by Nick Clark, National Manager General Policy
Commodities soften
The ANZ World Commodity Price Index fell 1.7% April, with dairy prices softening but meat prices firming.
Dairy prices fell 4.9% for the month, in response to higher milk production in the Northern Hemisphere early in April, but more recently prices have been stronger as per the GDT (see below). Meat & Wool prices were up 2.7%, with beef prices particularly ‘bullish’, while lamb and wool prices were also up a bit. Horticulture prices were unchanged, forestry down 3.0%, and aluminium up 1.5%.
The exchange rate was a little weaker in April, so this slightly moderated the NZ Dollar Index’s decline to 1.4% for the month. In NZ Dollar terms, Dairy prices were down 4.9% for the month and Meat & Wool prices were up 3.5%.
Despite the monthly increase, when comparing April 2023 with April 2022, the World Price Index was down 17%. Dairy prices were down 28% and Meat & Wool prices were down 9%. When converted for the exchange rate, the NZ Dollar Index was down 10% for the year. Dairy prices were down 21% and Meat & Wool prices down 2.2%.
ANZ also noted that global shipping prices trended higher in April.
GDT up again
The Global Dairy Trade auction had another increase at this week’s event, up 2.5% on top of a 3.5% increase at the previous auction.
Whole milk powder enjoyed a 5.0% increase, while skim milk powder was up 1.5%, butter up 2.4%, cheddar up 4.5%, and butter milk powder up 0.8%. Anhydrous milk fat bucked the trend dropping 2.4%.
The average selling price was $US3,506 and 23,265 tonnes of product were sold.
Notwithstanding the past two events’ increases, the GDT Price Index is still 24% lower than at the same time last year. However, it this is quite an improvement on a month ago when it was 38% lower.
Ag debt edges up
Agricultural sector lending was up a little in March, according to the Reserve Bank’s monthly Sector Lending Statistics.
In March 2023, agricultural sector lending was $62.32 billion, up $68 million from February and also up $722 million (1.3%) from March 2022. There were differences within the sector:
- Dairy cattle farming: $36.54 billion, up $26 million for the month and up $75 million (or 0.2%) for the year. This is the first-time dairy lending has been up annually since June 2019.
- Sheep, beef cattle, and grains farming: $15.25 billion, up $76 million for the month and up $126 million (or 0.8%) for the year.
- Horticulture: $7.44 billion, up $1 million for the month and up $657 million (or 9.7%) for the year. Horticulture lending has slowed sharply.
- Other agriculture on farm: $2.26 billion, down $41 million for the month and down $113 million (or 4.8%) for the year.
In contrast to agriculture’s annual 1.3% increase, annual growth in housing lending was 3.5%, continuing its recent trend of slowing annual growth, while personal consumer debt was up 4.1%. Business lending was up 4.9%.
Financial system stable
The Reserve Bank’s six-monthly Financial Stability Report has found New Zealand’s financial system “well placed to handle the higher interest rate environment and international financial disruptions”.
New Zealand households are facing increased debt servicing costs as their borrowing reprices to higher interest rates and cash flow pressures among households and businesses are growing. However, the report said that “to date there have been limited signs of distress in banks’ lending portfolios, with only a small share of borrowers falling behind on their payments. This reflects the ongoing strength of the labour market and that borrowers have been able to adjust their spending or use previous savings and repayment buffers.”
With regard to agriculture, the report had this to say…
Among businesses, the commercial property and agriculture sectors are relatively more leveraged, meaning they are more exposed to higher debt servicing costs on average.
Debt in these sectors tends to be secured against property. This initially allows them to borrow more relative to their incomes, but also makes them more vulnerable to changes in interest rates and housing market conditions. Within the commercial property sector, falling land values and high debt servicing costs have put developers with large land commitments at risk of defaulting.
In the agriculture sector, falling dairy prices over the last six months alongside increasing farm input costs, such as those of fuel, fertilisers, and labour, are putting pressure on profit margins. Fonterra is now projecting a reduced midpoint price of $8.30 per kilogram of milk solids (kgMS) this season, driven by the slowing global demand, particularly from the Chinese market.
Another significant concern for the dairy sector is increasing debt servicing costs. At an aggregate level, average interest costs per unit of production increased to $1.20 per kgMS from $0.50 per kgMS in mid-2021. Narrowing margins from rising costs and falling international dairy prices have led to more requests from farmers for working capital and overdrafts to meet short-term cashflow needs.
Federated Farmers’ next six-monthly Banking Survey will be undertaken later this month and will cast further light on farmers’ debt and interest rates and their banking relationships.
