, which is often in the range of 15 to 17%, has been applied across much of New Zealand freight network. So that's certainly going to affect many of our dairy farmers, particularly those that are higher import. Just to finish this bit, Jack, a quote I quite like from John F. Kennedy is the farmer is the only one in the economy who buys everything at retail, sells at wholesale, and pays the freight both ways. So that quote was from a while ago, but it's totally relevant.

SPEAKER_00 6:21

Still true. And Mark, are you hearing about farmers not being able to get things that they need, or is it m more that the cost of what they're needing is already increased?

SPEAKER_01 6:33

They're certainly getting the things that they need to keep things operating, but it is the cost. The costs are changing weekly. We're seeing it at the petrol diesel pump. And yeah, like I say, that's probably going to be accentuated over the next five, six months.

SPEAKER_00 6:50

Okay, Mark's story, how persistent could these higher fuel and freight costs be? And what does that mean for inflation in New Zealand?

SPEAKER_02 6:58

That is the question. How long do such shocks prevail and what are the impacts? And um there's maybe a couple ways of looking at that. One is from the the economy specifically, and then the other more immediately for the dairy sector. In terms of the economy, so we know fuel is a foundational cost, higher energy and transport costs flow through into the prices of goods and services across the economy. So it's very prevalent. So it affects nearly everything, including food, freight, and manufacturing. That adds upward, what's called imported inflationary pressure on the New Zealand economy at the same time as we've been, as everyone knows, working very hard to bring our inflationary pressure down and get the economy moving again. So the timing is very unfortunate for us as we're trying to sort of, you know, it probably will slow down the occurrence of the recovery. What we've seen in the past is that, in terms of the question of how long it will prevail, is that when we've had a significant energy price shock, it tends to lead to a cycle of inflationary pressures and readjustments far beyond the immediate commodity. And that can typically take 12 to 18 months. So even if the energy price shock was to sort of like stop today or tomorrow, and we're suddenly to have freight tankers flowing quickly again, I think you can expect to see that there will be this inflationary pressure in the economy. That means a number of things. It obviously has impacts on interest rate settings, which then affect borrowing costs, investment decisions, and overall economic confidence. And for sectors like dairy, this matters because costs tend to rise faster than revenue in the short term after a shock. We saw last week the Reserve Bank held its cash state steady for the second consecutive time, but they warned that if medium-term inflation begins to pick up, they will act decisively, and that will mean rate increases. So, even sort of seeing responses from some of the banks that some of those interest rates are starting to change. So that will be one obvious area where the economy and everybody will potentially see interest cost adjustments quicker than we had hoped going up. In terms of the sector, specifically farm working expenses, the message is unfortunately a bit similar. When the energy prices do abate or eventually stabilize, we can expect to see some immediate adjustments down. But other line items will tend to stay sticky. And we tend to have, in all probability, increased farm working expenses and an increased breakeven milk price for farmers to break even as a result.

SPEAKER_00 9:29

Why is it that those other things are more sticky?

SPEAKER_02 9:32

It's a combination of decisions. So if you take, I guess, without picking on vets or financial services, I mean they will have increased costs and they will build those costs into it and they tend to sort of come up and not quickly come back down. This doesn't say they won't come back down, but when all businesses are facing increased costs of doing business, they may stabilize, but they tend not to revert back to where they were.

SPEAKER_00 9:54

I guess there's also a period of time where they not run at a loss, but they absorb some of the cost increase for a little while.

SPEAKER_02 10:03

It's always interesting to know to what extent this imported inflationary pressures will impact on the economy when the economy has other things driving that and those interest costs as well. So it's not just about those imported price effects, but in all likelihood, some of this inflation and dairy inflation will persist for some time.

SPEAKER_00 10:22

Mark Spate, how are farmers approaching planning and budgeting for next season in a more uncertain environment in the short, medium, and long term?

