ASB: Challenging times, but agri-sector will emerge on top.
Farmers will not be alone in facing a challenging period over the next 18 months as economies here and overseas slow, says ASB’s rural general manager, Aidan Gent.
New Zealand households will spend an extra $150 a week because of increases in the cost of living, and farmers’ financial resilience will be tested while commodity, dairy and meat prices remain subdued.
“Those cost pressures are still there and we are seeing really tight cash flows, though input prices are starting to ease,” says Gent. “We have seen clear impacts from the recent severe weather events, and a significant volume and breadth of change is hitting the sector.
“While things do feel tough on the farm at the moment, we really think there is light at the end of the tunnel.”
In its inaugural Quarterly Update, ASB says China’s reopening offers some upside for New Zealand exporters, but a broader easing in demand will keep commodity prices subdued.
A lower farm gate milk price looms, while gains in meat and forestry prices should be relatively modest at most.
“The risks are probably tilted towards a sharper economic contraction and, if that happens, commodity prices could fall in excess of our expectations,” ASB says.
On the other hand, ASB says the decelerating global economy suggests the NZ dollar can shift a little lower in the medium term, providing some offset to farmer incomes (depending on the magnitude).
Mortgage and business rates look close to peaking as markets price in stimulatory official cash rate cuts for the near future. But debt servicing burden is still set to increase for many as more fixed-rate lending rolls onto higher interest rates.
The Reserve Bank said in its latest Financial Stability Report that, at an aggregate level, average interest costs per unit of dairy production increased to $1.20 per kilogram of milk solids, from 50c per kgMS in mid-2021.
Narrowing margins from rising costs and falling international dairy prices have led to more requests from farmers for working capital and overdrafts to meet short-term cash flow needs, the report says.
ASB says fuel, fertiliser, feed and labour costs are coming down but (business) compliance charges are still challenging for many farmers. Global grain prices are down 10-15 per cent from their highs, and fertiliser and energy prices have fallen 35-40 per cent.
Commodity prices peaked 12 months ago and in NZ dollar terms are down just over 10 per cent. “Costs are still elevated in an outright sense but, broadly speaking, supply looks to be past its lows for many commodities.”
Fonterra has reduced its mid-point farm gate milk price forecast for this season to $8.30 per kgMS, and ASB economists are predicting a price of around $7 per kgMS for the 2023/24 season.
ASB says dairy consumption is likely to slow this year in line with the global economy. Improvements in Chinese demand are likely to be offset by softer demand elsewhere.
“China is by far the dominant buyer of New Zealand dairy exports but it still only accounted for about half of the milk powder exports in past years. Higher levels of Chinese milk powder production combined with subdued consumption mean we are unlikely to see aggressive bidding by Chinese processors any time soon.”
ASB says fortunately many farmers have used the high farm gate milk returns over recent years to pay down debt and ensure they are in a resilient shape.
“What’s more, the New Zealand agri-sector has a long history of weathering storms and coming out the other side stronger – from the UK’s entry into the European Union in 1973 to the removal of agricultural subsidies in the 1980s.
“It’s likely the sector will need to employ some of that same resilience and adaptability over the next couple of years,” says ASB.
Gent says it starts with mindset and controlling the controllables: “I was in Southland recently talking to customers who are focusing on sustainability on farm. They are finding that the drivers of sustainability around optimising grass utilisation, and looking after your people, land and animals, are also key drivers of financial performance.”
He says the big change is the level of recording required but “when we think about the issue of how to feed and clothe people more sustainably, we are incredibly well positioned to do that.
“We turn soil, sunlight and water into food and fibre in fewer steps than most parts of the world – and, of all the places I could be invested in, New Zealand food and fibre is where I’d choose.”
Looking ahead to Fieldays (June 14-17), Gent says over generations New Zealand primary producers have proven their ability to innovate and turn challenge into opportunity.
“It wasn’t long ago that we were seeing cow collar technology at Fieldays for the first time; now we are seeing it across New Zealand. This year I expect to see a lot more in the data and technology space.
“We have a lot of faith in the resilience of the rural sector and will be championing it all the way.”
For more rural business insights, tips and tools visit: asb.co.nz/businesshub