by Nick Clark, National Manager General Policy
Budget 2022 was a big spending budget with a strong emphasis on cost of living, health, and climate change.
Its approach was sold by the Government as putting New Zealand on a path to a ‘Secure Future’. The Government considers its new and increased spending and its wider reform agenda (e.g., climate change, three waters, income insurance, and health reforms) essential for wellbeing. It also extended ‘targeted support’ for cost of living pressures – trying to dampen a hot political issue.
Operating spending in the coming year is forecast to be $127 billion, a little lower than the current year’s (which had been inflated by Covid support) and nearly $20 billion higher than the year before. It’s forecast to rise to $138 billion in 2025/26 but this doesn’t include new spending that will be announced in subsequent budgets so unless there is a shift in approach spending will most probably be a lot higher by then.
The operating deficit will be $19.0 billion this year. Over the next few years revenue is forecast to increase faster than spending and a surplus is expected to be restored from 2024/25. But if spending is higher than forecast and the economy struggles to generate revenue growth a return to surplus could yet be pushed out. The Budget’s economic forecasts had weaker economic growth but higher inflation.
A couple weeks before the Budget the Government also announced two new fiscal rules. The first was an operating surplus target of 2% of GDP and the second was a 30% of GDP limit for net debt, a new measure factoring in a wider range of assets and liabilities than before. The debt rule gives the Government considerable room to increase debt. Disappointingly there isn’t a target for operating spending or any rule for spending to meet a value for money test.
Federated Farmers wanted the Government to focus on policies that will help deliver a strong economy which is productive and competitive. This means a market-based economy that’s open to the world and isn’t crippled by excessive and poor quality regulation or high taxes. Fiscal policy should be prudent and responsible, with spending growth contained and focused on delivering strong value for money.
For more information see my write-up on Federated Farmers’ website.
The Global Dairy Trade auction fell 2.9% at this week’s event, its fifth consecutive decline.
Whole milk powder, by far the biggest product by volume, led the way down, dropping 4.9% compared to the previous fortnight’s auction. Also down were skim milk powder (-0.6%), butter (-1.0%), and cheddar (-0.1%). However, anhydrous milk fat bucked the losses, up 0.6%. There was no data for butter milk powder, lactose, or sweet whey powder.
The average selling price was $US4,432 and 24,285 tonnes were sold.
The GDT Price Index has lost 15.9% since peaking on 1 March and it’s back down to January levels. However, the Index is still 4.1% higher than at the same time last year.
Farm sales down
The Real Estate Institute of New Zealand’s Rural Market Statistics showed there were 395 farm sales for the three months ended March 2022, down 11.4% on the three months to February 2022 and down 10.6% compared to the three months ended March 2021.
1,781 farms were sold in the year to March 2022, up 4.0% compared to the year to March 2021. Dairy farm sales were up 37.3%, 24.4% dairy support down 24.4%, grazing farms down 4.6%, finishing farms down 0.2%, and arable farms down 3.2%.
The median price per hectare for all farms sold in the three months to March 2022 was $29,795, down 0.8% on the three months to February 2022 but up 15.0% on the three months ended March 2021.
Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, increased 4.8% for the three months to March 2022 compared to the three months to February 2022. It was also up 30.7% compared to the three months ending March 2021.
Business Price Indexes – March quarter
Statistics NZ’s quarterly Business Price Indexes showed the Producer Price Index for Outputs (prices received by businesses) was up 2.6% in the March 2022 quarter compared to the December 2021 quarter to be up 8.8% for the year. This was the highest annual increase in output prices since December 2008.
On a quarterly basis output prices for petroleum and coal product manufacturing were up 20.8% to be up 72.6% for the year. Electricity and gas supply output prices were up 19.3% for the quarter but down 5.0% for the year.
Output prices for agriculture, forestry, and fishing strengthened further, up 0.1% for the quarter to be up 14.1% for the year. Output prices for sheep, beef, and grains farming were down 4.1% for the quarter (but up 22.7% for the year) while those for dairy farming were up 0.9% for the quarter (and up 21.9% for the year).
Turning to prices paid by businesses, the Producer Price Index for Inputs was up 3.6% for the quarter and up 9.8% for the year. This was also the highest annual increase in input prices since September 2008.
The industry with the biggest increase in input prices was electricity and gas supply, up 31.1% for the quarter although down 7.7% for the year. Petroleum and coal product manufacturing had an increase of 10.8% for the quarter to be up 55.9% for the year.
For farmers, the gloss of higher farmgate prices is being eroded by higher costs of production. Input prices for agriculture, forestry and fishing were up 3.7% for the quarter and up 10.8% for the year. Sheep, beef, and grains farmers’ input prices were up 3.2% for the quarter and up 10.6% for the year while those for dairy farmers were up 4.3% for the quarter and up 12.7% for the year.
Farm expenses up
The same data release showed a 3.2% increase in the Farm Expenses Price Index for the March 2022 quarter compared to the December 2021 quarter. There were hefty quarterly rises for fuel (up 17.7%), weed and pest control (up 9.5%), fertiliser (up 9.1%), and electricity (up 7.2%). There were no quarterly declines.
On an annual basis, farm expense prices were up 9.7% compared to March 2021. Prices were up across the board with no declines. There were especially big increases for fuel (up 50.7%), fertiliser (up 36.6%), and weed and pest control (up 13.9%).
Farmers are getting more concerned about input prices, especially as high output prices begin to taper off.
Ongoing challenges for manufacturing and services
The manufacturing and services sectors both expanded in April but conditions remain tough, according to BNZ-BusinessNZ’s Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI).
April’s PMI was 51.2, down 2.5 points from March. A PMI above 50 shows the sector generally expanding, but April saw a slowing rate of expansion. The New Orders subindex continued to be positive but Production, Employment, and Deliveries all fell below the 50 mark. There was an upswing in negative comments from PMI respondents.
Meanwhile, April’s PSI of 51.4 was down 0.1 point. New Orders/Business, Activities/Sales were both in positive territory but declined, while Employment increased into positive territory. Supplier Deliveries remained entrenched in contraction. As with the PMI, there was also an upswing in negative comments from PSI respondents.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 19 May) show soils continuing to be significantly drier than usual in the Waikato, where a drought was declared earlier in the week. Western Northland, Auckland, southern Wairarapa, Tasman, Banks Peninsula, coastal parts of Selwyn and Ashburton districts, and much of South Canterbury and Otago are also significantly drier than usual. Soils are significantly wetter than usual around Gisborne, and much of the Hawkes Bay and Manawatu-Whanganui regions.
The NZ Dollar was slightly stronger over the week, rising 0.1% against the Trade Weighted Index. It was up against the US Dollar, the Euro, and the Chinese Renminbi, but down against the Aussie Dollar, the UK Pound, and the 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 another 7 points to 2.22% but the 10 year Government Bond yield lost 21 points to 3.55%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 25 May 2022. Market pricing suggests it will be another 50 pointer.
|This Week (19/5/22)||Last Week (12/5/22)||Last Month (19/4/22)||Last Year (19/5/21)|
|90 Day Bank Bill||2.22%||2.15%||1.91%||0.34%|
|10 Year Government Bond||3.55%||3.76%||3.51%||1.89%|
Source: Reserve Bank of NZ