SPEAKER_01 10:32

Talking to some of my key farmers last week, one of the main comments I picked up was doing nothing is not an option. Farmers that will come through this the best are those that are planning ahead for the rest of the season and have been completing budgets for 26, 27. I'd say for those budgets, I'd be using several cost scenarios. Say looking at farm working expenses, adding on, say 10%, 20%, 30%, basically stress testing that budget, seeing how what the bottom line ends up at. And then also looking at okay, what costs can be deferred to later. There will be some things like non-essential REM infrastructure upgrades that could be pushed further out. The other thing I'd say, Jack, is understanding cash flow realities of when the money's coming in and going out is key and regularly revisiting those budgets. That helps farmers stay ahead rather than reacting to this changing situation. So where is your farming business most exposed and what options are available that won't hurt next season's performance? And I think a bit of um what Mark said, it's important to look closely at the four F's, the fuel fertilizer, feed and freight. The other final thing I'd say is just keeping in touch with your trusted advisors, I suppose your banker, accountants, farm consultants, and keeping them in the loop early. Bankers are classic, they don't like surprises. So have those conversations early and keep everybody on the same page.

SPEAKER_00 12:13

You mentioned deferring costs. You know, there's a number of things that are deferrable. Which ones and perhaps this is a question for both marks, which ones might come down in cost if you defer them versus which might increase?

SPEAKER_01 12:28

I suppose that's a sixty million dollar question in terms of what's going to happen. I think you've got to be careful. You know, some of those big ticket ones around fertilizer, you'd be also checking, okay, what are the fertility levels like on farm? Is there Is it actually deferable? Is it deferable? Or, you know, maybe you can go through that with your fertilizer rep and go, actually, some of it's deferable, some of it is not.

SPEAKER_00 12:55

Mark, story?

SPEAKER_02 12:56

And I guess we tend to think of the classics like um repairs and maintenance and those kind of costs that farmers can defer. And we sort of saw that in previous price pressures where there's definitely some changes in in farm behavior around some of those activities where they can defer to some extent in in feed costs as well. There's decisions that can be made around there in response to the prices. Those are the classic ones. But then what we watch out for is, you know, a a season or two down the track, how you you're you obviously need to pick up on those RM expenditure costs, they come back to get you at some stage.

Signals To Track Over Winter

SPEAKER_00 13:30

Okay. And uh what are the key indicators or signals that farmers should keep an eye on over the next few months to judge whether you know the situation is easing or becoming more serious?

SPEAKER_02 13:41

There's information all all around us, and that's sort of what Mark was pointing to, and and I guess I'll come back to that aspect of it in a second. I think the key signals obviously, and farmers will be tracking what's happening with the immediate price pressures around fuel and energy prices because they flow quickly into freight and inflation more broadly. I'm sure many of us will be getting quite expert at tracking what's happening with fuel supply availability around the world at the moment and which tankers are coming into New Zealand waters and which aren't. I know I'm getting a lot better than at that than I was a few weeks ago.

SPEAKER_00 14:16

Yes, I had no understanding of how all that worked.

SPEAKER_02 14:18

Yeah, there's some great apps out there to track that information if you're into that. The second is inflation and interest rate signals. That will be key. I mean, there will be important announcements. Obviously, you know, your banks will be making decisions all the time, but the decisions from the Reserve Bank and signals around the trajectory of interest rate costs will be impacting on the confidence of farmers and the wider economy. Clearly, always we're ex, you know, you watch what's happening in terms of the GDT auctions and the market conditions and any responses going through there. It will be interesting to sort of see how they track in coming months. And farmers do all that anyway. They're across so much of this stuff. There's so much to be across. And I think that comes back to the point around your trusted information sources at the moment, because some of the information is very much interpretation to a degree we're doing that now, of course. But you um hopefully can go to your trusted sources, not panic, but just sort of focus on the things that you can do well and make decisions informed on the fact that this volatility is kind of the norm. Uh, maybe not these energy shocks, but farmers deal with volatility of the sort all the time. In terms of trusted sources, you know, I'd point to your trusted farm advisors, but also I'd hope that the information that DairyNZ has, like on our e-contracker and the forecast of expenditure items going ahead, is available tool for farmers to look at because what we try and do is turn some of that external information into estimates around what will actually translate into on farm. It may not always be right, but it's an informed prediction.

