by Nick Clark, National Group Manager General Policy
Sheep and beef outlook positive
Beef + Lamb New Zealand’s Mid-Season Update for the 2021/22 season has shown a positive outlook for sheep and beef farmers thanks to strong international demand for sheepmeat and beef exceeding supply pushing up prices.
Including co-products, total lamb exports are forecast to rise 12.9% from last season to $3.79 billion and mutton up 6.3% to $892 million. Beef and veal exports are forecast to rise 11.1% to $4.89 billion. Volumes exported are forecast to be down meaning the increase in export values will be due to significantly higher prices.
What does this mean for farm incomes and profitability? At a forecast average exchange rate of US$0.69, B+LNZ expects a typical sheep and beef farm’s gross farm income to be up 10.8% to $667,300 and farm expenditure to be up 4.5% to $500,400. Its forecast farm profit before tax is expected to be $166,900, up 35.5% on last season and up 29.4% when adjusted for inflation.
It’s good to see a recovery in farm profitability after a relatively tough 2020/21, but B+LNZ observed that it’s still lower than profitability in the 2017/18, 2018/19, and 2019/20 seasons.
While farm incomes are looking good for the season, B+LNZ noted that inflationary pressure is “causing on-farm costs to lift sharply”. The primary sector is also constrained by the shortage of labour and continuing supply chain disruption because of COVID-19. Farmers also “remain concerned about the speed of increasing environmental regulation and the encroachment of carbon forestry businesses changing the landscape of rural communities”.
Geopolitical tensions are also an ever present concern, and especially heightened right now.
GDT strengthens further
The Global Dairy Trade had another big increase this week, with the GDT Price Index up 5.1% compared to the last auction on 15 February. Lower global milk supply and commodity market uncertainty from the Ukraine conflict and associated sanctions are pushing up prices.
All commodities on offer saw higher prices. Whole milk powder was up 5.7%, skim milk powder up 4.7%, anhydrous milk fat up 2.1%, butter up 5.9%, cheddar up 10.9%, butter milk powder up 5.8%, and lactose up 0.9%.
The average selling price lifted to US$5,065 and 25,208 tonnes of product were sold.
The GDT Price Index is at a new record high, exceeding its previous peak in April 2013. It is 18.3% higher than at the same time last year.
Fonterra ups price forecast
Last week (prior to the most recent GDT auction) Fonterra updated its 2021/22 forecast Farmgate Milk Price.
The forecast range is now $9.30-$9.90 per kg milk solids, up from its previous forecast range of $8.90-$9.50. This increases the midpoint of the range, which farmers are paid off, by 40 cents to $9.60.
The lift in the forecast reflects the increase in global dairy prices since its last update in January, with supply and demand dynamics supporting higher prices.
Fonterra also revised down its forecast milk collections to 1,480 million kg milk solids, down 20 million on January’s update and down 3.8% on last season. Ongoing challenging weather conditions have continued to impact grass growing conditions.
Although a higher milk price puts its margins under pressure Fonterra advised that its current 2021/22 earnings guidance of 25-35 cents per share ‘remains unchanged’.
The $9.60 per kg MS farmgate milk price translates to a $14.2 billion injection into the economy. Fonterra observed that this would be ‘welcome news for farmers who are facing rising costs on farm, including from inflation and rising interest rates’.
Dairy drives commodities to new record high
The ANZ Commodity Price Index has powered ahead to set another record high in February.
The World Commodity Price Index was up 3.9% in February compared to January. Dairy prices surged 7.2%, with whole milk powder up 9.5%. Meat and wool prices were virtually unchanged, down 0.1%. Beef prices were up to record levels but lamb prices eased but were still relatively strong. Horticulture prices were flat, forestry prices were up 4.3%, and aluminium prices jumped 7.9% continuing a strong run.
The exchange rate was down again in February, slipping 1.2%, and this meant the NZ Dollar Index was up 4.9% for the month. This will further support farm incomes.
Compared to February 2021, the World Price Index was up 20.4% and the NZ Dollar Index was up 29.3%.
Business confidence slumps
ANZ’s Business Outlook Survey has shown a big drop in business confidence in February compared to the last survey in December.
Overall, a net 51.8% of businesses expect general economic conditions to worsen over the coming year, a 28.6 point worsening compared to the previous survey which was already very glum. Although enjoying the fruits of high international commodity prices, agriculture was the most pessimistic sector with a net 66.7% expecting conditions to worsen, just beating retail, and a worsening of 32.1 points.
Own activity, which is a better predictor for economic growth, also went negative with a net 2.2% of respondents expecting their activity to reduce over the coming year, a 14.0 point worsening. This was particularly evident in retail and services but agriculture was the most positive sector with a net 11.1% expecting activity to improve (an improvement from net 0.0%).
Cost expectations remain acute with a net 92.0% expecting costs to rise, with all agricultural respondents expecting cost increases. Pricing expectations are also extremely high with a net 74.1% expecting to increase their prices. Agriculture, as mostly price takers, was much lower at net 50.0%. Profit expectations were also deeply negative and investment and employment intentions also worsened.
Farm sales – it’s complicated
Data from the Real Estate Institute of NZ has shown a drop in farm sales, but an increase in median sales prices, with REINZ describing a complex picture as we enter 2022.
For the three months ended January 2022 there were 489 farm sales, down 2.4% on the three months ended December 2021 and down 3.2% on the three months ended January 2021. However, it was a different picture for the full year to January 2022 where there were 1,710 farm sales, up 11.0% on the previous year. Dairy farm sales were up 79.1%, finishing farms up 6.2%, and grazing farms up 2.9%, but dairy support sales were down 28.8% and arable farms were down 10.8%.
