A solution has been found to a trend towards broken arable contracts. By Glenys Christian.
Volatility brought on by world events has led to the tackling of the longstanding problem of arable contracts being broken.
Federated Farmers and Rural Contractors NZ representatives have got together and come up with registered contracts with NZX supplying indexed variable components which can be adjusted up and down.
They track costs in fuel, fertiliser and agrichemicals for an independent measure based on rises and falls in offshore pricing changes. With a three-month time lag, growers and contractors will be able to predict and anticipate price changes and know more of the reasons behind them through monthly updates and commentary from NZX, giving them greater clarity about what’s happening.
Waikato Federated Farmers Arable chair, Keith Holmes, said contracts were seldom broken in the South Island, but in the past there had been instances of what he described as “feral” behaviour in the north.
“People will sign a contract but then break it if they can get more money.”
There had been relative stability in the maize trading industry for many years until the current season.
“But suddenly there’s been an almost catastrophic change coming through.”
Input costs have a high degree of volatility with fertiliser prices going up in some instances by 100%. Petrol and diesel had risen and so had chemical sprays with interest rate increases yet to come through.
While some of these costs were known when growers were planting their crop, with harvesting prices already estimated to be from 20-30% higher than last year, they couldn’t make allowance for those which might occur later in the season. Not only could there be further increases but there could be big changes when it came to the cost of applying side-dressings or post-emergence sprays.
So the total costs of growing maize could easily be underestimated, along with the increasing returns for a number of alternative crops, as well as maize being used for grain.
He said this was giving growers a wake-up call.
“The world as we know it in traded maize has changed. These changes aren’t incremental, they’re absolutely dramatic.”
So a pre-emptive move was needed to put in place a robust, defensible contract for maize silage and grain to give a high degree of certainty as to what the final price would be.
“We don’t want people to get their fingers burned. They need to make sure their budgets stack up.”
The contract will be available to growers and contractors at a nominal cost with positive reactions received so far. Rural Contractors NZ held five roadshow meetings in August which were well attended by members. Chief executive Andrew Olsen says it’s timely to talk about cost shocks in the sector.
“We want to make sure there is both a legal and responsible way for both sides to transparently meet this challenge.”
Contracts may have been suitable in the past but now needed a few tweaks to deal with today’s pressures. These were often difficult conversations to have and for some growers their initial response might be to go to a contractor who wouldn’t increase their price.
“We want to have common sense discussions to make sure both of our businesses are intact on the other side.”
It was hoped growers and contractors were aware of and honoured their contractual obligations.
“We’re not trying to influence the price,” he says.
“All sectors are under cost pressures.”
The two organisations had worked together in the past and development of the contracts had opened the door to further collaboration.
“We need to get through this together.”
NZX’s Head of Insight, Julia Jones, says if more information is required by growers and contractors that could well be added in.
“This is just the beginning.”
