Commodity prices dip again
The ANZ World Commodity Price Index dipped again in October, extending its run of monthly losses to seven stretching back to March. Overall, it was down 3.4% in the month.
Dairy prices fell 2.8%, mainly due to weaker demand, especially from China where its persistence with a strict zero-Covid policy and associated lockdowns is slowing its economy and impacting consumer demand.
Meat and fibre prices were also down sharply, falling 5.8%. Lamb prices were down 7.1%, beef down 5.2%, and wool down 2.9%. Weaker economies in Europe and China are impacting on lamb prices (a premium product more sensitive to consumer demand) while beef prices are being pushed down by plenty of supply in the United States due to drought conditions.
Horticulture prices dropped 2.5% and forestry prices were down 3.6%. Aluminium was the only commodity to increase, up 1.2%.
The NZ Dollar depreciated in October, which offset the drop in world prices. As a result, the NZ Dollar Index eked out a 0.3% increase.
Compared to the same time last year, the World Price Index was down 5.2% but the NZ Dollar Index was up 12.3%, showing starkly the impact of a much reduced NZ Dollar.
GDT down again
The Global Dairy Trade fell again at this week’s auction, down 3.9% overall.
Most of the commodities on offer fell in price, with whole milk powder down 3.4%, skim milk powder down 8.5%, anhydrous milk fat down 1.7%, butter milk powder down 11.4%, and lactose down 1.0%. However, butter (up 0.2%) and cheddar (up 0.9%) bucked the trend to post increases.
The average selling price was $US3,537 and 28,867 tonnes were sold.
The GDT Price Index has dropped nearly a third since its peak at the start of March. It is also down 19.4% compared to the same time last year.
Tough times ahead needs banks to support their customers
The Reserve Bank has issued its six-monthly Financial Stability Report warning of tough times and the need for banks to support their customers.
The report observes that the global economic outlook is worsening with persistently high inflation, rapid tightening of monetary policy, slowing economic activity, financial market volatility, and increasing risks to the financial system.
With a rising interest rate environment, New Zealand house prices are declining, with some recent buyers at risk of falling into negative equity, putting them (and their banks) at risk if they can no longer afford their mortgage. Economic activity is expected to slow as households reduce their spending.
However, the Reserve Bank thinks “the financial system is resilient to the challenges ahead”, with New Zealand financial institutions “well placed to handle stresses arising from the testing economic environment. Banks have strong capital and liquidity positions, and profitability and asset quality are high.”
The Reserve Bank’s stress tests “show that New Zealand’s banks would be resilient to a severe scenario involving ongoing high inflation, further increases in mortgage rates, a significant rise in unemployment, and a large fall in house prices”.
The report emphasised that “it is important that financial institutions take a long-term view when supporting customers and allocating credit to the wider economy.”
We certainly agree.
The take on agriculture
Until relatively recently agricultural debt, especially dairy debt, was considered to be one of the biggest risks to financial stability. This risk has reduced in recent years thanks to efforts to deleverage and high commodity prices which have help boost incomes and profitability.
The Financial Stability Report had this to say about agriculture…
The milk price is currently sufficiently high for farmers to maintain profitability, with Fonterra having a midpoint projection above $9 per kilogram of milk solids this season. There are downside risks to dairy prices, notably slowing global demand.
The agriculture sector has been facing cost inflation at a similar rate to that of other businesses. Higher costs are being driven by imported fuel and fertilisers, due partly to the war in Ukraine. Ongoing labour market tightness is also constraining the agricultural sector’s output. The struggle to find workers has contributed to delays at meat processing sites and is curtailing horticulture output.
The agricultural sector is also facing higher debt servicing costs, as interest rates have risen in response to tighter monetary policy settings, although stresses remain low for now.
Regulatory change is an ongoing feature, with an increasing focus on climate and environmental regulation. The Government is consulting on new proposals for an emissions pricing framework for agriculture, and new environmental standards for plantation forestry.
The risk of foot and mouth disease (FMD) has come into focus following an outbreak in Indonesia. In New Zealand, the probability of an outbreak remains low owing to effective border controls and the lack of direct flights from Indonesia currently. However, an outbreak would have a large adverse impact on the sector if it occurred, as it would be likely to trigger a swift suspension of all FMD-susceptible animal-based exports. We are working with other parts of government to monitor the current Indonesian outbreak and risks to New Zealand.
Ag debt falls
Agricultural debt dropped in September, according to the Reserve Bank’s monthly Sector Lending Statistics. This broke a run of four consecutive monthly increases from April to August.
In September 2022, agricultural sector lending was $62.0 billion, down $209 million on August and down $272 million (0.4%) from September 2021. This masked differences within the sector:
- Dairy cattle farming: $36.4 billion, down $346 million for the month and down $1.4 billion (or 3.6%) for the year.
- Sheep & beef cattle farming: $15.4 billion, up $87 million for the month and up $136 million (or 0.9%) for the year.
- Horticulture: $7.2 billion, up $16 million for the month and up $983 million (or 15.9%) for the year.
- Other agriculture on farm: $2.3 billion, up $10 million for the month but down $57 million (or 2.4%) for the year.
In contrast to agriculture’s annual decline of 0.4%, annual growth in housing lending was 5.7% (continuing its recent trend of slowing annual growth) while business lending was up 8.9%. Interestingly, personal consumer debt was up 1.1%, the first annual increase in around three years – perhaps a reflection of cost of living stresses.
Federated Farmers’ November Banking Survey will be open for responses from 14 November. It will give us valuable information on farmers’ debt, interest rates, and relationships with their banks, so members please fill it out when the invitation hits your inboxes.
