Commodity prices slip from highs
After trending up over recent months the ANZ World Commodity Price Index dropped 1.9% in April compared to March.
Dairy prices fell 4.0% month-on-month, driven primarily by lower prices for whole milk powder. ANZ noted Chinese lockdowns causing logistical nightmares and dampening consumer demand while its economic slowdown will also be impacting on demand in other Asian economies. Meat and fibre prices dropped 2.8% as prices for beef, lamb, and wool all fell. ANZ said it’s becoming increasingly difficult to get product into China while shipping issues and uncertainty on future consumer demand are now weighing on sentiment.
The horticulture index was flat, forestry prices lifted 4.8%, and aluminium prices fell 7.3%.
When converted into NZ Dollars prices were down 0.8% month-on-month. The NZ Dollar was a bit weaker in April so knocking a bit off the decline in world prices.
On an annual basis, comparing April 2022 with April 2021 the World Price Index was up 13.2% and the NZ Dollar Index was up 17.5%. Both are still at near record highs.
Dairy prices slump
It’s early days but commodity prices may come under further pressure this month. This week’s Global Dairy Trade auction suffered an 8.5% drop in prices, with the GDT Price Index falling back to January levels.
Prices were down for all commodities on offer. Whole milk powder and skim milk powder, the two biggest by volume, were both down 6.5%, anhydrous milk fat was down 12.1%, butter down 12.5%, cheddar down 8.6%, and butter milk powder down 6.1%.
The average selling price was $US4,419 and 25,163 tonnes were sold.
Prices have now fallen at each of the last four auctions since mid-March but prices are still elevated by historic standards and remain 6.9% higher than at the same time last year.
Ag debt flat
Agricultural debt was virtually unchanged in March, according to the Reserve Bank’s monthly Sector Lending Statistics. Dairy debt continued to drop.
In March 2022, agricultural sector lending was $61.50 billion, down $9 million on February and down $767 million (1.2%) from March 2021. This masked considerable differences within the sector, with the dairy squeeze continuing and horticulture debt ballooning:
- Dairy cattle farming: $36.47 billion, down $252 million for the month and down $1.91 billion (or 5.0%) for the year.
- Sheep & beef cattle farming: $15.12 billion, up $100 million for the month and up $18 million (or 0.1%) for the year.
- Horticulture: $6.78 billion, up $135 million for the month and up $1.05 billion (or 18.3%) for the year.
- Other agriculture on farm: $2.37 billion, up $1 million for the month and unchanged for the year.
In contrast to agriculture’s annual decline of 1.2%, annual growth in housing lending was 8.7% (although its growth continued to slow) while growth in business lending was 7.7%. Personal consumer debt declined 7.0%.
Dairy risk diminished
The Reserve Bank’s six-monthly Financial Stability Report has been released, highlighting significant economic and financial challenges and risks, most notably the ongoing impacts of the Covid-19 pandemic and Russia’s war on Ukraine. With inflation running hot central banks around the world are tightening monetary conditions.
At home house prices remain above sustainable levels, despite recent declines. A large correction in prices remains a possibility, which would put recent buyers with limited equity under stress, reduce housing wealth, and lead to a contraction in consumer spending.
The Reserve Bank keeps a close eye on agricultural lending, especially to dairy which it has seen previously as a major risk to financial stability. Good news is that it considers risks from the dairy sector to have ‘diminished considerably in recent years’. It also observed banks diversifying lending away from dairy to other sectors, especially horticulture, and strong activity in the rural land market, including for conversion of sheep and beef farmland to forestry.
It’s worth repeating what the Reserve Bank said on agriculture:
While input prices are increasing, rising food prices are expected to be beneficial overall for New Zealand’s agricultural sectors. With a predominance of pasture-based production, New Zealand’s dairy, sheep, and beef farmers are relatively less exposed than international peers to the disruptions to grain markets resulting from Russia’s invasion of Ukraine.
