by Nick Clark
Reserve Bank points to rates hikes
The Reserve Bank this week kept monetary policy settings unchanged but also signalled a path towards higher interest rates.
The headline decisions were no surprise at all. The Reserve Bank kept the OCR on hold at 0.25% and it made no changes to its Large Scale Asset Purchase programme or to its Funding for Lending Programme.
Of much greater interest was the language of its statement and the tracks of the Reserve Bank’s key forecasts. Both changed compared to recent reviews.
The Reserve Bank noted that although the outlook continues to be uncertain and that although growth has been and will continue to be uneven, some of the downside risks to the economy have receded. It also dropped its previous references to being prepared to cut the OCR further.
The accompanying Monetary Policy Statement’s forecasts for growth, employment, and inflation were all a bit more positive compared to February’s. Interestingly, house price inflation is forecast to slow considerably to near zero later this year.
The MPS also saw the return of its OCR track (not published since before the pandemic), with it forecast to lift from late 2022 and projected to reach 1.75% by mid-2024. This grabbed market attention.
Fonterra forecasts stronger milk price.
An $8 milk price is looking likely for the coming season, which would contribute $12 billion to the New Zealand economy.
Fonterra’s Opening Forecast Milk Price for 2021/22 set an opening forecast farmgate milk price of $7.25 to $8.75 per kgMS, with a midpoint of $8. It also narrowed its forecast range for the current 2020/21 season, reducing the midpoint to $7.55 per kgMS (from $7.60). The reduction was prompted by lower GDT prices at auctions since March but it came as a surprise to many economists who had predicted the milk price midpoint for 2020/21 would be increased to the high sevens.
The large range for the 2021/22 milk price forecast reflects currently positive supply and demand dynamics tempered by a number of international market risks, like the course of COVID-19; governments winding back economic stimulus; exchange rate volatility; changes in the supply and demand that can affect dairy markets when prices are high; and geopolitical issues.
Fonterra also updated its business performance for the nine months to 30 April 2021. Its Total Group normalised earnings before interest and tax (normalised EBIT) was up 18% to $959 million, due to higher margins and reduced operating expenditure, with Greater China a particularly strong contributor.
The co-op’s normalised net profit after tax was $587 million, up 61% year-on-year, reflecting its improving underlying business performance and stronger balance sheet. Reported net profit after tax was $603 million, up 2%.
Fonterra is maintaining its normalised earnings guidance of 25-35 cents per share.
Farm sales strong.
Farm sales have continued their recent strength according to the Real Estate Institute’s monthly Rural Property Statistics.
For the three months to April 2021 466 farms were sold, up 89.4% on the same three month period last year. Although the big increase in part reflects very low number of sales during last year’s COVID lockdown, it was also a pick-up on the 432 sold in the three months to March 2021.
For the full year to April 2021, 1,677 farms were sold, up 45.1% on the previous year to April 2020. Dairy farm sales were up 120.0%, dairy support up 84.1%, grazing farms up 20.8%, finishing farms up 54.4%, but arable farms were down 11.8%.
The median price per hectare for all farms sold in the three months to April 2021 was $29,746, up 32.6% on the same three month period last year and also up 14.8% on the three months to March 2021.
It was a more moderate picture when adjusted farm size, location, and farming type, with the REINZ All Farm Price Index up 3.1% compared to the same period last year and down 2.4% on the three months to March 2021.
It’s getting drier.
While there is natural variation in precipitation due to seasons and cycles, New Zealand appears to be getting drier, according to Statistics NZ’s Environmental-Economic Accounts: Water Physical Stocks, year ended June 1995-2020.
Average annual rainfall for the five years 2016–2020 was 3.1% below the previous five-year average and 10.7% below the five-year average for 1996–2000.
In 2019, seven out of the nine North Island regions experienced drought-like conditions, with their lowest rainfall over the entire timeseries (year ended June 1995–2020. Northland had the largest percentage decrease in rainfall, with only around 64% of the region’s average annual precipitation (between 1995–2020) in the June 2019 year.
