Commodity prices set new record.
Commodity prices hit new a record high in October, according to ANZ World Commodity Price Index.
The World Price Index lifted 2.1% in October compared to September. Dairy prices jumped 3.7%, mainly on the back of tight global milk supply with demand steady. Meat and fibre prices were up 1.6%, with strong price gains for beef and lamb prices at record levels, although wool prices softened. Horticulture and forestry prices were relatively unchanged, while aluminium continued to push higher, up a further 3.5%.
A firmer NZ Dollar in the month knocked a little off world price increases, with the NZ Dollar Index up 1.7% in October.
On an annual basis, comparing October 2021 with October 2020, the World Price Index was up 23.7% and the NZ Dollar Index was up 16.4%. Both have edged past their previous record highs set in June 2021.
General Policy Manager for Federated Farmers, Nick Clark.
NZ also noted that global shipping costs remain elevated but said prices are showing some indications of stabilising. It expects freight disruption challenges to continue well into 2022.
GDT up again.
The commodities momentum has carried into November with the Global Dairy Trade having another increase this week, lifting 4.3% compared to the previous auction a fortnight ago.
Almost all commodities increased in price. Whole milk powder was up 2.7%, skim milk powder up 6.6%, anhydrous milk fat up 4.2%, butter up 4.7%, cheddar up 14.1%, and lactose up 1.6%. The one commodity to fall was butter milk powder which was down 3.8%.
Overall, the average selling price was $US4,207 and 29,915 tonnes were sold.
The GDT Price Index has increased at five of its last six events (the other was ‘no change’). It is almost back up to its most recent peak at the start of March before its five month run of declines. The Price Index is 37.6% higher than at the same time last year.
Ag debt falls.
Dairy pushed agricultural debt down again in September, according to the Reserve Bank’s monthly Sector Lending Statistics.
Agricultural debt was $62.31 billion in September 2021, down $196 million on August and down $556 million (or 0.9%) compared to September 2020.
In contrast to agriculture’s annual decline in lending, strong growth in housing lending continued on the back of the booming housing market, up 11.6%. Business lending was up 2.9% and personal consumer lending down 9.0%.
Agricultural credit was comprised of lending to the following sectors:
- Dairy cattle farms: $37.80 billion, down $290 million for the month and down $1.39 billion (3.6%) for the year.
- Sheep, beef cattle, and grains farms: $15.22 billion, up $39 million for the month and up $100 million (0.7%) for the year.
- Horticulture: $6.17 billion, down $17 million for the month but up $621 million (11.2%) for the year.
- Other agriculture on farm: $2.38 billion, up $34 million for the month and up $58 million (2.5%) for the year.
Dairy debt has dropped by nearly $4 billion since it peaked in July 2018.
Dairy financial risk subsiding but climate change looming.
The Reserve Bank’s latest six-monthly Financial Stability Report shows banks continuing to diversify their agricultural lending as the dairy sector continues to deleverage
In past years until recently the Reserve Bank has identified dairy debt as one of three key risks to financial stability (the others being global economy and housing). Diversification and deleveraging have reduced that risk and housing is now getting by far the most attention. So that’s good to see.
However, although agriculture and dairy may now be less of a financial stability risk the Reserve Bank has become more interested in climate change. The report talks favourably about land use change and banks doing more work on climate change risk. This could give banks another reason to ration credit and to keep the heat on dairy farmers to reduce debt.
For the record, the Reserve Bank’s commentary on agriculture follows…
The rebound in international economic activity since the middle of 2020 supported world commodity prices. Prices of New Zealand export commodities remain close to recent high levels, although they have eased slightly from recent peaks in some industries. Fonterra recently increased its forecast payout for the 2021/22 season to a midpoint of $8.40 per kilogram of milk solids (kgMS), which follows a final price for the 2020/21 season of $7.54/kgMS.
Banks have continued to actively diversify their agricultural lending portfolio away from the dairy sector and towards other sectors, especially horticulture. Elevated export prices have allowed the dairy sector to continue to deleverage, and banks have continued to encourage dairy farmers to improve their long-term viability. This will mean the sector is better placed to deal with any potential future downturn in dairy prices.
High export prices and low financing costs have resulted in the market for rural land becoming more liquid, with prices rising. In addition, the price of carbon in the Emissions Trading Scheme is at a historical peak, creating favourable conditions for conversion of marginal sheep and beef farming land into production and permanent forestry. By raising the value of alternative
land uses, a sustained high carbon price will underpin rural land prices more generally, which will support farm owners to transition away from activities with high emission intensity. So far, however, this conversion has been only on a limited scale.
