Rural round-up

26/10/2021

Costs wave to break over farming – Hugh Stringleman:

A one-and-a-half percent rise in interest rates over the next year will be a large component of rapidly rising on-farm inflation.

After a decade of low interest rates, the forecast increase in the Official Cash Rate (OCR) from 0.5% to 2% looks set to increase the interest portion of debt servicing by as much as one-third.

For individual farmers, the added interest cost will be dependent on total indebtedness and their mixture of fixed and floating rates.

The most recent Federated Farmers banking survey said the average farm mortgage rate was 3.8% and the average farm debt, across all types, was $4.3 million. . .

Peak milk underway in second Covid-affected season – Gerald Piddock:

Fonterra is facing its second consecutive season where peak milk collection is affected by covid-19.

The co-operative is expecting to process 80 million litres a day over the next few months, while at the same time keeping its 12,000 staff nationwide safe from the virus.

Fonterra chief operating officer Fraser Whineray says the co-operative had been working through a lot of management and business continuity plans to deal with covid while ensuring it was able to process the volumes coming through the factory.

“They are dynamic and they change because the environment changes,” Whineray said. . .

Shearing  his passion for six decades – Shannon Thomson:

Shearing — both the industry and the sport — has been a lifetime love for New Zealand Merino Shearing Society life member Graeme Bell.

A wool classer and master woolhandler, Mr Bell has been involved with shearing since the Merino Shears began in Alexandra in 1961.

He was 10.

Growing up in the centre of Alexandra, he did not come from farming stock, but as a young boy the lifesyle of the local shearers caught his eye. . .

Getting broadband to everyone – Mike Smith:

Recent episodes of Fair Go have highlighted the difficulties a number of rural people have in getting access to quality, reliable broadband and how tough this makes their lives.

Businesses can’t operate without a solid connection, kids can’t be educated from home when required, and life is just harder for everyone.

As chair of WISPA-NZ, which represents specialist internet providers who look after many rural users, I understand why having access to the Internet is now a vital part of everyday life.

The 37 companies that make up our group are all specialists in using wireless internet technology to get to the places phone cable and fibre don’t reach. . . 

Farmers urged to plan for dry summer – Shawn McAvine:

Farmers are being encouraged to plan ahead in the event of another dry summer.

Otago Rural Support Trust trustee and Otago Drought Recovery Committee member Amy Francis said the trust formed the committee after a drought was declared in Otago in April this year.

Her sheep and beef farm in Five Forks had been dry.

Recent rain had been ‘‘amazing’’ but the soil lacked moisture. . .

Country diary: My first sheep auction since Covid is an emotional one – Andrea Meanwell:

In my quest to buy some Swaledale gimmer lambs, I’m reminded that farmers in their 50s are considered youngsters.

As I walk through the double doors and into the auction, the smell of sheep and sawdust makes me feel suddenly emotional. During Covid I missed going to sales, missed chatting to other farmers and just being in a busy place with other people.

Today is one of the biggest sales of the year, the Swaledale and Rough Fell draft ewe sale at Kendal auction. Traditionally sheep were “drafted” off the fells after about four lambings, and sold to other farmers with better land for the remainder of their lives. While there are plenty of draft ewes here, there are also sheep of all ages from all over the Lake District.

I don’t really need to buy any sheep, but I have agreed with my son, whom I farm in partnership with, that should I see some Swaledale gimmer lambs I like, we can pay up to £70 each for them. We have calculated that at £70 they are affordable. Some people like to go to shopping centres for their retail therapy; I go to sheep auctions. . .

 


Interest rates rising

07/10/2021

The cost of borrowing is going up:

The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent. Consistent with their assessment at the time of the August Statement, it is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment.

The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions. While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus. . .

This is a response to a steep increase in inflation:

Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalised price rises. At this time, measures of core inflation and medium-term inflation expectations remain close to 2 percent.

The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment. . . 

The Taxpayers’ Union lays the blame for the increase at the government’s door:

“Today’s OCR hike – which will see households squeezed with hire mortgage payments, is a direct result of the Government’s reckless spending over the last 18 months. Even worse, with COVID’s economic shock now coming, it comes at the very worst time for households.”

“The Government needs to do all it can to focus on quality, not quantity, of spending. Its programme of money-printing and borrowing for political purposes has pumped up inflation to unacceptable levels and left future generations of taxpayers with a debt monster. Higher interest rates will increase the financial pain caused by that debt.”

It’s a risky move:

Today’s move by the RBNZ to raise the Official Cash Rate by 0.25 per cent to 0.5 per cent shows the bank has been forced to make the risky move despite two major New Zealand cities still being locked down, says National’s Shadow Treasurer Andrew Bayley.

