Friday, July 1, 2022

Farmers gloomy on year ahead

Farmers are facing 2013 pessimistically, especially those reliant on lamb and wool.  They are weighed down by the over-valued New Zealand dollar and personify what economists are calling “grumpy growth” on the national scale. The latest survey of farmer confidence says farm gate prices and high exchange rates are the major reasons for their gloom. A net 32% of respondents expect their farm’s profitability to worsen over the next 12 months and a net 14% expect economic conditions to worsen.

Forecast payout increases have resulted in improvements in the views of dairy farmers on their profitability and on the wider economy, but off a low base when the previous survey was taken.

However, meat and fibre farmers are even more pessimistic about their profitability because lamb prices are 35% lower than this time last year.

“The strong Kiwi dollar is acting like a sea anchor on all export returns,” Federated Farmers president Bruce Wills said when releasing details of the federation’s six-monthly farmer confidence survey.

He blamed central and local government borrowing and need for debt repayment for keeping our dollar over-valued, which is hurting farmers and manufacturers.

But with the agriculture sector on the brink of achieving $50 billion in debt, nearly 10 times more than two decades ago, isn’t Wills, the former banker, being hypocritical?

“Yes, I acknowledge that farm debt is extraordinarily high, but there is a high percentage of ‘good’ debt –for productive purposes,” he said.

“Unfortunately the ‘bad’ debt will grow this year as sheep farms borrow to cope with a one-third reduction in their incomes.

“While some agriculture debt is about survival, government still has an entrenched borrow-and-spend culture that needs to change,” Wills said.

The confidence survey showed farmers believed the top priority for the government was to cut its spending and therefore its borrowing demand.

Federated Farmers argues farm debt at the least earns its own servicing and has resulted in substantial productivity increases over the past 20 years, unlike the astronomical housing debt.

Wills called on the government to focus its spending on those things that will lift productivity and reduce compliance costs.

“It may not be sexy, but it is what the economy desperately needs,” he said.

In past decades since the NZ dollar was floated in 1984 exporters could rely on some self-correcting mechanism in the exchange rate, which rose along with commodity prices and fell in tandem.

Now the major influencers of exchange rates appear to be sovereign risk, debt servicing and investment inflows chasing our attractive interest rate margins.

ANZ Bank economists Cameron Bagrie and Con Williams, in their February Agri-Focus publication, predicted the NZD would remain high courtesy of the weak US dollar and offshore investment in NZ government bonds.

But they pointed to several reasons why they thought the NZD wouldn’t go higher, unlike some commentators last week, who thought US90c was possible.

Globally, domestic drivers of growth are picking up, reducing some countries’ reliance on currency weakness to buy growth, while in NZ there are clear signs of collateral damage from the high NZD.

Turning to that other bane of farmers’ lives, they said world commodity prices continued to improve across a broader base than in recent months, but in-market gains had delivered only modest relief to farm gate prices because of the high NZD.

The outlook for soft commodities looks positive because of the continued US dry weather, mixed weather for other major exporters and low inventories of key grains.

Dairy markets are expected to strengthen during the first quarter of this year, driven by supply constraints and strong demand from China, where our dairy exports have doubled over the past six months, compared with the same period the year before.

The ANZ Bank world commodity price index rose 0.3% in January, which was the sixth consecutive monthly rise. It has risen 8% since last July but remains 14% below its record high in April 2011.

However, the stronger NZD means the NZD commodity price index fell 0.5% during January and remains 10% lower than a year ago.

Figures attached to the commodity price report show sheep meat earned $2.6 billion, beef $2b, other meat and co-products $450 million and skins and pelts $567m.

Milk powder, butter cheese and casein together earned more than $12b, while wool earned $800m, kiwifruit $1b, wine $1.2b, and fish and seafood $1.5b.

The major market movements during 2012 included increases in sheep meat, milk powder, casein and seafood  for China, beef for the US, and milk powder for Hong Kong and the United Arab Emirates.

The big decreases included sheep meat for UK and Germany, beef for Korea and Indonesia and milk powder for India, the Philippines and Thailand.

Williams said the main reason for the strength of the NZD was debt servicing.

“I think most people are agreed that the NZD is over-cooked compared with its ‘fair value’ based on our fundamentals.

“Right at the moment international investors have confidence in our dollar because the economic issues offshore look to be worse than ours.”

Williams said there was plenty that could be done within the farm gate to improve profitability, rather than living in denial and blaming all woes on the exchange rate.

The Red Meat Sector Strategy hammered the potential available for the rural economy from poor performers improving their farm management.

Wills also hailed the red meat industry Primary Growth Partnership and welcome government assistance to “drive change”.

“The confidence of sheep and cattle farmers has taken a real kicking from the rapid decline in lamb and wool prices.

“They are very frustrated by this nonsensical boom and bust stuff, when high prices paid last year mean that meat company debt is transferred to low schedule prices this year.

“Yet again the meat industry has demonstrated it is dysfunctional and this must be addressed through the PGP and the RMSS,” Wills said.

“Our 2012-13 mid-season farm confidence survey shows pastoral farming to be operating at two speeds.

“It is encouraging that dairy farmers are more positive than six months ago, but the deepening pessimism of meat and fibre and our grain farmers is concerning.

“We can only hope the second half of the season turns around because the global demand is there and the recently announced PGP for red meat must deliver what Federated Farmers has striven for and that is unity.”

The six-monthly Federated Farmers confidence survey is voluntary and is conducted by email to the federation’s membership.

It was conducted in the second week of January and attracted 973 respondents. 

Related story: Agricultural confidence split 

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