Farm Confidence Survey
The results are out from the July 2023 Farm Confidence Survey. They were terrible with a further slump in confidence from January 2023 when it had been at a record low. Sadly, this survey plumbs new depths. Key points follow:
- General economic conditions (current): A net 80% of respondents considered current economic conditions to be bad (less than 1% thought they were good, while 81% thought they were bad). This was 15 points worse than January when a net 65% considered conditions to be bad. This is a terrible read.
- General economic conditions (expectations): A net 70% of respondents expected general economic conditions to worsen over the next 12 months (3% thought they would improve, while 73% thought they would worsen). That’s 12 points better than January when a net 82% expected conditions to worsen but the improvement was due to more people thinking conditions would stay the same rather than worsen, not because of any increase in people thinking things would improve.
- Farm profitability (current): A net 2% of respondents reported making a profit currently (29% making a profit and 27% making a loss, with 42% only just breaking even). This was down 26 points from January when a net 28% reported making a profit. Current profitability is on a knife-edge.
- Farm profitability (expectations): A net 70% of respondents expected their profitability to reduce over the next 12 months (4% expected it to increase, while 74% expected it to reduce), 3 points worse than January when a net 67% expected it to reduce. This is disturbing given profitability is now on a knife-edge.
- Farm production (expectations): A net 7.5% of respondents expected their production to reduce over the next 12 months (14.5% expected it to increase, while 22% expected it to reduce and 62% thought it would be the same). This was 2 points worse than January when a net 5% expected it to reduce. This is the third survey in a row where more farmers are expecting to reduce production than increase it. Recent severe weather events won’t have helped but it’s also likely to have been driven by lower expenditure on key farm inputs for production, acute labour shortages, farm-to-forestry conversions, and tougher environmental limits.
- Farm spending (expectations): A net 11% of respondents expected their spending to reduce over the next 12 months (34% expected it to increase, while 45% expected it to reduce). This was down 35 points from January when a net 24% expected their spending to increase. This is a major slump and although some of the heat might be coming off inflation driving up prices, it more likely reflects farmers planning to tighten their belts and put away their wallets. This does not mode well for rural economies.
- Farm debt (expectations): A net 14% of respondents expected their debt to increase over the next 12 months (30% expected it to increase, while 16% expected it to reduce). This was up 10 points from January when a net 4% expected their debt to increase. This reflects greater financial pressure and fewer people being able to pay principal and interest. The approach of banks during this challenging time will be very important, but our May 2023 Banking Survey results are not encouraging given the pressure that is evident out there and the reducing satisfaction of farmers towards their banks.
- Ability to recruit (experienced): A net 32% of respondents reported it has been harder to recruit skilled and motivated staff over the past six months (34% had found it harder, while 2% had found it easier, 34% no change, and 24% didn’t employ anyone). This was down 14 points from January when a net 46% reported it had been harder. The improvement in this metric was due to more people thinking it had been the same rather than harder, not because of any increase in people thinking it had been easier. We think a number of farmers have given up trying to find people, either because they have been discouraged by lack of people out there and/or because they are tightening their belts due to financial pressure.
- Greatest concerns (current): The four greatest concerns for farmers were Debt, Interest & Banks; Regulation & Compliance Costs; Climate Change Policy & ETS; and Input Costs.
- Highest government priorities: The four highest priorities farmers want the Government to address were Economy & Business Environment; Fiscal Policy; Disaster Recovery; and Climate Change Policy & ETS.
Many thanks to everyone who took the time to complete the survey and have their say. We received 1,010 responses over the period 10-17 July – before Fonterra’s latest milk price announcement (see below).
The next Farm Confidence Survey will be held in January.
Milk Price Cut
The mood on the farm won’t have improved after Fonterra’s announcement at the end of last week that it had revised down its Forecast Farmgate Milk Price for the 2023/24 season.
Fonterra reduced its forecast from a range of $7.25-$8.75 per kg milk solids to $6.25-$7.75, with a mid-point of $7.00, down from $8.00.
Falls in the Global Dairy Trade auction since Fonterra’s opening forecast was made in May means a cut in the forecast shouldn’t have come as a major surprise, although the size of the cut was bigger than expectations.
The cut is particularly unwelcome at a time when farmers’ costs of production have increased dramatically over the past few years, with some estimates putting it well over $8 per kg milk solids. Cost of production varies by farm system and debt levels, but most dairy farmers will make a loss even at the mid-point, let alone the bottom of the range.