The median price per hectare for all farms sold in the three months to January 2022 was $33,840, down 2.1% on the three months to December 2021 and up 31.8% on the three months to January 2021. Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, was up 2.1% compared to the three months to December 2021 and up 22.3% compared to the three months to January 2021.
REINZ pointed to high farmgate incomes beginning to be offset by higher farm input costs while climatic extremes are impacting on production, with acute labour shortages not helping. Banks seem more willing to conduct new business and retain existing clients but higher interest rates are flowing through, while the perennial concern about government policies continue to impact on farmer sentiment.
Hort drives debt growth
Strong growth in bank lending to horticulture resulted in an increase in overall agricultural lending in January, according to the Reserve Bank’s monthly Sector Lending Statistics. Dairy’s squeeze continued.
In January 2022 agricultural lending amounted to $61.90 billion, up $91 million on December 2021 but down $688 million (or 1.1%) from January 2021. By sector:
- Dairy lending was $37.10 billion, down $69 million in the month and down $1.68 billion (4.3%) for the year.
- Sheep, beef cattle and grains lending was $15.10 billion, up $24 million the month and down $12 million (0.1%) for the year.
- Horticulture lending was $6.56 billion, up $146 million for the month and up $871 million (15.3%) for the year.
- Other agriculture on farm lending was $2.40 billion, down $7 million for the month and up $69 million (3.0%) for the year.
In contrast to the continued squeeze on agricultural lending, growth in housing lending remained strong but continued to slow to an annual rate of 10.0%, while business lending was up 6.1% and personal consumer lending down 6.7%.
Terms of trade falls
Surging import prices resulted in a 1.0% drop in the terms-of-trade in the December 2021 quarter, according to Statistics NZ’s International Trade Statistics.
Export prices rose 2.7% in the quarter. Dairy prices dropped 0.8% and forestry prices were down 8.8% but meat prices were up 5.8% and wool prices were up 7.6%. Import price growth was stronger, up 3.8%, with the strongest increases for non-fuel crude materials, up 14.5%, and iron and steel, up 13.8%, and petroleum products, up 8.9%.
Turning to volumes, export volumes were flat. Dairy volumes were down 0.2%, meat down 7.0%, wool down 16.4%, and forestry down 3.5%. Non-food manufactures were up 10.6%. Import volumes were also down, falling 0.9%. There were big increases for iron and steel (up 17.8%) and transport equipment (up 13.5%) but petroleum products was down 7.2%.
Taking account of volumes and prices, December 2021 quarter’s goods export values were $17.05 billion and goods import values were $20.14 billion. There is considerable quarterly variation but both were up strongly on the same quarter in 2020 (exports up 13.6% and imports up 29.2%).
House consents down
There were 2,833 new homes consented in January 2022, down 6.3% from January 2021, according to Statistics NZ’s monthly Building Consents Issued. Although a drop, it is still the second highest January month in the series’ 57 year history.
For the year ended January 2022 there were 48,707 dwellings consented, up 22.1% on the year to January 2021. The value of those consents was $18.83 billion, up 28.0%.
The value of non-residential consents for the year to January 2022 was $8.16 billion, up 16.0% on the year to January 2021. Farm buildings worth $309 million were consented, up 8.9%.
Retail sales rebound
Statistics NZ’s latest quarterly Retail Trade Survey has shown a strong bounce in retail sales in the December quarter.
For the December 2021 quarter compared with September 2021 quarter the volume of retail sales was up 8.6% (seasonally adjusted), following an 8.2% slump in the previous quarter. There was particularly strong growth for hardware, building and gardening supplies (up 32.5%); motor vehicles and parts (up 21.6%); furniture, floor coverings, houseware, and textiles (up 19.4%); and department stores (up 18.5%). However, spending on accommodation was down 19.5% and supermarket and grocery stores down 5.3%.
The total value of retail sales (with price effects included) was up 10.0%, following a 6.8% drop in the previous quarter.
14 of the 16 regions showed higher sales values. West Coast and Otago were the two regions to drop, while Auckland had the strongest growth (bouncing 16.4% after slumping 13.8% in the previous quarter).
The strong recovery in retail spending is suggestive of a bounce in GDP, but the current March quarter will likely be a struggle. Economic data is going to be choppy in 2022.
Fiscal indicators still better than expected
The Government’s Interim Financial Statements for the seven months to January 2022 have shown most key indicators continuing to track better than forecast in December’s Half Year Economic and Fiscal Update.
Core Crown tax revenue was $59.71 billion, $1.36 billion higher than forecast. Corporate tax and individuals tax revenue were both higher than forecast but revenue from GST and customs and excise duties were both lower than forecast.
Core Crown expenses was $72.06 billion, $1.28 billion lower than forecast, mainly due to lower than expected Covid support payments as well as some likely timing variances for health and core government services.
The operating balance before gains and losses was a deficit of $8.00 billion, $3.66 billion lower than forecast and net core Crown debt of $121.13 billion was $1.65 billion lower than forecast.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 3 March) show soils conditions from Northland to Waikato becoming drier than usual for this time of year and remaining significantly drier than usual in Southland. In contrast, soil conditions are significantly wetter than usual in the lower North Island and in Nelson, Marlborough, and Canterbury.
The NZ Dollar was a little stronger this week, up 0.5% against the Trade Weighted Index. It was up against all our major trading partners, except the Australian Dollar.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 10 points to 1.34% while the 10 year Government Bond yield was down 4 points on 2.80%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 13 April 2022. Another increase is highly likely.
|This Week (3/3/22)||Last Week (24/2/22)||Last Month (3/2/22)||Last Year (3/3/21)|
|90 Day Bank Bill||1.34%||1.24%||1.14%||0.31%|
|10 Year Government Bond||2.80%||2.84%||2.55%||1.73%|
Source: Reserve Bank of NZ