by Nick Clark, National Manager General Policy
This will be my final Economic Update. After 19 years I am leaving Federated Farmers. Over the years I have enjoyed providing these weekly reports and I hope they have been interesting and informative. All the very best.
Reserve Bank comments on agri-lending
The Reserve Bank’s six-monthly Financial Stability Report, which will be released next week, will feature an article on ‘Developments in the Agricultural Sector’. In an unusual move, it released the article this week, i.e., several days in advance of the full report. To summarise (paraphrasing the Reserve Bank’s media statement):
The agricultural sector is facing difficult economic conditions, because of low dairy, meat and forestry prices, high operating expenses, and increased debt servicing costs.
Longer term, the sector faces uncertainty about the scale and timing of the costs of climate change.
Whilst defaults in banks’ agricultural lending portfolios are currently low, they are expected to increase and could accelerate if there is a prolonged period of high costs and low prices.
It is encouraging that dairy prices have improved in recent auctions, and the deleveraging across the industry over the past few years means most farmers are well placed to manage challenges in the short term.
The agriculture sector has huge social and economic significance in New Zealand. Our economy is more reliant on the agriculture sector compared with most other advanced economies and we monitor emerging risks and issues closely to protect the stability of our financial system.
The agricultural sector represents 11% of all bank lending. Within agricultural lending, dairy takes the predominant share, at around 60%, with beef and sheep is the second largest category at 25%.
Across the agricultural sector, demand has declined from China, which typically purchased one-third of our dairy exports, 40% of our meat exports and 60% of our forestry exports.
Defaults, payments overdue by more than 90 days, could increase materially if there is a prolonged downturn in export prices and demand. Banks tell us they are monitoring the situation and working closely with their rural customers.
In the longer term, the agricultural sector faces climate-related challenges and we are focused on safeguarding the stability of the financial system against these risks.
We are working with banks to improve their capability in assessing climate risks by stress testing their agricultural portfolios against shocks, including drought, emissions pricing, and other long-term climate risks.
We explore these issues further in a special topic from our November 2023 Financial Stability Report, which we are pre-releasing today, along with a Bulletin article: the 2022 climate change risk assessment for agricultural lending. Our full Financial Stability Report will be published on Wednesday 1 November.
Federated Farmers has been meeting with the main rural lenders over the past few months. We want them to support their farming customers through the current economic challenges, which over the coming months could include a drought brought about by El Nino. The Reserve Bank’s climate change risk assessment estimates that a one-year drought would result in 7% of sheep & beef and 8% of dairy borrowers defaulting, while a two-year drought would double those amounts.
Its climate change risk assessment also found that an emissions price of NZ$15 per tonne of CO2 equivalent resulted in 8% of dairy and 22% of sheep & beef borrowers being unprofitable, with those amounts increasing as the emissions price increased.
We want action from the incoming government to tackle policy and regulations which are limiting production and further increase costs of production. We need it to commit to working for a better business environment for farmers to restore confidence and enable them to thrive and not just survive. Our 2023 General Election Platform has plenty of ideas.
Exports and imports falling….
September saw double-digit percentage declines in both exports and imports, and it was also the fourth consecutive month where both have fallen compared to the same month last year.
Statistics NZ’s monthly Overseas Merchandise Trade Statistics show goods exports were worth $4.9 billion in September 2023, down 18% compared to September 2022. Most of the major export commodities had big falls. On the dairy side, exports of milk powder, butter, and cheese were down 31%; preparations of milk, cereals, flour, and starch were down 25%; and exports of caseins and caseinates were down 21%. Meanwhile, meat exports were down 18%; forestry down 14%; fruit down 17%; wine down 27%; and live animal exports down 81% reflecting the ban on those exports by sea. Wool bucked the trend with its exports up 13%.
Goods imports were worth $7.2 billion in September 2023, down 15% compared to September 2022. Again, most of the major import commodities had falls, except vehicles, parts, and accessories which was up 4.3%. Petroleum and products (which can be volatile due to large and lumpy shipments) was down 21%, while fertiliser exports were down 34%.
The monthly goods trade balance for September 2023 was a deficit of $2.3 billion. This was a little smaller than a $2.5 billion deficit for September 2022 but a little bigger than a $2.2 billion deficit for September 2021.
On an annual basis, for the year to September 2023, goods exports were $70.4 billion, up 0.1% on the previous year. For the key primary sector export commodities:
- Milk powder, butter, and cheese: up 3.3% to $20.3 billion.
- Meat and edible offal: down 12% to $8.7 billion.
- Logs, wood, and wood articles: down 6.7% to $4.8 billion.
- Fruit: down 4.8% to $3.7 billion.
- Preparations of milk, cereals, flour, and starch: up 7.7% to $2.5 billion.
- Wine: up 16% to $2.3 billion.
- Casein and caseinates: up 11% to $1.9 billion.
In addition, vegetables were up 11% to $509 million but live animal exports were down 24% $394 million; eggs, honey, and other animal products were down 10% to $417 million; and wool down 3.9% to $406 million.
Annual growth in goods imports has been falling, and it slowed further to 3.0% to $85.7 billion for the year. Imports of petroleum and products were up 24% to $11.3 billion; vehicles, parts, and accessories up 12% to $12.0 billion; and aircraft and parts up 212% to nearly $2.0 billion. Many others decline though, with fertiliser imports down 42% to $874 million.
The annual goods trade balance for the year to September 2023 was a huge deficit of $15.3 billion. It was down a little from that for the year to August 2023 ($15.5 billion) but was $2.4 billion higher than the previous year’s deficit of $12.9 billion.