A $1 cut in forecast milk price is estimated to reduce Fonterra farmers’ incomes by about $1.5 billion and this doesn’t include what other dairy companies do with their prices. Reduced farm incomes will flow through to the wider economy through lower spending as farmers tighten their belts and it will shred tax payments as profits go negative.
When talking about the milk price, it’s important not to forget other farmers. Sheep and beef farmers are also struggling with sharply lower prices flowing through from weak economic conditions in key markets, including China. For example, lamb slaughter prices are down more than 20% from the same time last year.
The approach of banks will be critical at this time. We want them to take the approach they took in 2014-15 when banks looked through the cyclical downturn in dairy prices and supported affected customers who would otherwise be viable businesses. Despite those tough times farmer satisfaction with their banks was very high.
Also needed is for politicians and government agencies to look at policies and recalibrate them to not only take short-term pressure off stressed farmers but also give them longer-term confidence to invest to improve their businesses. Our General Election Platform has plenty of ideas.
Inflation expectations easing – but not by much
As the Reserve Bank mulls its next move for the Official Cash Rate at next week’s review, expectations for annual inflation slipped only a little in the Reserve Bank’s latest quarterly Survey of Expectations.
The survey showed only a small decline in expectations for annual inflation one-year-ahead from 4.28% in May to 4.17% in August and surprisingly a small increase in two-year-ahead inflation expectations from 2.79% to 2.83%. Annual inflation for the June 2023 quarter was 6.0% so respondents are expecting it to ease, although relatively slowly and much slower than the Reserve Bank’s current forecasts made in May (which said inflation would fall to 2.7% in September 2024 and 2.0% in September 2025).
On average, survey respondents expected the one-year-ahead unemployment rate to rise to 4.47%, and they expected the two-year-ahead rate to be 4.68%. The unemployment rate for the June 2023 quarter was 3.6% so respondents are expecting it to rise, but not by as much as the Reserve Bank’s forecasts (rising to 5.3% in September 2024 and 5.4% in September 2025).
Most respondents don’t seem to be expecting a further hike in OCR in the current September quarter, with an expected average rate of 5.53%. Most also seem to be expecting it to be lower next year, with the year-ahead OCR slipping to 5.16% in September 2024.
Inflation expectations are watched closely when determining monetary policy. This is because they are important inputs into price and wage setting and also because they are used to assess the credibility of a central bank’s inflation objective (New Zealand’s is a range of 1-3% with a 2% mid-point). Respondents to the Expectations Survey don’t think inflation will fall as quickly as the Reserve Bank and they also don’t think unemployment will rise as much.
These results, plus the recent inflation and employment data, should be cause for concern to the Reserve Bank. While I don’t think it will hike the OCR next week, it may need to reiterate that any cuts are a long way off and it might even keep the option open for further increases.
Card spending down in July
Statistics NZ’s monthly Electronic Card Transactions has shown a seasonally adjusted 0.9% reduction in spending in July compared to June.
Taking off non-retail industries spending growth was flat. Spending was dragged down by sharp falls for fuel (down 5.5%) and vehicles (down 5.1%).
On an annual basis, comparing July 2023 with July 2022, card spending of $8.8 billion was up by 4.1%. Taking off non-retail industries spending growth was only 2.2% and adjusting for inflation real spending growth will have been negative.
Of the retail industries, the biggest annual increase was for consumables (up 6.5%) and hospitality (up 6.3%), while fuel was down 16% and apparel was down 4.3%.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 10 August) continue to show soils conditions across the North Island being about normal for this time of year. And in the South Island, they show conditions significantly wetter than usual in Kaikoura, Hurunui, Waimakariri, Timaru, Dunedin, and much of Central Otago. There are a couple of drier than usual patches in Marlborough Sounds and Mackenzie.
Exchange Rates.
The NZ Dollar was flat for the week, down by less than 0.1% against the Trade Weighted Index. It was down a little against all our major trading partners, except the Japanese Yen where it was up ever so slightly.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was down 4 points to 5.63%, while the 10-year Government Bond yield was up 2 points to 4.78%.
The Reserve Bank next reviews monetary policy settings (including the OCR) next week on Wednesday 16 August. Most economists are expecting it to be kept on hold at 5.50% although some are suggesting there may be further increases later in the year.
| This Week (10/8/23) | Last Week (3/8/23) | Last Month (10/7/23) | Last Year (10/8/22) | |
| OCR | 5.50% | 5.50% | 5.50% | 2.50% |
| 90 Day Bank Bill | 5.63% | 5.67% | 5.70% | 3.24% |
| 10 Year Government Bond | 4.78% | 4.76% | 4.82% | 3.33% |
Source: Reserve Bank of NZ
