Farming sector holds its breath

Political change appears to have been an important driver behind the drop in farmer confidence from six months ago, as it seems in other surveys covering the wider business sector post government formation. 

More farmers said the political situation was their greatest concern and many more farmers now see fiscal policy as the number-one government priority compared to six months ago. But while general regulation and compliance costs remain farmers’ single-biggest concern in the latest survey, this has fallen from six months ago.

Also bear in mind that the near-term influence of policy change on agriculture may also be less than it might have been. The previously proposed water tax was put on ice, free emissions were lifted to 95% from the 90% initially mooted, and the 90-day trial employment period was maintained for small businesses against a chance of it being scrapped.

But with the prospect that during this parliamentary term agriculture will be included, in some form, in the Emissions Trading Scheme (ETS) (current signals suggest probably 95% free emissions for a start) it is no surprise that more farmers are naming climate change policy and the ETS as their greatest concern compared to six months ago. Much detail is yet to be worked through, but in this area costs look set to rise.

However, it is not just politics and policy that have influenced farmer confidence over the past six months. Disease and weather are right up there too.

The detection of Mycoplasma bovis from July last year has caused a lot of angst in dairy and beef as cows have been culled, activity disrupted and costs incurred. This revelation explains the sharp elevation of biosecurity to the most important government priority as identified by farmers.

And the weather for many farmers in the past six to nine months has, starting last winter, been too wet, then too dry, then too hot, then too wet. 

On the matter of farmer confidence, note that the survey was taken as the dry spell inflicted the most pain. 

Decent rain since early January has generally helped more than hindered, although the recent blast from ex-cyclone Gita has hindered many farmers, altering production profiles, causing disruption and/or lifting costs.

Meanwhile, rising cost pressures were seen to have pushed farmer confidence lower. We can certainly see cost pressures brewing in the labour market. Farmers in dairy, meat and fibre, grains and others in all the main regions -- all reported difficulty finding labour.

The current confidence slump has occurred despite generally firm primary product prices. These have been supported by strong and broad-based economic growth offshore that has driven down trading partner unemployment rates and boosted demand for many primary products while supply has been on the tight side in some sectors.

Prices for most of NZ’s major primary export products are not only higher than a year ago, but are at levels well above their respective five-year averages. This is true for dairy, beef, lamb, forestry and venison. Horticulture is also strong -- note kiwifruit, apples and wine. Persistent weakness in coarse wool prices remain the exception.

Of course, there are various risks to the price outlook including the demand, supply and trade channels.

While there are differences across products, overall we see a mild softening in world prices for NZ primary products through 2018. But we are always mindful of the potential for supply shocks to alter the course of prices abruptly.

Perhaps confidence levels may be a touch higher if farmers were surveyed today, given the now agreed revised TPP trade deal, weather generally not as worrisome as after the dry in November and December, and dairy prices pushing higher in the first three GDT auctions of the year. 

These are reasons to think that farmers will follow through on their already positive spending intentions.

• Doug Steel is an economist with BNZ and his comments relate to the bank’s latest rural confidence survey Rural Wrap.