by Nick Clark, Federated Farmers Manager General Policy
Here we go again
It was probably only a matter of time but Covid-19 has reared its ugly head again, this time in the form of its virulent Delta variant. So, we’re back in Level 4 lockdown: Auckland and Coromandel for seven days and the rest of the country for three days. Depending how long the lockdowns last, which will depend on how well we can stamp out community transmission, this outbreak could have profound economic impacts and trigger fiscal and monetary policy responses.
OCR on hold
The Level 4 lockdown has had an early impact on monetary policy, with the Reserve Bank deciding to keep the Official Cash Rate on hold at 0.25%.
Prior to yesterday’s lockdown announcement the Reserve Bank was widely expected to lift the OCR to 0.50% and so begin a programme of increases that could see it reach 1.75% by this time next year.
Employment is at or above its sustainable level following a big drop in unemployment to 4.0%, consumer price inflation is tracking well above the Reserve Bank’s 1-3% target, business cost pressures are building, construction is booming, and the housing market is showing little sign of moderation. These and other indicators suggest an economy overheating.
The time would have been right for monetary policy normalisation to begin and in fact it had already begun. Last month Reserve Bank ceased, almost of year earlier than planned, its programme of large scale asset purchases and its forecasts were projecting OCR increases.
But it was not to be. As I wrote last week the only legitimate reason to keep the OCR on hold would have been uncertainty and risk about the course of Covid-19, especially if the Delta variant got into the community. And so it transpired.
The severity of a Level 4 lockdown meant keeping the OCR at 0.25% was the right call. If the lockdown is short and the economic damage is limited with a strong bounce-back then the Reserve Bank can be expected to move in October. We shall see.
Welcome good news was an increase in prices at this week’s Global Dairy Trade auction, the first rise after eight consecutive falls over the past four months.
Overall, the GDT Price Index was up 0.3%. Whole milk powder slipped 1.5% but other commodities were up or stable – skim milk powder up 1.1%, anhydrous milk fat up 1.5%, butter up 4.0%, cheddar up 2.8%, and lactose unchanged.
The average selling price was $US3,827 and 22,543 tonnes were sold.
Despite its recent run of falls, the GDT Price Index is still at historic highs and it is also 26.9% higher than the same time last year.
Sheep down, beef cattle up
Sheep numbers have fallen but beef cattle have risen, according to Beef + Lamb New Zealand (B+LNZ)’s annual Stock Number Survey.
As at 30 June 2021 there were 25.83 million sheep, down 0.8% from the year before. North Island sheep numbers were down 0.3% (to 12.42 million) and the South Island’s down 1.2% (to 13.41 million). Breeding ewes were down 0.5% overall to 16.48 million, while hoggets were down 0.6%. There was a lot of regional variation, with the decline in hogget numbers most noticeable in Northland-Waikato-Bay of Plenty (-6.7%) and Southland (-7.9%).
B+LNZ expects this season’s lamb crop to be 23.25 million, 1.6% higher than last season. This is based on ewe body condition and pregnancy scanning results at the time of surveying farmers. The outcome will depend on favourable weather conditions in spring.
Beef cattle numbers rose 2.5% to 3.98 million. North Island beef cattle were up 5.4% (to 2.78 million) but they were down 3.6% in the South Island (to 1.20 million).
Farm sales easing
The Real Estate Institute of NZ’s monthly Rural Property Statistics have shown an easing in farm sales volumes (although still well ahead of the same time last year) but solid sales prices.
There were 359 farms sold in the three months to July 2021. This was down 10.3% on sales in the three months to June 2021, but up 7.8% on sales in the three months to July 2020.
On an annual basis, 1,720 farms were sold in the year to July 2021, 42.5% more than were sold in the year to July 2020. Sales of dairy farms were up 146.7%, dairy support up 17.9%, grazing farms up 27.8%, finishing up 58.4%, but arable farms were down 38.1%.
The median sales price per hectare for the three months to July 2021 was $27,015, down 0.6% on the three months to June 2021 but up 12.3% on the three months to July 2020. The REINZ All Farm Price Index (which adjusts for farm size, location, and farming type) painted a stronger picture. It was up 10.4% for the three months to July 2021 compared to the three months to June 2021 and it was up 16.9% compared to the three months ending July 2020
Electricity price spike drives business expenses up – again
Statistics NZ’s Business Price Indexes for the June 2021 quarter has seen another steep rise in electricity prices, further pushing up prices for businesses.