Fonterra’s latest forecast farmgate milk price for the 2021/22 season of $9.60 per kg of milk solids (kgMS) would represent a record payout level, although this may be slightly offset in terms of farm incomes by lower production volumes, partly due to dryer weather conditions. The current strength in dairy prices may continue into next season, with limited prospects of global milk supply growth in the near term.
Overall, risks to the financial system from the dairy sector have diminished considerably in recent years. The dairy sector continues to use the currently favourable conditions and low interest rate environment to consolidate and reduce its leverage. On average, dairy farmers have repaid around $3 of bank debt per kgMS in recent years. Total dairy sector debt has declined by around 12 percent ($5 billion) since its peak level in 2018, reducing debt servicing costs, and meaning farmers will be better positioned to deal with any potential future downturn in dairy prices.
Banks continue to diversify their agricultural lending portfolios away from dairy to other industries, in particular horticulture. In the near term, most agricultural industries are facing similar pressures to those in other businesses, including a tight labour market, input cost inflation, and disruptions to production from the Omicron outbreak. Labour shortages are constraining production, including limiting fruit harvesting and leading to delays at meat processors. However, most of these factors are expected to be temporary. Against a broader backdrop of strong commodity prices, the continued diversification of banks’ agricultural portfolios is positive for the soundness of the financial system.
Activity in the rural land market has been strong over the past year, supported by the low interest rate environment, and an increase in listings as owners reassess their holdings in the face of changing land use regulations and a rising carbon price. Conversion of less productive
land used for sheep and beef farming to permanent or production forestry offers attractive financial returns at the current carbon price, as afforestation is a relatively cost efficient means for New Zealand to reduce its net emissions under current technologies. The Government recently consulted on potential changes to the Emissions Trading Scheme that would disallow new permanent exotic forestry. At the margin this could further raise the carbon price and incentivise more conversion of land into production forestry.
New fiscal rules
Finance Minister Grant Robertson this week announced new fiscal rules in advance of Budget 2022.
Surpluses are now expected to be restored in 2024/25, a year later than forecast in December’s Half Year Economic & Fiscal Update. Once surpluses are restored they’ll be kept within a band of 0-2% of GDP. The Minister said this will ensure new day‑to‑day spending isn’t adding to debt. With nominal GDP currently around $350 billion, a 2% surplus would equate to around $7 billion.
A new debt measure will be introduced to bring New Zealand closer in line with other countries. The new measure includes a wider range of government assets (like the Super Fund and advances) and liabilities (including debt held by other Crown agencies like Kainga Ora). In 2022 it is forecast to be 20.0% of GDP. This is considerably lower than other countries we like to compare ourselves with, including Australia, the US, the UK, and Canada.
A net debt ceiling of 30% of GDP will be put in place (50% translated to the current measure). This implies a tolerance for quite a lot more debt - $35 billion more based on GDP of $350 billion. The Minister emphasised this will be a limit rather than a target and flexible enough to allow a buffer for short-term shocks while providing greater room for productive investment, such as infrastructure where there is a huge backlog of projects and a massive potential bill for them. Fair enough but an unanswered question is if the new net debt rule ‘will be a limit rather than a target’ then what is the target?
It‘s reasonable to update the fiscal rules. Including a surplus range and a wider range of assets and liabilities in the net debt calculation are both appropriate. However, unlike Labour’s 2017 Budget Responsibility Rules there’s no target or limit for government spending. Federated Farmers believes operating spending should be held to below 30% of GDP, which is around the recent historical average.
We also think it very important for government spending to provide strong value for money. There’s no specific commitment for value for money, which is disappointing.
Government finances updated
Meanwhile, the latest update of the Government’s finances are out and they continue to project a smaller than forecast deficit for the year. This is the last fiscal update before Budget 2022 is delivered on 19 May.
The Government’s Interim Financial Statements for the nine months to March 2022 showed core Crown tax revenue of $78.62 billion, $2.68 billion more than forecast at the December 2021 Half Year Economic & Fiscal Update. As with the previous monthly update, income tax (corporate and personal) were both higher than expected but GST and excise duties were both lower than expected.
