by Nick Clark, GM General Policy
Outlook positive but confidence mixed
The forecast for global sheepmeat and beef demand is positive for the 2021-22 season supported by solid market fundamentals, strong demand, and tight supply, according to Beef + Lamb New Zealand’s (B+LNZ) New Season Outlook.
However, B+LNZ is also forecasting a stronger NZ Dollar, with its central forecast of US$0.75. Currently, it’s sitting a little below US$0.70. Such a rise would offset some of the buoyancy in international prices and therefore limit increases in farm-gate price.
Total export receipts for sheepmeat (lamb and mutton) for 2021-22 are forecast to be steady on 2020-21 at $4.10 billion (down 0.1%), with higher lamb exports (largely due to higher prices with volumes steady) offset by lower mutton exports (declines in prices and volumes). Beef exports will be down 7.0% to $3.89 billion on lower prices and volumes. Wool exports will increase 6.2% to $420 million.
Gross farm revenue for the 2021-22 farming year is forecast to increase 4.3% to an average $634,800 per farm, while expenditure is estimated to increase 3.0% to $491,300. Most spending categories are expected to increase as farmers face inflationary pressure on farm input prices, especially fertiliser. Farm profit before tax, is forecast to increase 9.0% to average $143,500 per farm.
B+LNZ observed that farmer confidence is mixed. While on-farm profitability is positive, it said resilience is being tested by the volatility of adverse weather events and the extent of environmental regulation.
Farmer confidence slips
Farmer confidence fell in the third quarter, with farmers now evenly split on the prospects for the agricultural economy in the year ahead. Overall, a net 0.0% of farmers felt confident about the prospects for the rural economy, down 13 points from the June survey.
Government policy and rising input costs were the key factors cited by pessimists while rising commodity prices was the key reason nominated by optimists.
Farmers’ expectations of their own farm business performance were marginally down from June, but they remain at net positive levels overall (+11% compared to +16% previously).
Dairy farmers are now significantly less positive about the prospects for their own businesses
while sheep and beef farmers and growers are marginally more positive. Rabobank also reported that Investment intentions were marginally higher this quarter with sheep and beef farmers recording the strongest appetite for investment
Ag debt edges down
Agricultural debt dropped slightly in August, according to the Reserve Bank’s Sector Lending Statistics for August.
Lending to the agricultural sector was $62.50 billion in August 2021, down $58 million for the month and down $595 million (or 0.9%) from August 2020. This was comprised of lending to the following sectors:
- Dairy cattle farms: $38.09 billion, down $36 million for the month and down $1.57 billion (4.0%) for the year.
- Sheep, beef cattle, and grains farms: $15.18 billion, up $38 million for the month and up $28 million (0.2%) for the year.
- Horticulture: $6.19 billion, down $46 million for the month but up $602 million (10.8%) for the year.
- Other agriculture on farm: $2.35 billion, down $12 million for the month but up $9 million (0.4%) for the year.
In contrast to agriculture’s annual decline in lending (down 1.2% when break adjusted), strong growth in housing lending continued on the back of the booming housing market, up 11.7%. Business lending was up 1.7% and personal consumer lending down 7.0%.
Business confidence recovers
Business confidence consolidated its improvement earlier in the month, according to the final results from ANZ’s Business Outlook Survey for September 2021.
Overall, a net 7.2% of respondents expected the economy to worsen over the next 12 months, about the same as September’s preliminary result and 7.0 points better than August. For agricultural respondents, a net 18.2% expect worse conditions but this is a 12.2 point improvement from August.
Turning to own activity, a net 18.2% of respondents expect their activity to increase over the next 12 months, the same as the preliminary result and down 1.0 point from August. For agriculture, a net 13.6% expect their activity to increase but this was down 16.8 points from August.
Cost expectations continued to be very high, with a net 84.2% expecting them to increase (90.9% for agriculture) and inflation expectations at 3.0% were at the top of the Reserve Bank’s 1-3% target range.
Profit expectations slipped further into negative territory to a net 15.6% expecting profits to reduce (-22.7% for agriculture).
Imports surge drives record trade deficit
A 38% increase in goods imports drove a record monthly trade deficit of more than $2 billion, according to Statistics NZ’s monthly Overseas Merchandise Trade Statistics.
In August 2021 goods imports were worth $6.50 billion, up $1.80 billion (or 38.4%) from August 2020. Vehicles, parts, and accessories leapt 87.1%, while petroleum and products were up 56.8%. More than half the major import commodities posted increases of more than 30%.
It was a different story for goods exports, which were down 0.9% to $4.35 billion. Movements in key export commodities follow:
- Milk powder, butter, and cheese up 1.4% to $602 million.