Overall, the Producer Price Index for Outputs (prices received by businesses) was up 2.6% compared to the March quarter and was up 4.0% for the year. On a quarterly basis output prices for electricity and gas supplies were up 14.3% and those for petroleum and coal product manufacturing were up 16.3%. Both also had double digit rises in the March quarter (17.4% and 12.2% respectively). Output prices were also up strongly for dairy processing which was up 13.8% for the quarter and meat processing up 5.9% – both reflecting higher world commodity prices.
Output prices for agriculture, forestry, and fishing were up 3.3% for the quarter and up 6.9% for the year. Output prices for sheep, beef, and grains farming were up 6.8% for the quarter (and up 6.2% for the year) while those for dairy farming were up 1.4% for the quarter (and up 11.2% for the year). Little wonder farmers were feeling positive about their businesses in our recent Farm Confidence Survey.
Turning to prices paid by businesses, the Producer Price Index for Inputs was up 3.0% for the quarter and up 5.9% for the year. Again, the industry with the biggest increase in input prices was electricity and gas supplies, surging 50.6% and followed a 34.1% leap in the March quarter. Petroleum and coal product manufacturing was also up 38.2% for the quarter. Meat processing had a 6.2% increase in input prices, while dairy processing’s was up 1.7%.
Input prices for agriculture, forestry and fishing were up 2.0% for the quarter and up 3.4% for the year. Sheep, beef, and grains farmers’ input prices were up 1.9% for the quarter and up 2.0% for the year while those for dairy farmers were up 2.5% for the quarter and up 4.3% for the year. Farmers are getting a bit more concerned about input costs 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 1.4% increase in the Farm Expenses Price Index for the June 2021 quarter compared to the March 2021 quarter. On an annual basis, farm expense prices were up 2.4% compared to June 2020.
Compared to the March 2021 quarter, there were hefty rises for electricity (up 10.4%) and fuel (up 7.5%), with fertiliser, lime, and seeds also up 3.0%. Interest rates continued their recent downward track, slipping 0.6% and the only major input type to see a fall in price.
On annual basis, compared to the June 2020 quarter, prices were down for interest rates (down 3.0%) and rent and hire (down 0.5%) but all others rose. The largest annual increases were for fuel (up 31.0%), electricity (up 17.8%), weed and pest control (up 5.8%), and fertiliser, lime, and seeds (up 5.5%).
Manufacturing and services still expanding
The PMI for July was 62.6, up 1.7 points from June, to reach its second highest point in the survey’s history. A PMI reading of more than 50.0 indicates that manufacturing is generally expanding, below 50.0 that it is declining.
BusinessNZ noted that key sub-index values of Production (66.0) and New Orders (65.0) both showed further expansion, while Employment (58.3) recorded its highest ever result. It also said that despite the strong result there were more negative comments than positive comments. The increasingly tight labour market, supply chain issues, and raw materials costs were the main concerns.
Meanwhile, the PSI for July was 57.9, down 0.5 points from June. Key sub-indices of Activity/Sales (63.6) and New Orders/Business (63.2) remained strong. The one sub-index remaining in contraction was Supplier Deliveries (47.6).
Migration and travel both down
The net migration gain for the year ended June 2021 was the lowest for a June year since 2013, according to Statistics NZ’s monthly International Migration Statistics.
The net migration gain of 4,700 for the year ended June 2021 was made up of an estimated 45,300 migrant arrivals and 40,500 migrant departures. For June years, this was the lowest number of migrant arrivals since 1986 and the lowest number of migrant departures since 1984.
Meanwhile, the number of arrivals and departures across the New Zealand border in June 2021 dipped slightly from the month before, due to interruptions to quarantine-free travel with Australia, according to Statistics NZ’s monthly International Travel Statistics.
There were 175,500 total movements across the New Zealand border in June 2021 (85,400 arrivals and 90,200 departures). This is down from May 2021, when there were 189,500 total movements across the border (91,300 arrivals and 98,200 departures).
Population growth slows
New Zealand has had its lowest annual rate of population growth in nearly a decade, according to Statistics NZ’s National Population Estimates
As at 30 June 2021 our population was provisionally estimated at 5.12 million. This was up 0.6% (or 32,400) from 30 June 2020. Population growth was down sharply on the 2.2% (or 111,000) increase for 2019/20.
In contrast to recent years most of the population growth was from natural increase, i.e., births minus deaths, (27,700) rather than from net migration (4,700).
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 19 August) continue to show most of the country’s soils being about average for this time of year. The main exception is the Hawkes Bay, where soils remain significantly drier than usual. Parts of Marlborough, Canterbury, and Otago are significantly wetter than usual.
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill dropped 25 points to 0.43% while the 10 year Government Bond yield was down 4 points to 1.68%. The Reserve Bank keeping the OCR on hold sparked the drop in the short-term rate.
The Reserve Bank will next review monetary policy settings (including the OCR) on 6 October.