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Soaring production costs curtail strong global prices

19 February 2008

GLOBAL agricultural commodity prices continued their boom over January as the Westpac-NFF Commodity Index recorded a 21.8% gain on the same period last year.

However, dramatic increases in farm costs and poor seasonal conditions are taking their toll, making it increasingly difficult for Australian farmers to capitalise on the international price surge.

“While higher world commodity prices continue to build optimism within the farm sector, the cost of doing business is also rising exponentially, eating into margins and adding to the risk profile of the sector,” Westpac senior economist Justin Smirk said.

“Fertiliser and chemical prices have more than doubled over the past 12 months, labour wage rates have risen sharply on the back of 30-year lows in unemployment and fuel prices have quadrupled since 2003 – recently punching through the US$100/barrel level.

“All-in-all, these cost pressures account for 42% of total farm cash costs and, in addition to drought and the global demand/supply correction, are reflected in agricultural prices globally. Unfortunately for our farmers, the drivers behind these costs are not expected to ease any time soon.”

National Farmers’ Federation (NFF) Vice-President Charles Burke noted: “The rising cost base of farming means smarter investment from all sectors – government and private – is critical to help build efficiencies in the agricultural supply chain.

“Unlocking built-up capacity constraints in infrastructure will play an important role in combating some of these cost pressures, particularly in the areas of freight transport, water and telecommunications.

“Australian farmers, indeed, all sectors of the economy, are now looking for solutions. We need to see real improvements to efficiency and, thereby, our international competitiveness – currently undermined by Australia’s dilapidated road, rail and port networks.

“Our supply chain is only as strong as its weakest link. Strategically-linked national investment in our ‘whole-of-chain’ production infrastructure, collective resources and the systems to interconnect them into an efficient delivery network, is essential.”

Compared with December 2007 levels, global prices in January 2008 increased for Barley (3.1%), Wool (2.7%), Canola (10.8%), Beef (2.0%), Cotton (5.8%) and Sugar (11.0%). Only Dairy (-2.7%) and Wheat (-0.4%), experienced a marginal downturn in prices during the month.

The overall weighted index increased a further 1.4%, in Australian dollar terms, during January, and rose to 21.8% above year-ago levels.

[ENDS]

The Westpac-NFF Index is weighted according to the value of Australian agricultural exports and includes only rural commodities – unlike other price indices that are overshadowed by oil, mineral and energy prices. It provides daily movements based on prices of Australia’s eight key farm exports – wheat, barley, beef, wool, cotton, sugar, dairy and canola – in both $US and $A.

Media Enquiries: Brett Heffernan on (02) 6273 3855 or 0408 448 250.

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