“The Government’s failure to rollout the vaccine and prepare our Covid defences has resulted in the Reserve Bank having to make this decision in the middle of lockdown, which is incredibly risky for the economy.

“Obviously, the Reserve Bank has seen that the cost of living is rising too quickly, and its hand has been forced. This has been exacerbated by huge amounts of wasteful, untargeted spending from the Government on matters entirely unrelated to the Covid response.

“As a result of the Government’s lack of fiscal discipline and failure to prepare for another Covid outbreak, mortgage-holders and businesses are now set to face rising interest costs at a time they can least afford it.

“The Government should now take a cue from the Reserve Bank and rein in its wasteful spending and focus unrelentingly on its Covid response, and ensuring businesses survive the current extended lockdown.” . . 

The announcement has already led to an increase in interest rates:

It took just a few minutes for ANZ to announce it was increasing its floating and flexi rates by 0.15 percent. . . 

No doubt other banks will follow.

It’s a small increase on what was a historically low rate and is unlikely to bring much cheer to savers.

But it could bring woe to some borrowers.

A small increase on a big amount, which many who have bought into the overheated housing market have borrowed, could be more than some can afford.

The younger ones among them might not have seen interest rates in double digits and will have no memory of the 1980s when inflation and interest rates were raging.

Like most conventional sheep and beef farmers then, most of our income came in a couple of big chunks when we sold our lambs and wool. That was always several months after our major costs had to be paid so we survived on seasonal finance and at the peak we were paying around 26% for everything we bought for the farm and household.

Thanks to the “failed” policies of the 80s and 90s, such eyewatering interest rates should be consigned to history.

That won’t be of any comfort to home and business owners whose finances are already stretched and for whom even a very small increase in interest could stretch them too far.


Money supply fuelling house prices

16/11/2020

Friends on Waiheke Island took us to visit friends of theirs who were selling their house on a 900 square metre section.

The asking price was $500,000.

“How many stock units could you run on the lawn?” my farmer asked, knowing at the time we were buying a neighbour’s farm of about 120 hectares with a house and wool shed for less than that.

Town and country property prices have gone up a lot in the two decades since then. House prices increased nearly 20% in the last year.

The steep climb is largely a function of supply and demand. There are far fewer houses for sale than there are buyers in the market.

Immigration has plummeted so we can’t blame that.

We can point some of the blame at the national lockdown in March and the more recent Auckland one that put a dampener on new builds, adding to the delays and costs caused by the RMA and building regulations.

But David Law at the New Zealand initiative says loose monetary policy is the bigger culprit.

. . . The Reserve Bank is undertaking a $100 billon programme of quantitative easing. The Official Cash Rate (OCR) is also now at a record low, reduced from 1% to 0.25% in March. These two decisions alone will lift returns on investment in housing and increase pressure on house prices, particularly as supply is constrained.

If the Government cares about fixing housing affordability, it should start by being clear on the reasons for those high prices.

Former Finance Minister Steven Joyce is also concerned about housing for the haves and no relief for the have nots:

. . . People can afford the repayments on a bigger mortgage so they bid up the sticker price on the house, while others look for any sort of asset yield that’s bigger than the derisory amounts available from bank deposits.

There is now much more recognition that ultra-low interest rates are driving high asset prices including house prices, but so far much less will to do anything about it. . . 

The Prime Minister has shown concern and said prices can’t keep going up at the rate they have been but her concern hasn’t translated into any practical solution to the problem/

Covid-19 is the big driver of the current economic recession, but the government’s policy response isn’t helping.

By continuing to invoke lockdowns at the drop of a hat, mandating big minimum wage and public sector pay increases, pursuing the adoption of the so-called living wage, increasing holiday pay and pushing myriad other anti-employment measures, there is no doubt that the economy will respond with more sluggish employment growth than would otherwise be the case.

In turn monetary policy has more work to do to maintain progress towards the full employment goal. Say hello to even lower interest rates for longer; and ever more nonsensical asset prices, especially houses.

It is a big irony that government policies that often seek to boost the fortunes of the low paid end up helping to trap them in a hand to mouth existence, with no way to break the cycle and get on the home ownership ladder. . . 

Worse, higher house prices lead to higher rents which makes it harder for low income renters to make ends meet and for higher income renters to save for a deposit to buy a home.

The simple fact is that under current policy settings, micro-economic policies that attempt to artificially boost incomes beyond what businesses and the economy can afford will simply end up driving a bigger wedge between the haves and the have nots in terms of asset prices and wealth, through the mechanism of ever lower interest rates. We are chasing our tails.

Anything which increases the supply of money and lowers the cost of borrowing without increasing the supply of houses will drive up prices.

The Reserve Bank is trying to stimulate the economy by encouraging businesses to invest and expand but government-mandated increase in wages and sick leave have the opposite affect.

