The recent increase in fuel prices is one of the factors which cause that farmers will have to tighten their belts. In a study done by the NAU, it is clear that the increase of critical production means such as fuel, lick and interest rates as from January 1, 2006 has a serious impact on the cash flow of the farming sector. These production means which, according to information of study groups form 35% of the total production costs, increased respectively with 34% (fuel), 27% (lick) and 17% (interest rates) since January 2006. The weighed average increase was 29%.
Even though beef prices were relatively high during November and December 2006, the average increase in beef prices, however, was only 13% and that of sheep prices 9%. The joint effect of the increase in above production inputs and the low increase of beef prices caused that the income index in March already reacted negatively against the cost index. Naturally this influences the profitability of farming and puts the cash flow situation of farmers under great pressure.
Against this background farmers must reflect carefully before making expenditures. It is recommended that the effect of non-critical production inputs, especially if there is an interest bearing factor involved, must be evaluated properly before making such expenses. It would though be wrong to save on critical production inputs which could influence production negatively such as giving lick.
Even though the farming sector regularly experiences such cycles, it might be now the right time for farmers to look strategically at their planning. One example is to pay off or reduce mortgages and overdraft facilities in order to bring about a saving on interest rates.