Banks have reported broad internal work programmes under way on climate-related risk, including a focus on understanding the emissions profiles of business customers, especially in the agricultural sector. A general concern noted by banks is variable data quality, making it difficult to combine scientific and financial data to understand climate change impacts at a farm level, both physical and transitional, and the resulting financial risks.
Record low unemployment.
Statistics NZ’s September quarter Labour Market Statistics has shown an increasingly tight labour market which will almost certainly lock in a further increase in the official cash rate.
Unemployment grabbed the headlines, with the rate dropping from 4.0% in the June quarter to just 3.4% in the September quarter. This is the lowest rate since December 2007, just prior to the Global Financial Crisis. Other indicators also showed a tighter labour market with underutilisation down from 10.5% to 9.2% and the employment rate increased from 67.6% to 68.8%. The 3.4% unemployment rate was much lower than anyone had expected.
Peopled employed rose by 55,000 in the quarter to 2.83 million, while unemployment fell 18,000 to 98,000. Compared to the September 2020 quarter employment was up 116,000 and unemployment was down 53,000.
Employment in the agriculture, forestry, and fishing industry was 165,300, up 5,400 for the quarter but down 6,800 compared to the same quarter last year.
Wage inflation continued to pick up with the Labour Cost Index up 0.8% in the quarter and up 2.5% for the year. Meanwhile, the Quarterly Employment Survey’s average ordinary time hourly earnings was up 1.4% in the quarter and 3.5% for the year.
The labour market is unambiguously tight with employment well above its ‘maximum sustainable level’. Combined with intense cost pressures on businesses and rising consumer price inflation, the Reserve Bank will need to continue tightening policy to keep a lid on inflation and stop a wage-price spiral.
Covid outbreak spoils the books.
The Government’s Interim Financial Statements for the three months to 30 September 2021 have shown stronger than expected revenue but a higher than expected deficit due to a surge in expenditure from support measures prompted by Covid-19 restrictions imposed in August.
Core Crown tax revenue was $23.99 billion, up $2.28 billion (or 10.5%) on the Budget 2021’s forecast, with stronger revenue from most tax types from a strong economy leading up to the August lockdown. However, the wage subsidy and resurgence support payments drove core Crown expenditure higher to $31.02 billion, up $3.18 billion (or 11.4%).
The net effect was an operating deficit before gains and losses of $5.35 billion, $782 million (or 17.1%) higher than expected.
Net core Crown debt was $112.20 billion, $10.63 billion (or 8.7%) lower than expected. It was 33.0% of GDP.
Consumer confidence dives.
The ANZ Roy Morgan Consumer Confidence Index has slipped into pessimistic territory.
In October the Index dropped 6.5 points to 98.0. A score of less than 100.0 indicates more pessimists than optimists. Perceptions of current financial situations fell 10 points to -3%, while net expectations for being better off this time next year fell 4 points to +20%. Perhaps for the next year’s economic outlook fell 8 points to +4%.
A net 7% think it a bad time to buy a major household item, unchanged on last month. This is regarded as the best retail indicator in the survey.
Expectations for house price inflation jumped 0.6 points to 6.7% while inflation expectations surged from 5.1% to 6.2%.
Home consents up again.
New home consents continued to rise in September but consents for other buildings declined, according to Statistics NZ’s monthly Building Consents Issued.
In September 2021 4,483 residential building consents were issued, up 24.4% on September 2020. Their total value was $1.73 billion, up 25.9%. For the year to September 2021 a new record of 47,331 residential consents were issued (up 25.4% on the previous year) valued at $17.79 billion (up 27.3%).
Non-residential building consents were worth $605 million in September 2021, down 20.2% on September 2020, although farm buildings were up 14.3% to $27 million. For the year to September 2021 non-residential consents were worth $7.72 billion (up 10.3% on the previous year) with farm buildings worth $284 million (down 2.2%).
Although strong consents are good news for addressing housing supply, the planned-for houses still have to be built. Supply chain problems and escalating costs are posing challenges and could impede construction.
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 4 November) show the North Island’s soils with mostly about average or wetter than usual moisture levels for this time of year, with the exception of coastal Wairarapa where soils are significantly drier than usual. In the South Island Marlborough’s soils are wetter than usual while parts of coastal Cantrebury and Otago are a bit drier than usual.
The NZ Dollar was a little stronger this week, up 0.3% against the Trade Weighted Index. It was up against all our major trading partner currencies, except the Euro.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up two points to 0.80%, while the 10 year Government Bond yield was up a further three points to 2.56%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 24 November. Another increase is likely, especially after this week’s employment data.