by Nick Clark, Federated Farmers GM General Policy
Dairy prices slip again….
The Global Dairy Trade auction edged down another 0.7% at this week’s auction, on the back of weaker prices for fats more than offsetting increases for powders.
Whole milk powder (by far the biggest product traded by volume) was up 0.7%, skim milk powder (the second biggest) was up 2.0%, and butter milk powder was up 14.4%. On the other hand, anhydrous milk fat was down 4.2%, butter down 12.1%, cheddar down 4.5%, and lactose down 2.0%.
The average selling price was $US4,162 and 22,020 tonnes were sold.
This small drop followed another smaller drop at the previous auction and it was the third drop in four auctions since its peak at the start of March. Even so, the GDT Price Index is 44.4% higher than it was at the same time last year.
….But commodity prices strengthen in April
Despite the most recent GDT results, commodity prices continued to push up last month, according to ANZ’s Commodity Price Index.
The ANZ World Commodity Price Index lifted 2.3% in April compared to March to extend its record high. With dairy prices plateauing, the lift in the index was driven by stronger prices for beef (up 6.2%), lamb (up 8.3%), forestry (up 3.5%), and aluminium (up 5.3%). The World Price Index is up 24.3% compared to April 2020 at the height of the pandemic’s impacts on export prices.
With the exchange rate relatively stable in April, the NZ Dollar Index gained 2.2% for the month and it was up 6.9% for the year.
Ag debt down in March.
Overall, agricultural sector debt was down a little in March according to the Reserve Bank’s monthly Sector Lending Statistics. Dairy lending continued to be squeezed.
In March 2021, total agricultural lending was $62.27 billion, down $64 million (or 0.1%) compared to February. On an annual basis it was down $630 million compared to March 2020, a 1.0% decline (or 1.3% when ‘break-adjusted’).
Turning to lending by sub-sector:
- Dairy farming: $38.38 billion, down $221 million for the month and down $1.56 billion (or 3.9%) for the year.
- Sheep, beef cattle, and grain farming: $15.10 billion, up $15 million for the month and up $90 million (or 0.6%) for the year.
- Horticulture: $5.73 billion, up $65 million for the month and up $508 million (or 9.7%) for the year.
- Other agriculture on farm: $2.37 million, up $78 million for the month and up $18 million (or 0.8%) for the year.
In contrast to agriculture’s overall 1.3% year-on-year decline, housing lending continued to accelerate, up 9.7%. Business lending was down 5.2% and personal consumer lending down 10.8%.
Financial stability sound but vulnerabilities remain.
The Reserve Bank released its latest six-monthly Financial Stability Report, finding that New Zealand’s financial system has coped well with the pandemic but warning that risks associated with the housing market are accumulating.
New Zealand has done better than feared, with export prices resilient, but some businesses remain vulnerable, especially from border restrictions and supply chain disruptions. Low global interest rates are supporting economic recovery, while contributing to higher asset prices. Tighter LVR requirements will help rein in high-risk mortgage lending. Capital and liquidity buffers have protected the financial system, but the Reserve Bank thinks further resilience is needed.
Much of the report focused on house prices but it also had a bit to say about agriculture.
Strong commodity prices are supporting ongoing debt consolidation and risk deleveraging in the dairy industry. Demand for agricultural commodities has remained robust throughout COVID-19, with New Zealand milk prices now higher than their pre-pandemic levels. China’s rapid recovery from the pandemic has supported continued demand for New Zealand’s key agricultural commodities. While demand for dairy has been the driving factor, stronger prices have recently also been recorded for meat and forestry products.
Banks have continued to diversify their loan portfolios away from dairy in favour of sheep and beef farming and horticulture, lessening the financial system’s exposure to sector-specific risks. While dairy’s share of banks’ agricultural sector lending remains considerable, it has declined from 69% to 63% in recent years. Banks are encouraging farmers to take advantage of the current milk prices and low interest rates to pay down existing debt. In addition, the number of dairy farmers identified by banks as being stressed has continued to decline. These trends are helping to build resilience in the dairy sector.
While still relatively small, banks’ lending to horticulture producers has maintained a solid growth rate, increasing 11% in the year to March. Banks should continue to monitor potential risks associated with this growth, including the sector’s vulnerability to labour shortages and severe weather events.
The agriculture sector as a whole also faces several longer-term headwinds, including increased variability in climatic conditions as climate change intensifies. The expected full entry of the sector to the Emissions Trading Scheme from 2025 will likely raise compliance costs and weigh on profitability. Further potential risks such as surplus overseas milk production, the growth of milk alternatives, bovine and crop disease outbreaks, heavily concentrated export markets, and geopolitical trade tensions have the potential to undermine commodity prices and sector prosperity.
The report also noted that Reserve Bank, with the Ministry for Primary Industries, has undertaken a desktop ‘stress test’ of dairy farms. It simulated a five-year path of a sample of dairy farms’ cashflows and balance sheets under various conditions, especially around milk prices and land prices (and presumably also interest rates?).