- Meat and edible offal up 24.6% to $552 million.
- Logs, wood, and wood articles up 17.7% to $472 million.
- Fruit down 2.4% to $459 million.
- Preparations of milk, cereals, flour, and starch (largely infant formula) down 14.4% to $180 million.
- Wine up 0.6% to $199 million.
In addition, exports of eggs, honey, and other edible animal products were down 16.9% to $42 million; live animals down 35.6% to $57 million; and wool up 5.6% to $27 million.
The net result was a monthly goods trade deficit of $2.14 billion. This was a blowout from August 2020’s $299 million deficit and it was also bigger than August 2019’s deficit of $1.64 billion.
For the year ended August 2021, goods exports were worth $61.13 billion, up 0.8% compared to the year ended August 2020. Looking at the key export commodities:
- Milk powder, butter, and cheese down 2.8% to $16.04 billion.
- Meat and edible offal down 1.0% to $8.27 billion.
- Logs, wood, and wood articles up 27.8% to $5.59 billion.
- Fruit up 0.9% to $3.88 billion.
- Preparations of milk, cereals, flour, and starch down 12.1% to $2.15 billion.
- Wine down 3.9% to $1.90 billion.
In addition, exports of eggs, honey, and other edible animal products were up 3.8% to $513 million; live animals up 7.8% to $460 million; but wool was down 0.4% to $411 million.
Goods imports for the year ended August 2021 were worth $64.1 billion, up 8.1% compared to the year ended August 2020. Imports of vehicles, parts, and accessories were up 39.6% while petroleum products were down 9.2%.
On an annual basis, the net result was a goods trade deficit of $2.94 billion. This was a widening from a $1.10 billion deficit for the year ended July 2021, and a stark contrast to the $1.37 billion surplus for the year ended August 2020.
New records for house consents
New monthly and annual records for homes were consented were set in August 2021, according to Statistics NZ’s Building Consents Issued.
4,490 new homes were consented in August 2021, up 42.3% on August 2020. These consents were valued at $1.69 billion, up 44.7%. The new monthly record broke the previous high of 4,310 set in June 2021.
This took annual new home consents to 46,453 for the year to August 2021, up 24.0% on the previous year. They were valued at $17.44 billion, up 26.4%.
Non-residential consents worth $785 million were consented in August 2021, up 16.7% from August 2020. $23 million of farm buildings were consented, up 13.0%.
For the year to August 2021, non-residential consents were valued at $7.88 billion, up 14.7% on the previous year. For farm buildings the annual value was $281 million, down 2.4%.
Next week – OCR call
On 6 October the Reserve Bank will make its decision on monetary policy settings. It had been almost universally expected to increase the OCR at its last review on 18 August but the level 4 lockdown announced on 17 August caused it to hold fire.
Restrictions have persisted and are still in place, especially in Auckland where our biggest city is still in level 3. Although national economic activity has taken a hit it has not been as severe as during last year’s national lockdown. The housing market continues to run hot, employment remains around its maximum sustainable level, and inflationary pressures have by no means abated. All would indicate the Reserve Bank should make its move.
On the other hand, the Reserve Bank’s speech last week about ‘least regrets’ suggests caution and that it won’t be moving quickly or in large leaps. Some in the markets had thought it would hike 50 points but after the speech sentiment changed to favour a 25 point increase. While that still seems the most likely outcome, the persistence of the outbreak and maintenance of level 3 in Auckland (and level 2 elsewhere) means a no change result should not be a big surprise.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 30 September) shows most of the country’s soils with about average or wetter than usual moisture levels for this time of year. Gisborne-Wairoa, Marlborough-Hurunui, and Central Otago are significantly wetter than usual. There are only a few small, scattered pockets of dryer than usual areas.
Exchange Rates
The NZ Dollar was again weaker this week, down a further 1.3%. It was down against all our key trading partners, except the Japanese Yen where it was unchanged.
Source: Reserve Bank of NZ
Wholesale Interest Rates
This week the yield for the 90 Day Bank Bill was up 4 points stable to 0.65%. The 10 year Government Bond rose 11 points to 1.97%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 6 October.
| This Week (30/9/21) | Last Week (23/9/21) | Last Month (30/8/21) | Last Year (30/9/20) | |
| OCR | 0.25% | 0.25% | 0.25% | 0.25% |
| 90 Day Bank Bill | 0.65% | 0.61% | 0.46% | 0.31% |
| 10 Year Government Bond | 1.97% | 1.86% | 1.71% | 0.46% |
Source: Reserve Bank of NZ