And any positive impact from the lower OCR is more than outweighed by the inflationary pressure low interest rates are putting on house prices.

The house we looked at on Waiheke Island would be selling for far more than $500,000 now. The farm we bought has increased in value too but it’s a productive asset supporting jobs and earning export income.

A house provides a home but it produces nothing and the rampant price increases of owning one is producing misery.


Why so glum?

08/08/2019

The quarterly unemployment rate is down to 3.9%; and the official cash rate is at an historic low of 1%.

Yesterday’s GlobalDairyTrade was down 2.6%, the fifth drop in the last six auctions but no-one’s suggesting the milk payout will be lower than $6.

Horticulture and wine are getting healthy returns, arable incomes are reasonable, wool is dismal but the outlook for sheep meat and beef is positive.

But Business confidence is down to -44.3% :

. . .That was the worst reading since August last year, when the index was at -50.3. Employment intentions slumped (-5.5 vs 0) as firms sought to cut jobs, capacity utilization weakened to its lowest since 2009 (0.4 vs 5.3), and activity outlook (5.0 vs 8.0) and export expectations (1.4 vs 5.3) deteriorated. In addition, profit expectations fell further(-16.3 vs -12.5), while investment intentions turned to negative (-0.3 vs 2.5). . . 

And consumer confidence is also gloomy:

The Westpac-McDermott Miller consumer confidence index in New Zealand fell to 103.5 in the second quarter of 2019 from 103.5 in the previous period. Households became increasingly worried about conditions in the global economy over the next five years (-3.5 points to 11.9); and the number of households who think now is a good time to purchase a major item has fallen to a two-year low (-5.5 points to 17.9).  . . 

Why are we so glum?

Today’s historic cut to the Official Cash Rate down to just one per cent sounds a dramatic warning that the New Zealand economy is slowing and the Government needs to get serious about growth, National’s Finance Spokesperson Paul Goldsmith says.

“The Reserve Bank’s cut came with the message, ‘Indicators of growth remained weak or weakened further over the past few months’.

“The only time in the history of the OCR there has been a cut of this magnitude have been after the 9/11 terrorist attack, during the Global Financial Crisis, and after the Christchurch earthquake.

“Of greatest concern is the absence of any clear growth plan from this Government.

“Budget 2019 was devoted almost exclusively to spreading national wealth, with very few policies to grow the economy. The most expensive Budget commitment to transform the economy was a $1 billion subsidy for rail. There was little else.

“Instead of ramping up infrastructure investment, the Government has stopped or postponed a dozen roading projects which were ready to get underway, and replaced them with projects that aren’t ready to go, and won’t be for a lot time yet’.

“We need to move beyond policies that add costs to the business and drive down business confidence.

“National would revive the economy by having a plan for growth which would see confidence bounce back and the economy gain the strength it’s lost under this Government.”

There is no doubt what the government is doing and not doing are a large part of the problem.

In spite of at least reasonable returns for almost all primary products farmers feel under-siege with very real concerns about the costs and restrictions the government will impose on them.

Other businesses have similar worries, not helped by the latest confidence-sapping message sent by the Prime Minister’s ordering Fletchers to not build anything until the Ihumātao dispute is settled.

Then there’s the on-going argument over the letter Associate Transport Minister Julie Anne Genter is refusing to release and the questions that raises over the part she played in delaying Wellington transport plans.

Concerns over this aren’t helped by claims from Wellington City Councilors that the Green Party confidence and supply agreement would have been put in jeopardy if a watered down Let’s Get Wellington Moving wasn’t accepted.

All of this points to government instability and is compounded by Winston Peters’ latest game playing over requiring a referendum on changes to abortion law.

When interest rates were already so low, it is unlikely the larger than expected drop in the OCR will have much impact on the productive economy when there are so many reasons pointing to the need for caution.

And while low interest rates help borrowers they punish savers.

All in all there is little to give anyone confidence anything is going to get better soon and plenty of reasons to doubt the government has the plans and policies to help.

And now the Reserve Bank has dropped the OCR, it raises the question of what happens when, as is likely, economic conditions get worse.


OCR down .25 basis points

11/06/2015

Reserve Bank Governor Graeme Wheeler has announced a small drop in the Official Cash Rate:

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.

Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased.

The New Zealand economy is growing at an annual rate around three percent, supported by low interest rates, high net migration and construction activity, and the decline in fuel prices. However, the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed.

Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued.

With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.

House prices in Auckland continue to increase rapidly, and increased supply is needed to address this. The proposed LVR measures and the Government’s tax initiatives planned for 1 October 2015 should ease the impact of investor activity.

A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range.

We expect further easing may be appropriate. This will depend on the emerging data.

It’s good to see policies to address the supply side of the Auckland housing problem being acknowledged so that the rest of us aren’t paying in higher interest rates.


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