Control The Fundamentals On Farm

SPEAKER_00 15:52

Okay, very good. And Mark Spate, where can farmers focus their attention to stay in control of what they can influence?

SPEAKER_01 16:00

I think the most important thing for farmers is to focus on what they can control and not get overwhelmed by the things they can't. I think a lot of it is accentuated with social media and some of the messages that come out. So it's just keeping your finger on the pulse of your business. I think a lot of it is farm system fundamentals, getting the basics right on farm. Nothing's changed. It's just, you know, the stocking rate, what's your drying off policy going through to the end of the season? The basics still have to happen, all this stuff going on. You want to achieve your body condition score targets, pasture cover targets to set you up for a really successful 26-27. The areas that are the biggest influence on profitability are related to pasture management and cost control. Much of that comes down to your team on farm, being on board with the feed management plan in the spring, getting those residuals right, and feed allocation for the cows correct. Get that right. The final thing I'd just say, Jack, is just be wary of, I suppose, contractors and salesmen. One of my farmers was upgrading a race, but said, basically said to the contractor that the amount budgeted was 35K. Definitely no more. And often what's the final price that can end up being paid? It can be 40k. And I suppose if that happens more than a few times across your farm working expenses, suddenly your budget starts to look a bit shaky. And you might have got away with that previously, but with input costs rising across the board, I think you've just got to be vigilant around some of those basics.

SPEAKER_00 17:46

From COVID, we know that even that good faith kind of quoting and and signing up for work, the cost increases eventually can't be absorbed anymore. So you kind of have to build that that in at this point, right?

SPEAKER_01 18:00

Oh, totally. Yeah.

Why NZ Dairy Stays Competitive

SPEAKER_00 18:02

Mark's story, looking more broadly, you mentioned it before, how resilient the New Zealand dairy sector is. How do we compare with other sectors and countries?

Keeping Confidence And Support Networks

SPEAKER_02 18:12

This question gives me uh an opportunity to be a little bit more optimistic or a little bit more positive in terms of the shock, because when you take a step back and sort of look at how the dairy sector, the New Zealand dairy sector tends to perform in these situations, the answer generally tends to be pretty well. And sometimes it takes a shock or an adverse weather event or a combination of things like this to sort of see how well the New Zealand dairy sector does stand up, both for itself and for its farmers, but for the you know the economy it's under supporting. And so to explain that a little bit more, you know, I would sort of say, you know, the dairy sector is a very resilient sector, both within the New Zealand economy, alongside other primary land use sectors, dairy is resilient, but critically compared to our competitors. And in this current situation, the globe is being adversely affected by these inflationary pressures. So it's not just us. One of our key strengths is, as I referred to before, is that dairy products are largely essential food items. So global demand for food and dairy protein doesn't disappear when economic conditions tighten. And while consumers may trade down in some areas overall, dairy consumption tends to hold up pretty well. We've seen that in the past. Another important thing that I would stress is as our low-cost, relatively low-cost pasture-based production system compared to our competitor countries. On a global scale, that gives us a competitive advantage. And when you're sort of seeing these price pressures flow through and inputs, we can play off that advantage. And then so systems that convert grass into milk efficiently tend to be more resilient to shocks and fertilize the energy or feed market. So that is the key point. There's also a degree of structural adaptability into our sector. Our sector responds pretty well to price signals. It's not confused by subsidies and other price signals. Farmers respond to the signals in front of them. And both our processes and exporters are very, very adaptable in that context. And finally, from a macro perspective, we've got strong institutions in a well-established export sector. So my key message on that point is more optimistic and stressing the fact that farmers are resilient and the importance of that for the New Zealand economy. So we're sort of seeing in this current shock and even previous shocks that dairy can ride through pretty well, keep the milk flowing, and critically the export revenue for the economy that comes off the back of that. That said, it just stresses even more the importance of keeping that cost, comparative cost advantage if we are to be resilient in the future, because we know volatility, I wouldn't say is here to stay. But as Mark said to me going into this, this isn't our first Rodeo and won't be the last one.

