by Nick Clark, Federated Farmers Manager General Policy
Steady as she goes (up)
Although some economists were picking a 50 point hike to the Official Cash Rate, the Reserve Bank took a more gradualist approach, increasing it by 25 points at this week’s review of Monetary Policy Settings.
As predicted in last week’s update, the Reserve Bank’s decision is consistent with its least regrets approach where it will only make big increases or decreases to the OCR in the event of big changes to the economic outlook.
Yes, commodity prices are at record highs, while September quarter employment and inflation data both surprised strongly on the upside, suggesting an overheating economy. Inflation expectations are ticking up and risk becoming imbedded. In normal times this would have prompted an aggressive response to get ahead of economic pressures.
But as we all know these are not normal times. There are still plenty of economic risks and uncertainties. No one knows how much GDP dropped in the September quarter (we won’t find out for a few more weeks) and no one knows with any certainty how it’s fared in the current December quarter. At least some of the higher current rate of inflation will be transitory.
Although the Reserve Bank did not take the 50 point option, it signalled the OCR to go higher than it was expecting it to in August. It also said the OCR would likely need to be pushed above its neutral rate. Its forecasts now suggest an OCR of 2.25% by the end of 2022 on its way to as much as 2.75% later in 2023. That implies six 25 point increases next year plus another two in 2023.
The Reserve Bank also signalled that as part of normalising monetary policy it will manage down its Large Scale Asset Purchase bond holdings. It said it would do so in a way that maintains the smooth functioning of financial markets, meaning gradually. More details will be provided early next year.
The exchange rate and wholesale interest rates both softened in response to the more modest increase in the OCR.
We now have a lengthy three month wait for the next Monetary Policy Review – 23 February 2022. Another 25 point increase is highly likely and already priced in by the markets.
Farm sales down but prices strong
Farm sales have continued their recent run of falls but prices remain strong, according to the Real Estate Institute’s latest Rural Property Statistics.
There were 253 farm sales in the three months ended October 2021, down 6.3% on the three months ended September 2021 and down 31.1% on the same three month period last year.
In total there were 1,623 farms sold in the year to October 2021, down 2.6% on the year to September 2021, but still up 21.9% on the year to October 2020. Against the latter, sales of dairy farms were up 130.3%, dairy support down 20.0%, grazing farms up 14.7%, finishing farms up 25.5%, and arable down 43.2%.
The median price per hectare for all farms sold in the three months to October 2021 was $34,265 up 9.6% compared to the three months to September 2021, and up 22.6% on the same three month period last year.
Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, increased 0.1% in the three months to October 2021 compared to the three months to September 2021. Compared to the three months ending October 2020, the REINZ All Farm Price Index was up 18.2%.
Import surge continues
October 2021 saw yet another month of record imports, according to Statistics NZ’s Overseas Merchandise Trade Statistics.
In October 2021 goods imports were worth $6.64 billion, up $1.37 billion (or 25.9%) from October 2020. Most commodities recorded big increases. Mechanical machinery and equipment jumped 43.1%; vehicles, parts, and accessories leapt 38.1%; and petroleum and products soared 45.8%. Fertiliser imports were also up 77.7%.
Goods exports also rose, although not as strongly as imports, up 11.5% to $5.35 billion. Dairy and meat led the way, with movements in key export commodities following:
- Milk powder, butter, and cheese up 17.9% to $1.47 billion.
- Meat and edible offal up 24.9% to $584 million.
- Logs, wood, and wood articles up 5.6% to $490 million.
- Fruit up 34.7% to $229 million.
- Preparations of milk, cereals, flour, and starch (largely infant formula) down 29.8% to $156 million.
- Wine down 7.1% to $189 million.
In addition, exports of eggs, honey, and other edible animal products were up 1.9% to $46 million; live animals up 216.0% to $40 million; and wool up 15.2% to $46 million.
