Farm incomes contract even further

Farmers face tougher times but this downturn will not be as bad as the 1998 recession, says Bank of New Zealand chief economist Tony Alexander.

BNZ economists expect farm incomes to contract at least 5 per cent in the year ahead, on top of an estimated 9 per cent contraction in the 2005/06 year.

But one reason Alexander believes this downturn will be a lot milder than in 1998 is the weather. There was an El Nino pattern in 1997/98 with associated drought. That is absent this time.

And while world prices for export commodities have eased back about 5 per cent from their heights early last year, a repeat of the steep drop that followed the Asian crisis is not on the cards.

Then economic growth among New Zealand's main trading partners slowed to below 1 per cent; now the consensus among forecasters is for trading partner growth of around 3.5 per cent this year and next year.

Alexander said that while growth in China and India is expected to provide a firmer base for commodity prices, confidence about long-term commodity prices was likely to limit the extent to which farmers cut back on capital expenditure.

ANZ's commodity price index is still 23 per cent above its average level over the past 20 years in world price terms, though only 4 per cent above average when those prices are converted into New Zealand dollars.

The kiwi has fallen nearly 4USc against the US dollar from its recent peak of 70USc in mid-January, but Alexander doubts this is the start of a major move down.

He says the Reserve Bank will probably wait to signal a cut in interest rates.

"I think it will be the middle of the year. Then, maybe, we will get down to the 60USc area," he said.

"But there's nothing to justify a forecast of 50USc.

"Last time around, we dropped about 20USc over an 18-month period. That's not in the offing, which means we are not going to be looking at some major bounce up in the export sector in late 2007 and 2008."

There is evidence farmers are pulling back their spending. The number of tractors registered in the three months to January was down 20 per cent on the same period a year earlier.

Farm sales in the same period were down 16 per cent. "There is a general view that some consolidation is advisable after many years of consolidation and debt growth."

Reserve Bank figures show farm debt has more than doubled during the past five years. But interest rates are lower than they were in 1998.

"We believe more farmers have got low long-term fixed rates locked in this cycle than was the case back then. And floating rates used for financing cashflow deficiencies are also substantially lower, with the 90-day bank bill near 7.5 per cent versus over 10 per cent back then."

Alexander said when farmers saw their incomes tightening they often adjusted their spending faster than other sectors.

This could lead to excessive pessimism among firms servicing the farming sector, about the downturn.

"But they should not expect this cycle to remotely resemble that of 1998."