Goods exports to China were down 20% for the month to $1.3 billion and they were down 5.9% for the year to $19.3 billion. Goods imports from China were also down 17% for the month to $1.7 billion and down 8.1% or the year to $18.0 billion. Despite recent falls, annual goods exports and imports to and from China remain around twice those of our next biggest export and import trading partner, Australia.
…as ANZ issues a trade warning
In advance of these ugly trade stats, ANZ put out a paper ringing alarm bells about New Zealand’s trade balance.
At -3.5% of GDP in the June 2023 quarter, the difference between exports and imports is historically large and compares to a 1987-2020 average of +1%. ANZ said that to comfortably service our debts to the world we need it to close.
ANZ noted some temporary and cyclical factors (with my take in brackets):
- Tourists are returning (positive for trade balance)
- Agricultural exports under pressure from weak prices and potential drought from El Nino weather pattern (negative for trade balance)
- Contractionary monetary policy reducing import demand (positive for trade balance)
And it also looked into longer-term factors:
- Decline in dairy herd and therefore milk volumes from combination of environmental regulation, limited high quality land, and rising costs (negative for trade balance).
- Export commodity prices should find long-term support (positive for trade balance)
- China’s demographic decline presenting structural risks for its economy (negative for trade balance).
- Threat from synthetic meat and dairy to demand for the real thing (negative for trade balance)
- Deglobalisation increasing the cost of imports and reducing market access for exports (negative for trade balance).
- Adaptation to climate change, where New Zealand’s food production might be less hard-hit from climate change than competitors (positive for trade balance).
ANZ concluded that “if we don’t fix our trade balance through proactive policy, everything we import (cars, computers, rice etc) may become more expensive through a weaker exchange rate, and interest rates may need to be higher than otherwise”.
Food for thought for the incoming government.
Agricultural businesses down in 2023.
Statistics NZ’s annual Business Demography Statistics showed that in February 2023 New Zealand had 605,000 businesses (up 1.8% from February 2022), across 641,600 business locations (up 1.7%). They employed 2.46 million employees (up 3.0%).
Looking more closely at the agricultural sector, it was a different story. In February 2023 there were 50,574 business locations, down 4.4% compared to February 2022 and continuing a long-running trend of declining business numbers since at least 2000 (when the records begin). These businesses employed 78,700 people, down 3.4% for the year, but still up a little on the year 2000. This indicates growth in the average number of people employed by each agricultural business (from 1.02 in 2000 to 1.56 in 2023).
Turning to the main sub-sectors, in February 2023 there were:
- 14,127 dairy cattle farming business locations (down 7.8%) employing 24,700 people (down 2.4%);
- 22,899 sheep, beef cattle, and grains farming business locations (down 2.4%) employing 18,600 people (down 3.6%); and
- 7,275 horticultural business locations (down 4.3%), employing 27,650 people (down 3.3%).
Traffic volumes fall.
After rising in August, ANZ’s Truckometer for September 2023 saw drops for both light traffic and heavy traffic volumes.
Comparing September with August, the light traffic index fell 1.3%, while the heavy traffic index dropped 3.5%.
On an annual basis, the three-month averages compared to the same period last year were not much better than flat – up 0.7% for light traffic and up 0.3% for heavy traffic. This despite strong population growth and the recovery in tourism.
According to ANZ light traffic is generally a good indicator of consumer demand while heavy traffic provides a good steer on production. ANZ said “the data reflects that the New Zealand economy is patchy as the cost of living and tighter monetary policy bites. But it’s not capitulating”.
Migration boosts population growth.
New Zealand’s population increased strongly in 2022/23 with growth for all regions and all but two districts/cities.
Statistics NZ’s annual Sub-National Population Estimates showed that the population of 5,223,100 was up 105,900 (or 2.1%) for the year to June 2023. This was a dramatic acceleration from the previous year to June 2022 when New Zealand’s population increased by only 5,800 (or 0.1%). The difference was due to a huge turnaround in net migration, which went from a negative drag on population growth in 2021/22 to providing 82% of growth in 2022/23.
After a rare population decline in 2021/22, Auckland was the region with the fastest growth in 2022/23, up 2.8%. Otago had the second fastest growth of 2.7%, and Waikato’s was 2.3%. The West Coast had the slowest growth of 0.4%.
The districts and cities with the fastest growth were Queenstown-Lakes (8.0%), Selwyn (5.2%), Mackenzie (3.6%), and Hamilton (3.4%). The two that declined were Buller (down 0.5%) and Chatham Islands (down 0.3%).
NIWA Soil Moisture Data.
NIWA’s latest soil moisture maps (as at 9am Thursday 26 October) show a decidedly mixed bag across the country. Soil moisture levels are significantly drier than usual in East Cape, northern Taranaki, and around Kaikoura, and becoming dryer in Thames-Coromandel and Southland. In contrast conditions are significantly wetter than usual in the Far North, Gisborne-Wairoa, coastal Wairarapa, and much of the Canterbury and Otago regions.
Exchange Rates
The NZ Dollar was down again this week, slipping a further 1.0% against the Trade Weighted Index after falling 2.3% last week. It was down 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 down 1 point to 5.65%, while the 10-year Government Bond yield was down 5 points to 5.50%.
The OCR is next reviewed on 29 November.
| This Week (26/10/23) | Last Week (19/10/23) | Last Month (26/9/23) | Last Year (26/10/22) | |
| OCR | 5.50% | 5.50% | 5.50% | 3.50% |
| 90 Day Bank Bill | 5.65% | 5.66% | 5.71% | 4.13% |
| 10 Year Government Bond | 5.50% | 5.55% | 5.20% | 4.48% |
Source: Reserve Bank of NZ