In 2020, rainfall was relatively low in the North Island, while the South Island experienced a noticeable increase. This was the first time since 1998 that rainfall in the entire North Island was less than rainfall in the West Coast region alone.
The South Island experienced a less pronounced decrease than the North Island. The average precipitation in the South Island over the five-year period (2016–2020) was 1.5% below the previous five-year average, compared to the North Island’s 6.0% below.
Productivity lagging but agriculture shows what’s possible.
New Zealand’s lagging productivity performance has been highlighted yet again by the Productivity Commission’s latest Productivity by the Numbers publication.
It found that compared to other OECD countries New Zealanders work longer hours and produce less. We work on average 34.2 hours per week compared with 31.9 hours per week in other OECD countries and we produce on average $68 output per hour, compared with $85 output per hour in other OECD countries.
Poor productivity has been a problem for New Zealand for many, many years and it is why we fell so far behind the OECD during the 1970s and 1980s and why, despite economic reforms which halted the slide, we have not been able to materially close the gap since then. Multi-factor productivity growth was relatively strong from 1990-2000 but it has been stagnant since.
The fastest growth in labour and multifactor productivity over the past 40 years occurred in primary industries. Its growth rates peaked in the late 1980s and early 1990s and have been more subdued since, but the primary industries are still growing more than goods producing industries and services industries.
The Productivity Commission noted that the primary industries have long been productivity growth leaders and that comparatively rapid growth in the 1980s and 1990s has been attributed to the wide-ranging economic reforms of that era.
“The removal of agricultural subsidies and regulation over the mid-1980s prompted productivity growth through several channels. First, farmers were more economical with their inputs. Fertiliser use fell by almost half over 1985-87. Repairs and maintenance and capital purchases were deferred, and farm employee numbers fell. Second, farmers shifted production towards more profitable markets. Land devoted to livestock and arable farming fell, while horticulture, dairy and forestry shares grew. Third, there were a number of on- and off-farm innovations, which sought to raise the value of output. Rae, Nixon & Lattimore (2004) cite the development of branding, marketing scale and a retail trade for the deer industry as one example of post-1984 off-farm innovation.”
It also noted that while the reforms were painful for many farmers the impact was smaller than some had expected, with only 1% taking government exit packages compared to the 20% that had been predicted.
As the Government looks to repudiate and, in some cases, reverse the 1980s and 1990s reforms it would be wise to look back a bit further and consider why the reforms had to be done in the first place and how ultimately beneficial they were.
Another question the Government should think carefully about is whether its avalanche of regulation aimed at farming will help or hinder the sector’s productivity.
Big increase in imports but off a low base.
Leaps in imports of petroleum and vehicles in April drove a big increase in imports, according to Statistics NZ’s monthly Overseas Merchandise Trade statistics.
Goods imports were worth $4.98 billion in April 2021, up 26.0% compared to April 2020. There was strong growth for all the major import commodities, especially petroleum (up 92.5%) and vehicles, parts, and accessories (up 76.7%). However, it should be noted that April 2020 was a particularly weak month due to COVID-19 and April 2021’s imports were still $142 million lower than those for April 2019.
Meanwhile, goods exports were worth $5.37 billion in April 2021, up 1.2% on April 2020. This small increase broke a seven month run where monthly exports were down on the same month the year before, but it masks big drops for most primary sector exports, especially food. Movements for key commodities follow:
- Milk powder, butter, and cheese down 19.9% to $1.25 billion.
- Meat and edible offal down 1.7% to $752 million.
- Logs, wood, and wood articles up 258.1% to $495 million.
- Fruit down 24.0% to $609 million.
- Preparations of milk, cereals, flour, and starch (largely infant formula) down 29.9% to $182 million.
- Wine down 35.9% to $105 million.
In addition, exports of eggs, honey, and other edible animal products were down 32.3% to $35 million; live animals up 209.8% to $94 million; and wool up 288.7% to $26 million.