Labour market still running hot
Statistics NZ’s quarterly Labour Market Statistics show a stable unemployment rate and the labour market continuing to defy predictions of its demise.
The Household Labour Force Survey showed 102,000 people unemployed in the March 2023 quarter, up 2,000 from the December quarter, and keeping the unemployment rate unchanged at 3.4%. Employment was up 23,000 (or 0.8%) in the quarter to 2,886,000. It was up 69,000 (or 2.5%) for the year.
Both the labour force participation rate (72.0%) and the employment rate (69.5%) were up slightly and are at the highest rates recorded since the survey began in 1986. The underutilisation rate, a broader measure of spare capacity, decreased from 9.3% to 9.0%.
Meanwhile, wage inflation continues to rise. For the year to the March 2023 salary and wage rates (including overtime), as measured by the Labour Cost Index, increased 4.3%, compared with 4.1% in the year to December 2022. Average total weekly earnings (including overtime) per full-time equivalent employee, as measured by the Quarterly Employment Survey, was up 7.6% for the year.
Despite a slowing economy and predictions of recession employment continues to grow, the unemployment and underutilisation rates still remain very low, the rates of labour force participation and employment remain at record highs, and wage growth continues to be strong.
What does this mean for the Reserve Bank’s OCR decision on 24 May? The labour market is still strong and although headline inflation was lower than expected in the March quarter, it continues to be far too high, and core underlying inflation has not reduced.
So, I don’t think these statistics give the Reserve Bank any reason to ease off and I expect it will deliver a 25-point increase, taking the OCR to 5.50%.
Jobs up in March
Another measure of the strong labour market was another monthly increase in employment, according to Statistics NZ’s Monthly Employment Indicators.
In March 2023 there were 2,365,600 ‘actual’ (i.e., unadjusted for seasonal effects) filled jobs across the whole economy, up 82,800 (or 3.6%) compared to the same month last year. This follows a seasonally adjusted 0.4% increase for the month of March compared to February.
There were 101,000 filled jobs in agriculture, forestry, and fishing, down 3,300 (or 3.1%) for the year. Seasonally adjusted jobs for the wider primary industry were up slightly for the month.
March’s jobs growth follows strong results in January and February indicating that the labour market is not yet softening in spite of economic headwinds.
Still in the doldrums
Consumer confidence edged up a little in April, according to the latest ANZ-Roy Morgan Consumer Confidence Survey.
Compared to March, the Consumer Confidence indicator rose 1 point to 79.3, remaining extremely weak. A score below 100 indicates more pessimists than optimists and over the past year it has been bouncing around record lows.
Consumers are understandably wary, especially about current conditions. The proportion of people who believe it is a good time to buy a major household item, a key retail indicator, lifted 1 point to -31. A little more encouragingly there was a pick-up in those expecting to be better off this time next year and also improvements in perceptions for the future economic outlook.
Inflation expectations eased slightly from 5.4% to 5.2%. ANZ observed that this indicator has been bouncing around a narrow range for the last six months.
Building consents up and down
Statistics NZ’s monthly Building Consents Issued for March have shown a month-on-month increase in residential building consents, but a decline in annual terms.
In March 2023, there were 3,970 residential building consents, valued at $1.8 billion. The seasonally adjusted number of consents was up 7.0% for the month, after a fall of 9.4% in February. For the year ended March 2023, the number of new dwellings consented was 46,924, down 7.9% from the year ended March 2022. These consents were valued at $19.6 billion, down 0.3% compared to the year before.
The annual value of non-residential building work consented was $9.7 billion, up 11% from the year ended March 2022. Out of this $312 million was for farm buildings, down 2.0%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 4 May) show most of the country’s soils continuing to be wetter than usual for this time of year. However, soils are drier than usual in pockets of Northland, East Cape, mid and south Canterbury, and Southland.
Exchange Rates
The NZ Dollar was stronger for the week against the Trade Weighted Index, up 1.3%. It was higher against all our major trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 7 points to 5.60%, but the 10-year Government Bond yield was down 2 points to 4.06%.
The Reserve Bank next reviews monetary policy settings (including the OCR) on 24 May 2023.
| This Week (4/5/23) | Last Week (27/4/23) | Last Month (4/4/23) | Last Year (4/5/22) | |
| OCR | 5.25% | 5.25% | 4.75% | 1.50% |
| 90 Day Bank Bill | 5.60% | 5.53% | 5.25% | 2.11% |
| 10 Year Government Bond | 4.06% | 4.08% | 4.04% | 3.78% |
Source: Reserve Bank of NZ
