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New Zealand rural confidence hits two-year high

6 September 2006

New Zealand rural confidence hits two-year high

New Zealand farmers continue to view the 12-month outlook for the New Zealand economy very differently from city-based business people. Where business confidence is at low levels, farmers are the most optimistic about the rural economy since October 2004.

The latest Rabobank AC Nielsen Rural Confidence Survey, which was conducted during the first two weeks in August, clearly shows farmers’ positive response to a lower New Zealand dollar and continuation of strong global commodity prices.

Rabobank general manager rural New Zealand Ben Russell said the Rural Confidence Survey was “definitely bucking the pessimistic trend of business confidence in the economy as a whole”.

“Whereas business confidence surveys are hitting 18-month lows, the rural confidence survey has reached a two-year high,” he said.

“We believe the primary driver is the lower New Zealand dollar. New Zealand exports more than 90 per cent of the agricultural products we produce and farmers are well aware of the impact exchange rates have on the income side of their businesses.”

The August survey showed 32 percent of farmers were anticipating an improvement in the economy and 56 percent were expecting it to remain the same. This is a significant turnaround from the first survey of 2006, taken in February, when only three percent of farmers thought the economy would improve and 23 percent believed it would stay the same. The New Zealand dollar was worth over USD0.70 during the February survey.

Optimism in New Zealand’s rural economy appears to have a converse relationship with movements in the NZ/US dollar exchange rate, with confidence being more positive when the New Zealand dollar is weaker. Farmers are well aware this makes New Zealand agricultural products more competitive on the world market.
The NZD/USD exchange rate and New Zealand farmers’ expectations of the agricultural economy 2000-06

Confidence was shown to be highest amongst sheep farmers, with the August survey indicating their optimism is at its highest level since February 2000.
This was despite the fact lamb prices in the 2006 year have been, on average, NZD10 a head lower than the previous year, Mr Russell said.
“Sheep farmers have experienced a greater reduction in income than in the beef or dairy sectors, but they obviously have strong expectations of higher lamb prices for the 2007 season. Eighty two percent of sheep farmers responding to the survey indicated that they expected gross farm income to be the same or higher than this year,” he said.

Surprisingly, beef farmer confidence has not been impacted by the opening of key North Asian markets to American beef. The United States regained access to Japan in August after being shut out of the market for over two years due to the discovery of bovine spongiform encephalopathy (BSE).

“However, over the past few months, prices for manufacturing beef in the United States have remained strong and this has been reflected in beef schedule prices in New Zealand,” he said.

Dairy farmer confidence has also experienced steady improvement from February, where a net 60 per cent thought the rural economy would worsen. In August, a net 11 percent believed the rural economy would improve.

The severe weather conditions over winter, particularly snow in South Canterbury and North Otago, has not impacted negatively on the outlook for the next 12 months. Responses on the agricultural economy and expectations of income from farmers in those areas are similar to those of producers in the rest of the country.

“The August survey also indicates that farmers have a realistic view of rising input costs,” Mr Russell said. “A net 90 per cent of farmers believe that costs will rise in the next 12 months and there is a strong expectation that interest rates will remain the same or even increase”.

Rabobank analysis shows there have been modest increases in most farming inputs over the last ten years, with fuel and electricity being the exceptions. Fuel has increased by 37 per cent and electricity by 16 per cent in the year to June 2006.
“Fortunately the large increases have been in inputs that account for relatively smaller percentages of total farm expenditure,” Mr Russell said. “On sheep and beef farms, fuel and electricity account for an estimated four per cent and 1.5 per cent respectively of farm working expenses. On dairy farms, fuel is approximately five per cent and electricity three per cent of costs. On all farm types, the most significant costs are interest payments, fertiliser and wages. Increases in these costs have been more modest”.
Farm Expenses Price Index 1992-2006

Source: Statistics NZ

Mr Russell said the results of the New Zealand survey made an interesting contrast to the rural confidence survey undertaken by Rabobank in Australia. The results of the latest Australian survey, released at the end of August, show that the confidence of Australian farmers has plummeted to a four-year low. This was driven largely by lack of rain over winter. Of the farmers expecting the agricultural economy to worsen, 57 per cent cited drought as the reason for their pessimism.

“Australian sheep and beef farmers are receiving similar positive market signals to their New Zealand counterparts, but are facing stock in poorer condition due to drought and the additional cost of supplementary feeds,” Mr Russell explained.

The Rabobank/AC Nielsen Rural Confidence Survey is the only study of its type in New Zealand and surveys a panel of more than 800 farmers across New Zealand. The survey is conducted bi-monthly.

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked one of the world’s safest banks by Global Finance magazine.

Rabobank operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

ENDS

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