by Nick Clark, Federated Farmers Manager General Policy
Commodity prices rise but freight issues biting
June saw commodity prices continue to rise to new record highs, but freight costs and delays are also intensifying, according to the monthly ANZ Commodity Price Index.
The World Commodity Price Index was up 0.8% June, taking the year-on-year increase to 27.8%.
Dairy prices slipped 1.5% for the month, but they remain 35% higher than in June 2020.
The meat and fibre index lifted 1.8% in June, pushing the year-on-year gain to 24%. Lamb prices are now 30% higher than a year ago and beef prices up nearly 18%. Wool prices were up nearly 6% in June to be 48% higher than the same time last year.
Horticulture prices were up 4.3% for the month (to be 17.5% for the year), forestry prices up 3.6% (to be up 24% for the year), and aluminium prices up 0.6%, to be up 56% for the year.
In local currency terms the NZ Dollar Index gained 2.3% for the month, as the stronger world prices were further boosted by a lower exchange rate. On an annual basis the NZ Dollar Index was up 17.4%.
Although higher commodity prices are good news for farmers and the wider economy, ANZ observed that global shipping costs continue to climb, with the Baltic Dry Index gaining 30% in June to hit a new record high. Also of concern are shipping delays. ANZ reported that Yantian port in southern China was compromised by a COVID-19 outbreak but although it is back operating at full capacity it will apparently take months to clear the backlog. ANZ predicts the congestion in the shipping industry is not expected to abate until well into next year.
GDT down again
The Global Dairy Trade auction fell again at this week’s auction, this time dropping 3.6%.
Almost all commodities fell in price. Whole milk powder was down 3.0%, skim milk powder down 7.0%, anhydrous milk fat down 0.9%, butter down 3.2%, cheddar down 9.2%, and butter milk powder down 9.8%. Lactose was the only one not to fall – it was unchanged.
Overall, the average selling price was US$3,924 and 24,278 tonnes were sold.
This was sixth consecutive drop in the GDT Price Index and the seventh drop out of the last eight auctions held since mid-March. Prices are still up 21.9% on the time last year, but the annual rate of growth has been slashed from the previous auction in mid-June when it was 37.0%.
Business confidence jumps but so do labour shortages and inflation pressures
NZIER’s June quarter Quarterly Survey of Business Opinion has shown a sharp improvement in both business confidence and demand in firms’ own business.
A net 10% of businesses expected an improvement in the economic outlook, a turnaround from the March quarter survey when a net 8% expected a deterioration. Firms’ own trading activity also picked up strongly, with a net 26% of businesses reporting increased demand.
NZIER observed that the building sector was particularly buoyant but conditions in other sectors were more mixed, with services firms more positive but manufacturers and retailers feeling downbeat. The survey does not cover farming.
Firms are looking to expand their investment and employment but labour shortages – both skilled and unskilled – have become the most acute on record. As a result, capacity pressures are continuing to build with cost and price pressures rising.
Job ads to new record high
Job advertising continues to build on its already exceptionally high level, according to the June month BNZ/SEEK Employment Report.
The 1.0% increase in June took SEEK’s adverts to another record high. Annual comparisons remain distorted by the COVID-hit base period of last year (e.g., adverts up 115% compared to June 2020) but more useful is that job adverts in June were more than 24% above pre-COVID highs.
Most regions and most industries posted month-on-month gains. Adverts for the farming, animals, and conservation industry were up 3% for the month.
Consumer confidence steady
Consumer confidence was unchanged in June, according to the ANZ-Roy Morgan Consumer Confidence Index. The Index was 114.1 in June, barely changed from May’s 114.0.
The proportion of people who believe it is a good time to buy a major household item, a key retail indicator, rose 3 points to +22.
Inflation expectations leapt to 5.1%, a record high since data started in 2010. Meanwhile house price inflation expectations were little changed at 5.8%.
Greenhouse gas emissions data
Statistics NZ this week released data for Greenhouse Gas Emissions for Industries and Households.
For the year to December 2019 total emissions from industries and households were 84.97 kilotonnes of carbon dioxide equivalent, up 2.1% compared to 2018. Industry-related emissions 75.14 kilotonnes (up 2.5%) while household emissions were 9.83 kilotonnes (down 0.3%).
Over the longer period of 2007-19, total greenhouse gas emissions were up 1.9%, with household emissions up 12.5% and industry-related emissions up 0.7%.
The manufacturing industry’s emissions over 2007-19 were up 16.2% and construction emissions up 86.3%, while the electricity, gas supply industry was down 34.3% and mining down 16.9%.
Agriculture’s emissions over 2007-19 were up 2.0%, close to the overall increase in emissions. Increased dairy emissions more than offset declines in emissions for horticulture; sheep, beef, and grains farms; and poultry, deer, and other livestock farming.
Next week – Reserve Bank speaks
The big economic event next week is the Reserve Bank’s review of monetary policy settings. While the OCR will almost certainly remain unchanged at 0.25%, all eyes will be on signals for the future.
The Reserve Bank has deliberately kept monetary policy ultra-loose to support the economy during the pandemic and it has been prepared to accept temporary spikes in inflation. As a result, worst impacts of the pandemic have been avoided, including for unemployment – which is close to its pre-pandemic level. However, there is now growing concern about overheating with a very tight labour market and with cost and price pressures intensifying across the economy. Inflation is looking like it could be higher and more persistent than earlier thought.
The market is already factoring in higher interest rates from early next year, and some are saying it could happen sooner. But all this assumes the Reserve Bank is on the same wavelength. The key question it will be contemplating is whether it’s prepared to withdraw the punch from the recovery party. There are certainly downside risks to the recovery, especially if we have a COVID outbreak, but recent and current data does suggest that the balance has shifted.
If the Reserve is to change its stance, then the question is ‘how?’. The prime initial candidate would be to end the Reserve Bank’s programme of Large Scale Asset Purchases. This is New Zealand’s version of quantitative easing, where the Reserve Bank has been buying up government bonds on secondary markets. With the Government’s fiscal deficit considerably smaller than expected, there should be less supply of bonds to buy. That means the LSAP could be scaled back and ended in advance of the current June 2022 timeframe without too much angst, provided it is well signalled. Once that happens the next logical step would be to begin hiking the OCR and it could get to 1.75% within a couple of years.
No one wants to pay higher mortgage interest rates, but we have to remember that ultra-loose monetary policy was always meant to be temporary. House prices responded aggressively to rock bottom mortgage rates and producer prices have also been under pressure. If consumer price inflation is allowed to take off in a tight labour market it could cause a damaging wage-price spiral, the likes of which we haven’t seen in decades. This would drive inflation ever higher, distorting business and consumer decisions and eroding our international competitiveness – just as it did in the 1970s and 1980s. The Reserve Bank would then have to take harsher action to get inflation back under control. The least regrets approach might be to act sooner rather than later.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 8 July) show normal soil conditions across most of the country. Coastal Central Hawkes Bay is the only area with soils significantly drier than usual for this time of year. Meanwhile soils in the coastal areas of Canterbury, Marlborough, and south of Dunedin are significantly wetter than usual.