Monday, March 27, 2006

Mark Peart: Pessimistic farmers stuck with half-empty glasses

Assessing the medium to long-term economic prospects for the rural sector is a bit like weather-forecasting.

It's not for the faint-hearted and there's a better than even chance that the forecaster will end up with egg on their face.

So rather than forecasting, I'll precis some of the current thinking.

Optimism and pessimism are subjective concepts.

When one looks, for example, at the latest Rabobank/ACNielsen Rural Confidence survey, it pulls no punches in suggesting that New Zealand farmers have a "strongly pessimistic" view of the future.

Rabobank New Zealand executive manager Hamish Midgley's reaction to the survey reflects the notion that people can either see the economic glass as half-full or half-empty.

Midgley says the main driver for the decreased confidence among dairy farmers appears to be a growing view that they will not receive more than $4/kg milk solids next season.

"The survey shows that 40 per cent of dairy farmers believe their incomes will be lower in the next 12 months and more than 80 per cent of all farmers expect cost of production to increase," he says.

But, as he acknowledges, therein lies the rub.

He thinks farmers are likely to be reacting to short-term messages rather than looking into next year and beyond.

"We can't underestimate the short-term effect that the combination of high interest rates and the value of the New Zealand dollar have had on returns this season and therefore on farmers' confidence levels," he says.

But there is a silver lining on the horizon, right?

Right. Rabobank's agriculture in focus report acknowledges tougher times this year, predominantly driven by exchange and interest rate impacts, but says there are positive market signals.

"Rabobank's view is that our major markets for sheep meat, beef and dairy products are sound," Midgley says.

"Demand continues to increase and global economic growth in excess of 4 per cent is forecast. New Zealand remains a competitive supplier of high-quality products."

So surely it's just a case of battening down the hatches and weathering the storm.

BNZ chief economist Tony Alexander says a falling currency delivers an income boost to current exporters but by itself will not encourage a swathe of new exporting industries.

He says New Zealand has suffered because of its inability to grow and spread its export base.

"What's of great concern at the moment is the way in which businesses are pulling back on their capital expenditure."

Farmers are no exception to this rule.

According to Rabobank, they continue to have a conservative approach to further investment.

Sheep farmer investment intentions are at the lowest point since the Rabobank survey began.

A net 10 per cent of dairy farmers intend to invest in their businesses in the next year, which is at least one indicator that might nudge the glass more towards half-full than half-empty.

Alexander says hopefully businesses will get their cash flows under control.

From that should stem a structural lift in capital spending from next year.

"If not, then our current account deficit will continue to remain large, our currency will trend downward over time, income gains will remain good for commodity exporters, but more Kiwis will leave for countries like Australia to gain incomes which, when converted into Kiwi dollars, will be trending upward strongly over time relative to what can be earned here."

That suggests things could be okay for the rural sector, measured strictly in bottom-line terms. But skill shortages are another issue and one that needs to be closely monitored.

* Mark Peart is a Dunedin-based freelance writer.


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