SPEAKER_00 20:54

And Mark's obviously there's a lot of resilience in in our dairy sector, but we might not always feel that every day. So for farmers who are feeling uncertain or overwhelmed, what's the key message you'd want them to take away from all this?

SPEAKER_01 21:07

I think a lot of it is it's key to keep in touch with your farming mates. How are they navigating the period where inputs are rising? They're the ones, the go-to, you know, your farming and farmers that you respect. Keep in touch with them and obviously your business team, both on and off the farm, are absolutely critical as well. There's a farmer that I've worked with previously who keeps his finger on the pulse on a daily basis. He has the laptop open with the feed budget, financial budget being regularly updated. He's the sort of guy that lives on the edge of it. This is the way he runs his life. And I don't think it's a bad practice, just in terms of keeping tabs on the farm system and obviously keeping your farm team in the loop as well. The other thing I'd say just breaking things down into manageable steps. Helps and I'll go back to some of those earlier points revisiting budgets, prioritizing the fundamentals on farm, and just having plans in place. Just talking. One farmer I talked to at the start of all this made the comment panic slowly. Just take it one step at a time. It's important not to do this in isolation. You've got your trusted advisors, you've got peers, Darian Z team, we can help out. And there's terrific resources on the website that have just been updated recently. So main thing is making sure you've got a really good team around you, also aware of your farmers in the community, ones that might be struggling and maybe reaching out to them as well.

SPEAKER_00 22:47

Okay. Thank you. Any final thoughts from you, Mark Story?

SPEAKER_02 22:51

The situation's changed quite a bit from six weeks ago when we're sort of looking at um a pretty positive financial situation forecast for farmers this year. And then obviously it was on the back of the the Fonterra payout, etc., which um is all part of the mix. I mean, that's still there. And I think farmers have earned that and incredibly grateful for having that financial buffer going into this current period. Our farmers there with volatility day in and day out. The key message from myself is that the after effects may take a little bit longer than we sometimes talk about in the media. So start to prepare accordingly.

SPEAKER_00 23:26

Thank you, Mark Story and Mark Spate, for those insights. What we've heard today is that while global events like the situation in the Middle East are creating uncertainty through fuel prices, freight costs, and wider economic pressures, the New Zealand dairy sector remains relatively resilient, as it has been for a long time. Dairy demand is generally stable, our pasture-based systems are competitive globally, and the industry is experienced at operating through volatility. For farmers, uncertainty brings challenges, but farmers still have strong levers within their own control. So focusing on the fundamentals of your farm system, staying on top of budgets and cash flow, and building flexibility into plans for next season can make a real difference. Even small and well-targeted changes can help protect operating margin and confidence. And perhaps most importantly, you don't have to navigate uncertainty on your own. Stay connected with your peers and advisors, and there are DairyNZ resources available online to help sense check decisions, reduce the pressure, and support good planning. And we'll link to these in the show notes. While none of us can predict exactly how global conditions will play out, understanding the risks, staying focused on what can be influenced, and taking a steady, step-by-step approach will put you in a stronger position to adapt as conditions evolve. Thanks for listening and we'll catch you next time. Matewa. If you'd like to get connected with DairyNZ's latest advice, research, tools, and resources, whether it's reading, scrolling, listening, or in person, you can visit dairynz.co.nz forward slash get connected, and don't forget to hit follow to keep up to date with our latest episodes. As always, if you have any feedback on this podcast or have some ideas for future topics or guests, please email us at talkingdairy at dairynz.co.nz. Thanks for listening, and we'll catch you next time on Talking Dairy.