The net result was a monthly goods trade deficit of $1.29 billion. This was a blowout from October 2020’s $471 million deficit and it was also bigger than October 2019’s deficit of $1.04 billion.
For the year ended October 2021, goods exports were worth $62.06 billion, up 3.3% compared to the year ended October 2020. Looking at the key export commodities:
- Milk powder, butter, and cheese up 1.0% to $16.37 billion.
- Meat and edible offal up 3.0% to $8.48 billion.
- Logs, wood, and wood articles up 24.4% to $5.57 billion.
- Fruit up 1.7% to $3.95 billion.
- Preparations of milk, cereals, flour, and starch down 12.8% to $2.10 billion.
- Wine down 5.0% to $1.90 billion.
In addition, exports of eggs, honey, and other edible animal products were up 0.7% to $514 million; live animals up 24.1% to $503 million; and wool was up 10.2% to $425 million.
Goods imports for the year ended October 2021 were worth $66.98 billion, up 15.8% compared to the year ended October 2020. Imports of vehicles, parts, and accessories were up 52.1% while petroleum products were down 0.7% Fertiliser imports were up 33.9%.
On an annual basis, the net result was a goods trade deficit of $4.92 billion. This was a widening from a $4.09 billion deficit for the year ended September 2021, and a stark contrast to the $2.22 billion surplus for the year ended October 2020.
Retail takes a hit
Nationwide consumer spending fell significantly in the September 2021 quarter, according to Statistics NZ’s quarterly Retail Trade Survey.
For the September 2021 quarter compared with June 2021 quarter the total volume of retail sales fell 8.1%, while the total value of retail sales (with price effects included) fell 7.0%.
The Auckland region, which was in lockdown for half the quarter, dominated the national fall with a 14.5% slump in the September 2021 quarter. However, it wasn’t totally about Auckland with 12 of the 16 regions having lower sales values. The regions to record increased sales were all small ones: Gisborne, Tasman, Marlborough, and West Coast.
Most industries suffered declines in sales. The largest declines were for:
- Department stores (down 22.6%);
- Food and beverage services (18.5%);
- Furniture, floor coverings, houseware, textiles (down 18.1%);
- Hardware, building, and garden supplies (down 14.1%);
- Liquor (down 12.1%);
- Motor vehicles and parts (down 12.0%); and
- Clothing, footwear, and accessories (down 10.4%).
The exceptions were supermarket and grocery stores (up 7.5%), which do well during lockdowns, followed by non-store and commission-based retailing (up 2.5%).
The decline in retail sales comes as no surprise considering Covid restrictions during the September quarter, especially severe and lengthy in Auckland. The key question is whether there has been a recovery in the current December quarter and, if so, how strong has it been? Given restrictions have stretched well into the quarter there is unlikely to have been a strong bounce like that seen last year after the 2020 national lockdown.
Banking Survey thank you
Many thanks to the 906 farmers who responded during a busy time to Federated Farmers’ November 2021 Banking Survey. The survey has closed and Research First is now analysing the results. Watch this space for the results.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 25 November) show soils in Wairarapa, North and Mid Canterbury, and South Otago significantly drier than usual. Northland, Coromandel, Gisborne, and Central Otago are significantly wetter than usual.
Exchange Rates
The NZ Dollar lost further ground this week, down 1.2% against the Trade Weighted Index. It was down against all our major trading partner currencies.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was down 7 points to 0.80%, while the 10 year Government Bond yield was down eight points to 2.57%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is likely.
| This Week (25/11/21) | Last Week (18/11/21) | Last Month (26/10/21) | Last Year (25/11/20) | |
| OCR | 0.50% | 0.50% | 0.50% | 0.25% |
| 90 Day Bank Bill | 0.80% | 0.87% | 0.74% | 0.25% |
| 10 Year Government Bond | 2.57% | 2.65% | 2.39% | 0.89% |
Source: Reserve Bank of NZ