by Andrew Olsen, CEO, Rural Contractors NZ
Earlier this year, as inflation began to bite, Federated Farmers and Rural Contractors NZ engaged NZX to devise a new cost indices tool to support new forage contracts between farmers and contractors.
NZX Dairy Analyst Alex Winning has built the index as a tool for both rural contractors and farmers to use.
We devised the indexes to support rural contractors and farmers to understand and manage some of the key inputs and variable factors that may influence their cost margins. Several key variables were considered;
- The movement of domestic prices vs. international futures of urea
- Diammonium phosphate (DAP)
- Petrol and diesel
- Domestic price movements of superphosphate
- The Baltic Dry Index (BDI) (an index tracking shipping of average dry material)
- The foreign exchange (FX) movements of NZD:USD
- The MJME/kgDM and dry matter price movement comparisons of domestic PKE, maize, grain, oats and feed wheat and barley.
When considering comparisons to international futures prices, we can forecast any upwards or downwards movements that may impact the NZ market. Our general rule of thumb is a three-month lag between international and domestic price movements in NZ. This accounts for the price increase offshore and the time taken between a contract settling offshore and delivery to NZ. While this isn’t an exact science, we see this correlation in many situations; fertiliser price increases after the beginning of the Ukraine conflict which also impacted fuel prices along with post-Covid border reopening in Europe and the US; PKE price increases after Malaysia’s export closures and even the lag between the increase in fuel and fertiliser prices on shore and the increase in grain and feed prices here in NZ.
We considered the Baltic Dry Index (BDI) and FX rates because of the impact they have on importing. While a weaker NZD:USD rate is favourable for our exporting market, it significantly impacts how much it costs to import into NZ. When considering all variables that come from offshore and impact your business, it is important to understand how much these variables may increase importing costs. The NZD:USD exchange rate has recently traded at the lowest price in 15 years. This means that imported machinery, fertiliser, vehicles and raw materials will cost more. The FX rate drives kiwi export earnings but reduces the buying power of the Kiwi dollar in the global market; this is a tough trade-off that is worth keeping an eye on.
While the thought of those increases may be a concern, one positive is that the cost of seaborne freight has reduced significantly in the last twelve months; it’s predicted to continue to remain low. The BDI is one way to measure the cost of shipping and given the volume of grain and feed and input products we import, we consider this our best measurement of the impact of shipping on Kiwi businesses.
So how can you utilise these indexes to help you stay on top of the current inflationary pressures? While there are many more factors that influence any rural business which we don’t outline here, this is a good basis for the potential movements of your input costs. Check in regularly and consider the domestic movements against your historic costs to understand movement in your cost structures. Tracking international prices along with futures price movements is an important foresight for the potential of where your cost structures change. Consider FX, oil and BDI movements when understanding what your imported variables may be priced at in the future.