Economic Week

October 20, 2017
by Nick Clark

Well, as everyone now knows NZ First has chosen Labour to form a coalition, with support of the Greens.  Details of the incoming government’s policy programme and priorities will no doubt emerge over the coming days.  Rest assured that Federated Farmers will be assessing what it all means for farmers and will make sure the farming voice is heard in this new environment.

New Zealand's primary sector exports are expected to increase strongly in the current year, according to the Ministry for Primary Industries.  

MPI’s September quarter Situation and Outlook for Primary Industries showed primary sector exports reaching $38.1 billion for the year to June 2017, up 2.4% on the previous year.  This was mainly thanks to a 10.1% rebound in dairy exports after two poor years in 2015 and 2016.  However, meat and wool exports had a steep decline, dropping 9.2%.

Looking ahead, primary sector exports are expected to increase 9.2% to reach $41.6 billion for the year to June 2018, with dairy continuing its strong growth (up 18.5% to $17.4 billion) and meat and wool recovering slightly (up 1.5% to $8.5 billion). Most other sectors are expected to post solid growth, with forestry up 5.0%, horticulture up 5.1%, seafood up 6.1%, arable up 7.3%, and ‘other’ up 0.8%.

These forecasts are little changed from the previous June quarter Update.  

Dairy prices slipped in this week’s Global Dairy Trade auction.  Overall, the GDT Price Index was dropped by 1.0%, with whole milk powder down 0.5% and skim milk powder down 5.6%.  The only product that rose in price was anhydrous milk fat, up 5.2%.  The average winning price was US$3,204 and 35,669 tonnes were sold.

This is the sixth decline out of nine auctions held over the past four months, with the Index down by 5% over that period.  However, prices are still 16% higher than the same time last year.

This week’s drop was a little unexpected given the impact of wet spring weather on milk production which saw Fonterra reduce its forecast growth in milk collection for the season from 3% to 1%.   So far buyers seem relatively unphased.

Looking ahead, if New Zealand’s milk production remains flat then this should provide support for prices but increasing European and US milk production could negate this.  Some but not all economists now think Fonterra’s $6.75 payout forecast will need to be trimmed.

Inflation edged up in the September quarter, according to Statistics NZ’s Consumers Price Index (CPI).  The CPI’s annual increase was 1.9%, up on the June quarter’s annual increase of 1.7% (but less than the March quarter’s annual increase of 2.2%).

The annual increase was driven by housing and household utilities, which increased 3.0% (with purchase of new houses up 5.4% and rents up 2.2%), and food prices, which increased 2.8% (with vegetables up 9.0%).  Partially offsetting these increases were communication prices which decreased 5.3% (with telecommunications services down 4.5% and equipment down 22%)

The quarterly increase was 0.5% from the June 2017 quarter. Food prices rose 1.1% (with vegetables up 6.2%) and housing and household utilities rose 1.0%, (with local authority rates up 3.5%, rents up 0.6%, and purchase of new houses up 1.1%.  In contrast, transport prices fell 1.1% (with petrol down 1.7% and international airfares down 5.5%.

The inflation rate was a bit higher than economists expected but despite this the Reserve Bank is likely to remain relaxed and it should be in no hurry to increase the OCR.  At its next review in November it will likely continue to be studiously neutral – as it has been all year.   

September was a soggy month for farm sales according to the Real Estate Institute’s monthly Rural Statistics.

There were 271 farm sales in the three months ended September 2017, down 30.2% on the same period last year.  1,667 farms were sold in the year to September 2017, 6.6% fewer than were sold in the year to September 2016.  There were increases in sales for finishing farms (up 43.3%) and dairy farms (up 31.3%) but there were fewer sales of grazing properties (down 29.1%) and arable farms (down 25.8%).

Despite lower sales volumes, values held up.  The median price per hectare for all farms sold in the three months to September 2017 was $27,363, up 2.0% on the same period last year.  The REINZ All Farm Price Index was also up 10.6% over the same period.

REINZ puts the slump in volumes down to “extreme climatic conditions faced by the farming community in recent months”, resulting in waterlogged pastures.  REINZ observed that “a considerable number of farms are now coming on the market, with evidence of more land owners considering their options”.  It pointed out that labour, climate, environmental issues and politics are amongst the driving factors.

	This Week (19/10/17)	Last Week (12/10/17)	Last Month (19/9/17)	Last Year (19/10/16)
OCR	1.75%	1.75%	1.75%	2.00%
90 Day Bank Bill	1.93%	1.93%	1.94%	2.23%
10 Year Government Bond	2.92%	2.98%	3.00%	2.56%

Source: Reserve Bank of NZ