Headline article from the BNZ Weekly Overview of January 30.
Farmer Spending Eases
In New Zealand you don’t tend to see us economists writing very often about specific sectors. That’s partly because we are so busy with the overall macro picture that we don’t have time for the individual components. It also reflects the difficulties of developing a macro view by looking at the smaller pieces because so many bits of the jigsaw are missing. In other words, we don’t have much data on individual sectors. But we try our best, so here is a look at the state of health of the farming sector as measured by a small range of sentiment and spending indicators.
First, are farmers feeling happy at the moment? The most up to date measure of this applies to early-December and comes from the NBNZ Business Outlook survey. Back then the net percent of farmers expecting economic conditions to deteriorate was a fairly horrible 36%. This was better than 58% in August just after the exchange rate jumped to US 48 cents and dairy prices slumped to be 40% down from a year earlier. A net 36% reading is bad and 50% below the average reading for December in the previous ten years. In contrast for the four other sectors measured in the NBNZ survey while all had slightly negative readings they were all only 32% - 35% below their December averages. So farmers are not just the unhappiest business group in New Zealand – as is traditionally the case – but are relatively more unhappy than normal out of all groups. Its fairly easy to explain why. Farmers are almost all exporters so the rise in the NZ dollar will be eating into their expected incomes either now or when their FX hedging rules off. The first following graph shows levels of NZD-denominated meat & wool and dairy product prices on a monthly basis. For dairy producers returns fell away very sharply from mid-2001 to mid-2002 but have now recovered slightly to lie 7% below their ten year average. For meat and wool producers returns have simply pulled back from unusually high levels to be around 14% above their ten year average. Can we see evidence of the farmer pessimism in spending indicators? Farm sales activity has certainly weakened according to REINZ data released this week. Over 2002 there were 2,631 farms sold around New Zealand, down 17.4% from the 3,184 sales over 2001 but still the second best of the past six years. Sales in the December quarter were 29% down from a year ago so the slowdown is continuing. But for what it is worth the median sale price measure (which gets heavily distorted by changing types of farms being sold and changing farm size) has flattened out after rising firmly from early 2000 to mid-2002. (See the graphs in the following section of the WO.) This suggests farmers are not generally suffering decreasing equity through falling land prices.
The number of tractors registered in the December quarter was up 4.3% from a year ago and at 2,918 the number registered in 2002 was the highest in our records which start in 1992. But growth has clearly slowed and numbers are likely to start falling soon after rising since late-1999. Another spending measure comes from building consents data. In the three months to December the value of consents issued for the construction of farm buildings totalled $34.1m. This was up 0.6% from a year ago but growth in this measure has been flat to negative since the middle of last year. This follows surging activity from early 2000 shown in the following graph. The interesting thing in this measure is that although growth has slowed activity remains at a high level.
Apart from these measures we have nothing else to go on to get a gauge of farmer spending except the intentions indices contained in the NBNZ survey which showed terrible pessimism and bank lending data. There is a slightly interesting divergence between above average farmer intentions of undertaking investment (9% versus 10 year average of 5%) and the well below average confidence measure. The result may suggest many farmers are willing to look through the current period of high uncertainty and keep preparing for the future. The near average reading for the livestock purchase intentions indicator suggests the same thing. Also interestingly, as yet there is no sign that the rate of growth in farm borrowing is easing much though we expect this will happen this year. The annual rate of growth in farm debt edged up to 20.4% in December from 19.9% in November with debt growth in the month of $84m some $72m greater than that which occurred in December 2001.
All up, farm incomes are
falling and farmers feel pessimistic. But returns for meat
and wool producers remain at above average levels,
international dairy prices have recovered strongly recently,
the weather is not too bad for most producers, low interest
rates are helping finance farmers through a period of
falling returns, and land prices are holding up generally.
Our interpretation of the impact of farm spending on the
economy remains the same as it has for most of 2002. We
expect the farming sector to depress economic growth overall
this year, but the pullback in spending will be more of an
edging away from extreme levels of activity than complete
closure of the wallet.