by Nick Clark, Federated Farmers Manager General Policy
Dairy prices up again
The Global Dairy Trade posted another gain at this week’s auction, rising 1.9%.
All the commodities on offer posted price increases. Whole milk powder was up 1.9%, skim milk powder up 1.4%, anhydrous milk fat up 1.3%, butter up 3.5%, cheddar up 2.2%, and lactose up 1.6%.
Overall, the average selling price was $US4,287 and 30,397 tonnes were sold.
This is the seventh consecutive auction without a decline (one was a nil change) since mid-August. As a result, the GDT Price Index has clawed back almost all the losses incurred between March and August when it had a long run of declines. With these increases the GDT Price Index is now 37.6% higher than at the same time last year.
Some economists are picking the season’s farmgate milk price will test the upper bound of Fonterra’s current forecast range of $7.90-$8.90 per kg MS.
Businesses prices accelerate
Producer prices increased more in the year ended September 2021 than in any other year for more than a decade, according to Statistics NZ’s quarterly Business Price Indexes.
Overall, the Producer Price Index for Outputs (prices received by businesses) was up 1.8% compared to the June quarter to be up 6.2% for the year.
On a quarterly basis output prices for petroleum and coal product manufacturing were up 10.8% to be up a whopping 50.2% for the year. On the other hand, electricity and gas supply output prices were down 15.6% for the quarter but were still up 8.7% for the year after big increases in the March and June quarters.
Strong international commodity prices are flowing through to farm incomes. Output prices for agriculture, forestry, and fishing continued to strengthen, up a further 6.3% for the quarter to be up 13.8% for the year. Output prices for sheep, beef, and grains farming were up 14.9% for the quarter (and up 17.4% for the year) while those for dairy farming were up 9.1% for the quarter (and up 22.7% for the year).
Turning to prices paid by businesses, the Producer Price Index for Inputs was up 1.6% for the quarter and up 7.0% for the year.
The industry with the biggest increase in input prices was meat and meat product manufacturing with input prices up 12.3% for the quarter and 6.7% for the year. Dairy product manufacturing was also up 7.4% for the quarter and 16.7% for the year. Petroleum and coal product manufacturing had an increase of 11.3% reflecting higher international oil prices. To be up 37.1% for the year. Input prices for electricity and gas supply were down 24.0% for the quarter but were still up 10.7% for the year after big increases in March and June quarters.
Input prices for agriculture, forestry and fishing were up 2.2% for the quarter and up 6.0% for the year. Sheep, beef, and grains farmers’ input prices were up 2.3% for the quarter and up 4.9% for the year while those for dairy farmers were up 2.7% for the quarter and up 8.1% for the year.
Farmers are getting more concerned about input prices although for now at least that concern has been tempered by the high prices they’re receiving.
Farm expenses up
The same data release showed a 1.8% increase in the Farm Expenses Price Index for the September 2021 quarter compared to the June 2021 quarter.
Compared to the June 2021 quarter, there were hefty rises for fertiliser, lime, and seeds (up 8.4%) and fuel (up 7.2%). Interest rates continued their recent downward track, slipping a further 0.6%, and there were also declines for dairy shed expenses (down 3.4%), electricity (down 1.3%) and weed and pest control (down 3.6%). But most inputs edged up in price.
On an annual basis, farm expense prices were up 4.3% compared to September 2020. Prices were down for interest rates (down 3.2%), weed and pest control (down 1.3%), and dairy shed expenses (down 1.0%) but all other inputs rose. The largest annual increases were for fuel (up 29.8%), fertiliser, lime, and seeds (up 15.9%), and electricity (up 11.2%).
Mixed fortunes for manufacturing and services
Manufacturing expanded but services contracted in October, according to BNZ-BusinessNZ’s Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI).
The PMI for October was 54.3, up 2.7 points from September’s 51.6. A PMI above 50.0 indicates that manufacturing is generally expanding, below 50.0 that it is declining. BusinessNZ observed that increased activity for October was ‘fairly evenly spread’ across its sub-indexes, with all in excess of 50.0. It also noted that the proportion of negative comments dropped to 55% compared with 71% in September and 78% in August. BNZ was cautious in its assessment considering it to reflect ‘recovery from a large hit rather than an indication of outright strength’.
