Have commodities peaked?
Having posted record highs in recent months, commodity prices slipped in July. The ANZ World Commodity Price Index was down 1.4% compared to June.
Dairy was the main downward influence, with its prices down 3.4% for the month. Meat and fibre prices were up 0.6%, with higher prices for lamb and wool but lower prices for beef. Horticulture prices were also up 0.6% but forestry prices were down 2.0%. Aluminium lifted a further 2.2% and have been on the up since last October.
The exchange rate depreciated in July, so this resulted in the NZD Index being pretty stable for the month – edging up 0.1%.
Compared to July 2020, the World Price Index was up 22.5% and the NZD Index was up 17.1%. This strength will have boosted farmers’ incomes and their profitability.
On the downside ANZ also observed that global shipping costs are still rising. It doesn’t think demand for containers and container ships or shipping costs will ease anytime soon.
Eight in a row
Dairy prices slipped again at this week’s Global Dairy Trade auction, the eighth fall in a row and the ninth over the past 10 events since mid-March.
The GDT Price Index was down 1.0% compared to the previous auction a fortnight ago, dragged down by the biggest product by volume whole milk powder, which fell 3.8%. Other commodities were mixed, with rises for skim milk powder (up 1.5%), anhydrous milk fat (up 1.3%), butter (up 3.8%), and cheddar (up 0.7%), but falls for butter milk powder (down 8.0%) and lactose (down 3.1%).
The average selling price was $US3,784 and 24,084 tonnes were sold.
Despite the continuation of its run of falls, the GDT Price Index remains 24.3% higher than at the same time last year.
Rabobank observed that Chinese buyers are significant players on the GDT platform and while they are still very active their procured volumes are down. It cited strong growth in China’s domestic milk production and high dairy import volumes outpacing consumption growth and causing inventories to rise. Chinese buyers pulling back on the GDT, especially when prices have been high, would be a reaction to this supply-demand dynamic.
Running hot – unemployment slumps, wages up
The labour market ran hot in the June quarter, according to Statistics NZ’s Labour Market Statistics.
Unemployment fell to 4.0% from 4.6% in the March quarter. The number of people employed was up 29,000 (or 1.1%) in the quarter to 2.78 million while the number of unemployed fell 16,000 (or 12.4%) to 117,000. The labour force participation rate edged up to 70.5% and the underutilisation rate was down, both indicators of a tighter labour market.
Wage inflation also ticked up, with the Labour Cost Index increasing 0.7% for the quarter and 2.1% for the year. Average ordinary time hourly earnings, measured by the Quarterly Employment Survey, also increased by 4.0% for the year to $34.76 per hour. Both the LCI and QES measures increased faster for the private sector than the public sector.
With the Reserve Bank reviewing monetary policy settings and announcing its decision on 18 August, the scorching labour market data is a final major piece in the puzzle. Inflation at 3.3% has breached the Bank’s 1-3% target range and employment will be at or above its maximum sustainable level.
Although risks to the outlook remain (including from the Covid-19 Delta variant), the odds are growing of an OCR hike next week and for it to be increased steadily from there. The markets have largely taken this as a ‘given’ with wholesale interest rates up sharply over recent weeks.
Ag debt up despite dairy squeeze
Dairy lending continued to be squeezed lower despite an overall increase in agricultural debt, according to the Reserve Bank’s Sector Lending Statistics for June.
Lending to the agricultural sector was $62.33 billion in June 2021, up $89 million for the month but down $569 million (or 0.9%) from June 2020. This was comprised of lending to the following sectors:
- Dairy cattle farms: $38.18 billion, down $78 million for the month and down $1.63 billion (4.1%) for the year.
- Sheep, beef cattle, and grains farms: $15.12 billion, up $68 million for the month and up $86 million (0.6%) for the year.
- Horticulture: $5.95 billion, up $75 million for the month and up $608 million (11.4%) for the year.
- Other agriculture on farm: $2.39 billion, up $17 million for the month and up $32 million (1.4%) for the year.
In contrast to agriculture’s annual decline in lending (down 1.2% when break adjusted), the growth in housing lending continued to surge on the back of the booming housing market, increasing further to 11.9%. Business lending was down 1.3% and personal consumer lending down 5.3%.
New record for home consents, but farm buildings down
A new record for new homes consented was set in the year ended June 2021, according to Statistics NZ’s monthly Building Consents Issued.
The annual number of residential consents was up 17.8% to 44,299 and the annual value of consents was up 20.4% to $16.58 billion. There was particularly strong growth in numbers of townhouses, flats, and units consented (up 44.3%), but standalone houses, which had seen only slow growth from 2017 to 2020, were also up 10.8%.
Meanwhile, the value of non-residential consents was up 13.1% for the year to June 2021 to $7.68 billion. Within this, the value of farm buildings was $263 million, down 10.3%. This was the third consecutive annual decline in the value of farm building consents, which are now well off their 2018 peak of $350 million.
Consumers a little less confident
Consumer sentiment eased slightly in July, according to the monthly ANZ-Roy Morgan Consumer Confidence survey.
July’s Consumer Confidence rating was 113.1, down 1.0 point on June’s 114.1. The responses to survey questions were decidedly mixed. A net 8% of respondents felt they were better off than at the same time last year, down 6 points, but there was a 1 point improvement for expectations for the year ahead (up to +23%). Also, while a net 2% expect economic conditions to be bad in 12 months (a 5 point worsening) the five year outlook rose 2 points to +12%. There was also a 2 point improvement in those thinking it a good time to buy a major household item (up to +24%).
Inflation expectations remain elevated, with an average expected annual increase in consumer prices of 4.9% (down from 5.1% in June), while expected annual house price inflation accelerated from 5.8% to 6.4%. The notion of an unstoppable housing market seems well ingrained.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 5 August) show most of the country’s soils being about average for this time of year. The main exception is coastal Hawkes Bay, where soils remain significantly drier than usual, with parts of Marlborough and Canterbury still significantly wetter.
The NZ Dollar was stronger this week, up 1.1% against the Trade Weighted Index. It was up against all other our major trading partner currencies.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill jumped 18 points to 0.65% while the 10 year Government Bond yield was up 8 points to 1.51%.
The Reserve Bank will next review monetary policy settings (including the OCR) on Wednesday 18 August.
|This Week (5/8/21)||Last Week (29/7/21)||Last Month (5/7/21)||Last Year (5/8/20)|
|90 Day Bank Bill||0.65%||0.47%||0.34%||0.30%|
|10 Year Government Bond||1.59%||1.51%||1.67%||0.72%|
Source: Reserve Bank of NZ