Core Crown expenses were $92.60 billion, $136 million lower than forecast. The net effect was the operating balance before gains and losses being a deficit of $8.11 billion, $4.09 billion less than expected.
Net core Crown net debt (under the old measure) of $127.1 billion (33.6% of GDP) was $2.94 billion higher than expected.
Labour market tight
Statistics NZ’s Labour Market Statistics for the March 2022 quarter unsurprisingly show a continued tight labour market
Although the unemployment rate was unchanged from December 2021 at 3.2%, this is still rock bottom and compares to a rate of 4.6% in March 2021. Employment edged up by only 2,000 people in the quarter (or 0.1%) but this reflects very low growth in the labour force and the participation rate was almost unchanged at a relatively high 70.9%.
Growth in wages and salaries saw a pick-up with the annual increase in the Labour Cost Index up to 3.0% (from 2.6% in the December quarter). Meanwhile, the Quarterly Employment Survey showed average ordinary time hourly earnings up 4.8% to $36.18. Higher wages are good but they need to reflect higher productivity. Otherwise, higher wages run the risk of generating more inflation as businesses pass on the higher costs they face.
Another indication of labour market tightness, if one was needed, was the BNZ-SEEK Employment Report also out this week. It showed a further increase in job ads in April, up 2.6% on March, and up 49.9% for the year to April 2022 compared to the year to April 2021.
There’s nothing in the data that would dispute the view that employment is above its maximum sustainable level. With that resolved the Reserve Bank should be able to focus on its price stability goal which needs it to get inflation down before it gets backed in. Hence another increase in the OCR is inevitable and it increasingly looks like it will be a 50 point increase.
Consumer confidence edges up
After hitting a record low in March, consumer confidence recovered a little in April according to the latest monthly ANZ-Roy Morgan Consumer Confidence Survey.
The overall consumer confidence index increased 5.5 points from 77.9 to 84.4, but this was still very weak with a score under 100.0 indicating more pessimists than optimists.
Most indicators continued to be negative, although all had improvements. The expectation for annual inflation eased from 6.0% to 5.6% and the expected house price increase eased further to 1.7%.
House consents strong – but will they be built?
More than 50,000 new homes were consented in the year ended March 2022, a new annual record. But labour and materials shortages, rising costs, slow population growth, low consumer confidence, and tightening monetary policy all pose risks to getting the houses built
Statistics NZ’s Building Consents Issued for March 2022 5,303 dwellings consented in the month, up 25.7% on March 2021. The value of $2.06 billion was up 27.7%. For the year ended March 2022, there were 50,858 consents, up 24.0% on the year-ended March 2021, at a value of $19.69 billion, up 29.7%.
Turning to non-residential buildings, the total value of consents was worth $8.50 billion for the year to March 2022, up 13.6% on the previous year. Farm buildings to the value of $318 million were consented, up 10.6%.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 5 May) show soil conditions significantly drier than usual across the west coast of the North Island, including almost all of the Waikato region. They are also drier than usual in Tasman and much of the east coast of the South Island. Soils continue to be significantly wetter than usual in Gisborne and Hawkes Bay.
Exchange Rates
The NZ Dollar was up a little over the course of the week, rising 0.2% against the Trade Weighted Index. It was up against the US Dollar, the Yen, and the Chinese Renminbi but down against the Aussie Dollar, the Euro, and the UK Pound.
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 13 points to 2.12% and the 10 year Government Bond yield was up 6 points to 3.77%.
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 (5/5/22) | Last Week (28/4/22) | Last Month (5/4/22) | Last Year (5/5/21) | |
| OCR | 1.50% | 1.50% | 1.00% | 0.25% |
| 90 Day Bank Bill | 2.12% | 1.99% | 1.66% | 0.36% |
| 10 Year Government Bond | 3.77% | 3.71% | 3.25% | 1.69% |
Source: Reserve Bank of NZ