Farmer confidence plumbs new depths
Six months ago, in January, farmer confidence was at its lowest level recorded in the 13 year life of Federated Farmers’ six-monthly Farm Confidence Survey. Anyone hoping for improvement in July’s survey will be disappointed. In fact, confidence has dropped even further.
1,217 farmers completed the survey over the period of 18 to 26 July. The full report is here but in summary these are the key results, comparing July 2022 with January 2022, follow:
- General economic conditions (current): A net 47.8% of respondents consider current economic conditions to be bad, down 55.6 points from a net 7.8% considering conditions to be good. That’s a huge drop in six months.
- General economic conditions (expectations): A net 80.9% of respondents expect general economic conditions to worsen over the next 12 months, up 16.9 points from a net 64.0% expecting conditions to worsen. This is not inconsistent with other business confidence surveys.
- Farm profitability (current): A net 55.1% of respondents reported making a profit currently, down 6.0 points from a net 61.1% reporting making a profit. This is still pretty high.
- Farm profitability (expectations): A net 53.1% of respondents expect their profitability to decline over the next 12 months, up 11.9 points from a net 41.2% expecting it to decline. This is perhaps to be expected given the squeeze from higher input costs and high commodity prices retreating.
- Farm production (expectations): A net 0.5% of respondents expect their production to decline over the next 12 months, down 2.3 points a net 1.8% expecting it to increase. This is the first survey in its history that there has been a net negative score for production.
- Farm spending (expectations): A net 54.6% of respondents expect their spending to increase over the next 12 months, up 1.9 points from a net 52.7% expecting their spending to increase. This will be due to inflation of input prices rather than spending on more goods and services.
- Farm debt (expectations): A net 15.3% of respondents expect their debt to reduce over the next 12 months, down 15.6 points from a net 30.9% expecting their debt to reduce. This means farmers are expecting to pay down less debt, maybe because they won’t have as much free cash to pay down debt – they’ll be paying more interest instead.
- Ability to recruit (experienced): A net 44.3% of respondents reported it has been harder to recruit skilled and motivated staff over the past six months, down 4.3 points from a net 48.6% reporting it had been harder. This is a slight easing in labour market but still very tight.
- Greatest concerns (current): The three greatest concerns for farmers were Climate Change Policy & ETS; Regulation & Compliance Costs; Input Costs; and Debt, Interest, Banks.
- Highest government priorities: The four highest priorities farmers want the Government to address were Fiscal Policy; Economy & Business Environment; Regulation & Compliance Costs; and Biosecurity.
Another GDT fall
In what will be another blow to confidence dairy prices took another hit at this week’s Global Dairy Trade auction, falling another 5.0% compared to a fortnight ago.
All commodities on offer fell in price. Whole milk powder was down 6.1%, skim milk powder down 5.3%, anhydrous milk fat down 1.4%, butter down 6.1%, cheddar down 0.7%, and butter milk powder down 9.2%.
Overall, the average selling price was $US3,913 and 27,500 tonnes were sold.
The GDT Price Index has fallen at nine of its last ten auctions since its peak on 1 March. Since then, it has dropped sharply. The Index is now 0.3% lower than at the same time last year but it’s important to remember the Index is still well above average levels.
In June Fonterra set a wide range for its 2022/23 milk price forecast of $8.75-$10.25 per kgMS. It’s still early days in the season and the lower NZ Dollar is helping offset some of the GDT falls but at this stage it might be prudent for farmers to plan for a milk price testing the lower end of the range.
Commodity prices down but still strong
The ANZ World Commodity Price Index fell 2.2% in July, it’s fourth drop in a row after its record high in March. But world prices are still up for the year and they’re up strongly when converted into NZ Dollars.
World prices for dairy products fell 2.9% in July. ANZ said demand is steady but challenging economic conditions are causing resistance in paying ‘exceptionally high prices’ from earlier in the year. Meat and fibre prices fell 1.5% with beef prices down 4.5% more than offsetting a slight firming in lamb prices. ANZ noted labour shortages affecting throughput at New Zealand meat processors.
There were also price falls for forestry (down 2.5%) and aluminium (down 6.6) but horticulture prices were up 0.4%, with apple prices up but kiwifruit prices down a little. Again, labour shortages have constrained volumes.
The weaker NZ Dollar took the edge off lower world prices with the NZ Dollar Index down only 0.5% for the month.
On an annual basis, comparing July 2022 with July 2021, the World Price Index was up 4.3% and the NZ Dollar Index was up 14.2%, reinforcing the impact of the weaker currency.
Ag debt rises
Agricultural debt increased in June, according to the Reserve Bank’s monthly Sector Lending Statistics. This is the second month in a row where the sector’s debt increased.
In June 2022, agricultural sector lending was $61.93 billion, up $310 million on May but still down $396 million (0.6%) from June 2021. This masked differences within the sector:
- Dairy cattle farming: $36.62 billion, up $183 million for the month and down $1.56 billion (or 4.1%) for the year.