Unemployment stable, wages rising
The unemployment rate has again remained stable according to Statistics NZ’s quarterly Labour Market Statistics.
The Household Labour Force Survey showed 97,000 people unemployed in the September 2022 quarter, translating to a seasonally adjusted unemployment rate of 3.3%. This was up 1,000 (or 1.2%) from the June quarter, but with employment also growing (up 36,000 or 1.3%) the unemployment rate was unchanged. Indeed, it has been essentially unchanged for a year, hovering between 3.2% and 3.3% over the past five quarters.
Meanwhile the underutilisation rate, a broader measure of spare capacity, slipped slightly from 9.2% to 9.0%, to the lowest since September 2007. The labour force participation rate rose to 71.7% (from 70.9%) and the employment rate rose to 69.3% (from 68.6%), the highest rates recorded since the survey began in 1986. Increases were particularly strong for young people (15-24 years) and for women.
Meanwhile, wage inflation continues to rise. In the year to the September 2022 quarter, all salary and wage rates (including overtime), as measured by the Labour Cost Index, increased 3.7%, compared with 3.4% in the year to the June 2022 quarter. Average total weekly earnings (including overtime) per full-time equivalent employee, as measured by the Quarterly Employment Survey, rose 7.9% in the year to the September 2022 quarter. Both are strong and getting stronger.
A drop in the rate of underutilisation, increases in the rates of labour force participation and employment, and accelerating wages are all solid evidence of a tighter labour market. They back up the results of successive business surveys and a raft of stories of employers, including farmers, simply unable to fill vacancies despite offering higher wages and better conditions.
But why in this environment has the rate of unemployment barely budged? Have we truly reached ‘rock bottom’ and what could be done to reduce it to boost labour supply? An important question is whether the welfare system is doing enough to encourage people into work? And will ideas like the Income Insurance Scheme only make the situation worse?
If we’re not going to do more to boost labour supply domestically then clearly we need more migrants. The Government seems to be waking up to this but it’s still very time consuming and increasingly unaffordable to access migrant labour. Immigration policy should be simple, open, and permissive.
Still in the doldrums
ANZ-Roy Morgan’s Consumer Confidence shows consumer confidence becalmed in October.
The overall index was 85.4, unchanged from September, which had in turn been unchanged from August. A score of under 100 indicates more pessimists than optimists making the negativity stubbornly persistent.
The index had plunged to 77.9 in February with the Omicron wave. More recently high inflation, increasing interest rates, and lower house prices have hit consumer confidence and it has not recovered in any meaningful way.
Consumers’ expectation for inflation over the coming year was pretty stable at 5.0%, as was the expectation for house prices, a 0.5% increase.
Building Consents Issued – September 2022 month
September saw a month-on-month increase in the number of residential building consents, according to Statistics NZ’s Building Consents Issued.
Comparing September 2022 with August 2022, residential building consents were up a seasonally adjusted 3.8%. The $1.87 billion value of consents was up 7.4% from September 2021.
The 50,732 new homes consented for the year to September 2022 was up 7.0% from the year ended September 2021. These consents were valued at $20.5 billion, up 14.8%.
Meanwhile, non-residential building consents worth $833 million were issued in September 2022, up 35.8% compared to September 2021. Of this $21 million was for farm buildings, down 21.4%.
For the full year to September 2022, non-residential consents were worth $9.4 billion, up 19.2% on the previous year. Farm buildings were worth $322 million for the year, up 13.3%.
Kiwi Dollar falls in trading rankings
The NZ Dollar has fallen to be the 14th most traded currency globally, according to a global survey compiled by the Bank of International Settlements.
The triennial survey took place in April 2022 and involved central banks and other authorities in 52 jurisdictions and more than 1,200 banks and other dealers.
The NZ Dollar had held the number 10 ranking since 2010, but since the 2019 survey it’s been overtaken by the Singapore Dollar, Swedish Krona, Korean Won, and Norwegian Krone.
Our Reserve Bank noted that the slide in the NZ Dollar’s ranking came at a time of heightened foreign exchange volatility, with changing interest rate expectations, COVID restrictions, rising commodity prices, and geopolitical tensions following the Russian invasion of Ukraine.
It added that while being overtaken by some of its peers in a volatile period, the NZ Dollar “continues to trade with a disproportionate frequency relative to the size of the New Zealand economy”.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 3 November) show the effects of this week’s wet weather in many areas. Soil moisture levels are significantly wetter than usual for this time of year in most of the top half of the North Island, as well as the South Island’s Golden Bay, South Otago, and Southland. In contrast soils as significantly drier than usual in Tararua, Tasman-Nelson, and much of North and Central Canterbury.
Exchange Rates.
The NZ Dollar was up again this week, rising 0.9% against the Trade Weighted Index. It was up against all our key trading partners, except the US Dollar.
Source: Reserve Bank of NZ
Wholesale Interest Rates.
Over the course of the week, the yield for the 90 Day Bank Bill was up 8 points to 4.17% while the 10 year Government Bond yield was up 20 points to 4.56%, continuing its recent volatility.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 November. It will be the final review for 2022. Most expectations are for a 75 point increase.
| This Week (3/11/22) | Last Week (27/10/22) | Last Month (3/10/22) | Last Year (3/11/21) | |
| OCR | 3.50% | 3.50% | 3.00% | 0.50% |
| 90 Day Bank Bill | 4.17% | 4.09% | 3.87% | 0.80% |
| 10 Year Government Bond | 4.56% | 4.36% | 4.29% | 2.52% |
Source: Reserve Bank of NZ