The very large increases for forest products, live animals, and wool (as well as other manufactured exports like mechanical machinery and equipment, iron and steel articles, aircraft, textiles, etc.) were all off low bases from a time when most non-food exports were locked down by COVID-19 restrictions.
The net result was a monthly goods trade surplus of $388 million. This was down sharply from a $1.35 billion surplus for April 2020 but is more comparable with April 2019’s surplus of $361 million. Trade surpluses are typical in April months.
For the year ended April 2021, goods exports were worth $59.02 billion, down 2.4% compared to the year ended April 2020. Looking at the key export commodities:
- Milk powder, butter, and cheese down 7.6% to $15.19 billion.
- Meat and edible offal down 5.0% to $7.89 billion.
- Logs, wood, and wood articles up 17.4% to $5.14 billion.
- Fruit up 1.1% to $3.75 billion.
- Preparations of milk, cereals, flour, and starch down 7.0% to $2.26 billion.
- Wine down 2.5% to $1.89 billion.
In addition, exports of eggs, honey, and other edible animal products were up 25.8% to $528 million; live animals up 51.3% to $495 million; but wool was down 21.4% to $377 million.
Goods imports for the year ended April 2021 were worth $58.29 billion, down 7.2% compared to the year ended April 2020. The biggest drop was for petroleum products, down 42.4%.
On an annual basis, the net result was a goods trade surplus of $733 million. This was down sharply from $1.69 billion for the year ended March 2021, but it is still a turnaround from the $2.39 billion deficit for the year ended April 2020.
Retail sales recover.
The March 2021 quarter was positive for retail sales, according to Statistics NZ’s quarterly Retail Trade Survey.
In the March 2021 quarter actual retail sales were $26.40 billion, up 6.5% on the same quarter last year. And compared with the December 2020 quarter, seasonally adjusted retail sales were up 2.5% bouncing back from a 2.6% fall compared to the September quarter.
On a quarter-on-quarter basis, the main upward movements by industry were for electrical and electronic goods (up 8.4%); recreational goods (up 16.4%); hardware, building, and garden supplies (up 4.5%); and department stores (up 5.6%). Fuel had the biggest fall, down 2.2%, followed by pharmaceutical and other store-based retailing, down 1.4%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 27 May) show that large parts of the country’s soils continue to be significantly drier than usual for this time of year. This is particularly so in the Far North, from Hawkes Bay to Wairarapa, virtually all of Canterbury, and South Otago. Only Nelson and Marlborough Sounds are significantly wetter than usual.
Exchange Rates
The NZ Dollar was up 1.2% for the week against the Trade Weighted Index, strengthening against all our major trading partners. Most of the increase came later in the week, after the Reserve Bank’s review of monetary policy settings.
NZ Dollar versus | This Week (27/5/21) | Last Week (20/5/21) | Last Month (27/4/21) | Last Year (27/5/20) |
| US Dollar | 0.7281 | 0.7175 | 0.7223 | 0.6193 |
| Australian Dollar | 0.9414 | 0.9271 | 0.9272 | 0.9317 |
| Euro | 0.5976 | 0.5890 | 0.5983 | 0.5647 |
| UK Pound | 0.5164 | 0.5083 | 0.5201 | 0.5027 |
| Japanese Yen | 79.46 | 78.29 | 78.24 | 66.57 |
| Chinese Renminbi | 4.6542 | 4.6187 | 4.6877 | 4.4251 |
| Trade Weighted Index | 75.63 | 74.70 | 75.34 | 69.92 |
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week the yield for the 90 Day Bank Bill was unchanged on 0.33%. The 10 year Government Bond yield was also unchanged on 1.88%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 14 July.
| This Week (27/5/21) | Last Week (20/5/21) | Last Month (27/4/21) | Last Year (27/5/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 0.25% |
| 90 Day Bank Bill | 0.33% | 0.33% | 0.35% | 0.26% |
| 10 Year Government Bond | 1.88% | 1.88% | 1.60% | 0.71% |
Source: Reserve Bank of NZ