The draft results indicate that while the sector overall has been gradually deleveraging, dairy debt is highly concentrated and pockets of vulnerability to a milk price downturn or drought remain. Simulations suggest that in a scenario with the milk price reduced to $5.50 per kgMS for five years, almost one-third of dairy farms would have negative cashflows and over half of these would require some form of debt restructuring.
Meanwhile, Federated Farmers’ latest six-monthly Banking Survey is now open for responses. The survey provides important insights into farmers’ relationships with their banks and this time we also ask for views on the end of cheques and on bank branch closures. As well as an opportunity to have their say about banking respondents can also choose to go into a draw for a $500 grocery voucher. Federated Farmers members should check their inboxes for their survey invitation.
Labour market strong, can we get more workers?
Unemployment fell in the March quarter, down to 4.7% from 4.9% in the December quarter and 5.2% in the September quarter.
Statistics NZ’s quarterly Labour Market Statistics showed a 5,000 (or 3.6%) decline in unemployment to 135,000, a 15,000 (or 0.6%) increase in the number of people employed to 2.75 million, and an increase in the labour force participation rate from 70.1% to 70.4%.
There were 170,700 people employed in the agriculture, forestry, and fishing industry, virtually unchanged from the December quarter’s 170,600 but up 12,700 (or 8.0%) on the March 2020 quarter.
Wages, as measured by the Labour Cost Index, were also up 0.4% in the quarter and 1.6% for the year.
The March quarter data was strong but not necessarily in a good way. The labour market’s tightness, including in agriculture, is a factor of high demand for labour combined with limited and dwindling labour supply. It adds to the case for resuming immigration, especially for skilled workers so desperately needed in agriculture, but also reinforces the need for more efforts to get people who have left the labour market back into work.
In terms of monetary policy implications, we must be getting closer to the Reserve Bank’s objective for maximum sustainable employment.
Government books in (even) better shape before Budget.
On 20 May Grant Robertson will deliver his fourth Budget and the first for this particular Labour Government. This week’s update of the Government’s Financial Statements for the nine months to 31 March was the last prior to the Budget. It showed further improvement in the Government’s fiscal position.
Core Crown revenue was $74.81 billion, $4.10 billion more than forecast in December’s Half Year Economic and Fiscal Update. Corporate tax, source deductions (e.g., PAYE, etc.), and GST revenue were each more than $1 billion higher than forecast. Core Crown expenses were $79.09 billion, $263 million less than forecast.
The net result was an operating balance before gains and losses in deficit to the tune of $4.27 billion, $5.16 billion less than forecast.
Net core Crown debt on 31 March was $105.31 billion (33.3% of GDP), $6.65 billion less than forecast.
Budget 2021’s starting point provides the Government more options than looked possible a year ago. But it’s not all plain sailing with the economy losing steam towards the end of last year and this year likely to be patchy and uneven. There is still a long way to go.
Home consents at all-time high.
It’s taken 47 years but a new record has been set for new home consents. Statistics NZ’s Building Consents Issued showed there were 41,028 new homes consented in the year to March 2021, beating the previous annual record of 40,025 for the year to February 1974.
The 41,028 consents issued was up 9.1% on the year to March 2020 and the $15.18 billion value of those new home consents was up 9.5%.
Meanwhile, the value of non-residential consents was $7.48 billion for the year to March 2021, up 5.3% on the year to March 2020. Within this the value of farm buildings consented was $287 million, up 5.6%.
Businesses more confident.
Only a week or so after publishing the final results from April’s Business Outlook Survey, ANZ has now released the preliminary results for its May survey.
The preliminary results show a further bounce in business confidence, with expectations for the economy back into positive territory (up 9 points to +7.0%) and own activity also up strongly (up 10.1 points to +32.3%).
Expectations for profitability and employment also rose but cost and pricing expectations remained very high and ease of credit remained negative.
Final results for May will be released at the end of the month.
And consumers too.
The ANZ-Roy Morgan Consumer Confidence Index for April was 115.4, up 4.6 points from March’s 110.8 but still a little short of its historical average of 120.
ANZ reported that perceptions of current financial situations lifted 7 points to +10%, its strongest post-COVID level. A net 31% expect to be better off this time next year, up 1 point. A net 18% think it is a good time to buy a major household item, up 4 points. Perceptions on the next year’s economic outlook rose 11 points to +4%, while the five-year outlook was unchanged at +15%.
Inflation expectations bounced back to close to recent highs (up from 4.0% to 4.7%), while house price inflation expectations were basically unchanged at 6.0%.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 6 May) show soil conditions becoming increasingly drier than usual, with a growing number of ‘red’ areas especially on the east coasts of both islands.
The NZ Dollar was up 0.4% for the week against the Trade Weighted Index, strengthening 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 2 points while the 10 year Government Bond yield was up 11 points.
The Reserve Bank will next review monetary policy settings (including the OCR) on 26 May.
|This Week (6/5/21)||Last Week (29/4/21)||Last Month (6/4/21)||Last Year (6/5/20)|
|90 Day Bank Bill||0.37%||0.35%||0.35%||0.26%|
|10 Year Government Bond||1.72%||1.61%||1.81%||0.60%|
Source: Reserve Bank of NZ