- Sheep & beef cattle farming: $15.20 billion, up $76 million for the month and also up $76 million (or 0.5%) for the year.
- Horticulture: $7.04 billion, up $88 million for the month and up $1.09 billion (or 18.3%) for the year.
- Other agriculture on farm: $2.32 billion, down $24 million for the month and down $67 million (or 2.8%) for the year.
In contrast to agriculture’s annual decline of 0.6%, annual growth in housing lending was 6.9% (continuing its recent trend of slowing annual growth) while business lending was up 8.6%. Personal consumer debt declined 6.1%.
The recent increase in agricultural debt is also consistent with the farm debt result from the Farm Confidence Survey where relatively fewer farmers are expecting to reduce their debt.
Unemployment rises – what gives?
The rate of unemployment defied all expectations and rose in the June quarter, according to Statistics NZ’s Labour Market Statistics.
The unemployment rate was 3.3% in the June quarter, up from 3.2% in the March quarter. The number of people employed was unchanged at 2.82 million, while the number of people unemployed was up 2.1% to 96,000. The labour force participation rate was down a little from 70.9% to 70.8%.
More consistent with a tight labour market is an acceleration in wage growth. The Labour Cost Index was up 1.1% for the quarter and up 3.4% for the year, while average ordinary time hourly earnings were up 2.2% for the quarter and up 6.4% for the year.
Labour shortages are acute, with plenty of job vacancies, wages rising quickly, and more timely statistics suggesting employment grew in the June quarter. Pretty much every economic forecaster was expecting the unemployment rate to fall below 3%. Is this a rogue result or is the ‘rock bottom’ rate of unemployment higher than thought?
With labour shortages increasingly impacting on businesses and the economy, a key question for the Government is whether it needs to do more to encourage people off welfare and into work and therefore reduce the ‘rock bottom rate’ below 3%. Or whether it needs to do more to ensure its immigration policy settings allow a meaningful increase in labour supply. In my opinion the answer to both is yes.
Meanwhile, a key question for the Reserve Bank is what the surprise data means for its ‘dual mandate’ of price stability and employment maximisation? In my view it shouldn’t change the Bank’s thinking about the red hot labour market. Unemployment is well below its interpretation of maximum sustainable employment of around 4.5% while the surge in average wage rates heightens risk of a wage-price spiral, impeding its efforts to get inflation down.
So, in my opinion this data won’t prevent another 50 point increase in the OCR on 17 August.
Job ads lift
BNZ-SEEK’s monthly Employment Report showed job advertisements were up 1.3% in July compared to June, partially recovering from June’s 5.3% drop.
Compared to June 2021, job ads were up 8.8%. They remain at very high levels despite being 4% below their peak in May.
Job ads for the farming, animals, and conservation industry were down 6% for the month.
Consumers a little less miserable
The monthly ANZ-Roy Morgan Consumer Confidence Index recovered a little in July.
The Index lifted 1.4 points in to 81.9, but this is still very low (a score of under 100 means more pessimists than optimists).
The proportion of people who believe it’s a good time to buy a major household item, the best indicator for retail spending, fell 4 points to -25, unwinding half of the previous month’s bounce.
A piece of good news is that inflation expectations eased from 5.6% to 4.9%, the lowest rate in a year. ANZ described this as “a win, as it shows monetary tightening is gaining traction”.
House consents slipping
June saw a decline in residential building consents but annual growth remains strong, according to Statistics NZ’s Building Consents Issued
On a month-on-month basis, from May to June, residential building consents slipped a seasonally adjusted 2.3%. Consents issued in the month of June 2022 were also down 6.5% compared to June 2021. The $1.64 billion value of those consents was down 0.5%.
Despite the monthly fall, the 50,736 new homes consented for the year to June 2022 was still up 14.4% from the year ended June 2021. These consents were valued at $20.0 billion, up 20.5%.
Meanwhile, non-residential building consents worth $655 million were issued in June 2022, up 11.2% compared to June 2021. Of this $33 million was for farm buildings, up 30.6%. For the full year to June 2022, non-residential consents were worth $9.0 billion, up 15.8% on the previous year. Farm buildings were worth $336 million for the year, up 30.6%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 4 August) show soils conditions about average for this time of year across the North Island. In the South Island soil conditions are significantly wetter than usual in many areas, especially down the east coast of the island and in Central Otago.
Exchange Rates
Overall, the NZ Dollar was a little stronger this week, up 0.3% against the Trade Weighted Index. It was up against our main trading partner currencies, except the Japanese Yen.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 5 points at 3.21% while the 10 year Government Bond yield was down 14 points to 3.36%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 17 August.
| This Week (4/8/22) | Last Week (28/7/22) | Last Month (4/7/22) | Last Year (4/8/21) | |
| OCR | 2.50% | 2.50% | 2.00% | 0.25% |
| 90 Day Bank Bill | 3.21% | 3.16% | 2.83% | 0.55% |
| 10 Year Government Bond | 3.36% | 3.50% | 3.67% | 1.58% |
Source: Reserve Bank of NZ