In contrast, the PSI stepped further into contraction, dropping 1.9 points to 44.6 (from September’s 46.5) and reversing some of the gain from August to September. All but one of the sub-indexes were below 50.0 with the exception (employment) on a knife edge of exactly 50.0. Business NZ described the result as disappointing while BNZ predicted that the ongoing weakness in services fits with its thinking that any GDP bounce in the current December quarter will be ‘modest’.
Travel but a trickle
The total number of people crossing New Zealand’s border in September 2021 was the lowest since May last year, according to Statistics NZ’s latest monthly International Travel Statistics.
There were 16,100 border crossings in September 2021 (down from 41,300 in August 2021), made up of 8,200 arrivals and 7,900 departures. This is the lowest number of monthly arrivals since May 2020 and the lowest number of departures for any month since September 1961.
It was a similar story for International Migration Statistics. Comparing the September 2021 month with the September 2020 month provisional estimates were:
- Migrant arrivals: 1,700 (± 100), down 69 percent.
- Migrant departures: 1,100 (± 100), down 78 percent.
- Monthly net migration gain: 700 (± 100), up from 600 (± 20).
Banking Survey open – be in to win
Federated Farmers’ latest six-monthly Banking Survey is open. Many thanks to the several hundred farmers who have so far responded. If you haven’t completed the survey, click here. It will take only a few minutes and as well as giving us invaluable intelligence on bank relationships you can go into a prize draw for a $500 grocery voucher.
Next week – Monetary Policy Review
The Reserve Bank reviews monetary policy settings on 24 November. It is almost certain to increase the OCR as it moves towards normalising monetary policy. The only real question is whether it increases by 25 points to 0.75% or 50 points to 1.00%. Market expectations suggest the 50 point option is on the table.
The Reserve Bank’s inflation and employment targets have both been quickly and greatly exceeded, and this would in normal times point to a robust response. However, it will be concerned about the ongoing economic impacts of the Delta outbreak and whether the recovery will be rapid or sluggish. It will also want time to assess whether inflationary pressures are transitory or more enduring.
Given its generally cautious, least regrets approach, the Reserve Bank is, I believe, more likely to take the 25 point option. However, it might also signal an interest rate track implying a higher end point of increases, say to have the OCR reach 2.00% by the end of 2022 (implying five 25 point increases next year).
The Reserve Bank may also discuss the future of the assets it purchased in 2020-21 as part of its Large Scale Asset Purchase (LSAP) programme, New Zealand’s version of quantitative easing. It stopped buying assets in July (earlier than initially planned) but the bonds purchased have maturity dates going out as far as 2041. It will be considering how to manage the portfolio as it seeks to normalise monetary policy. Will it sell down its bonds, let them mature, or partially reinvest the proceeds? Probably a mix of all three. Reducing its portfolio would be another form of monetary policy tightening and doing so might help reduce how high and how fast the OCR has to go.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 18 November) show soils across much of the North Island significantly wetter than usual, with exception of the Wairarapa. Eastern areas of the South Island, except the area around Dunedin, are mostly drier than usual.
Exchange Rates
The NZ Dollar lost some ground this week, down 0.6% against the Trade Weighted Index. It was against all the major trading partner currencies except the Euro.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up three points to 0.87%, while the 10 year Government Bond yield was up one point to 2.65%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 24 November. Another increase is likely.
| This Week (18/11/21) | Last Week (11/11/21) | Last Month (18/10/21) | Last Year (18/11/20) | |
| OCR | 0.50% | 0.50% | 0.50% | 0.25% |
| 90 Day Bank Bill | 0.87% | 0.84% | 0.74% | 0.25% |
| 10 Year Government Bond | 2.65% | 2.64% | 2.25% | 0.89% |
Source: Reserve Bank of NZ