Strengthening dairy prices have helped keep New Zealand farmer confidence levels at high levels but overall sentiment has been dented by a worsening outlook for sheep and beef, rural lending specialist Rabobank said in its latest rural confidence survey.
The survey, completed in early November, recorded a small decline in sentiment among farmers after a surge higher - driven by stronger dairy prices - in the previous quarter.
The overall net confidence reading fell to plus 25 per cent, down from plus 35 per cent last quarter, but remained at net positive levels for the third consecutive quarter, the bank said.
The survey found the number of farmers expecting the rural economy to improve in the next 12 months had fallen to 39 per cent per cent - down from 48 per cent in the previous quarter - while the number expecting it to worsen rose a percentage point to 14 per cent.
Rabobank New Zealand general manager for country banking, Hayley Moynihan, said the positive outlook for the dairy and horticulture sectors had kept overall confidence in the agricultural economy high.
"The prospects for the dairy and horticultural sectors are good for 2017 and, while overall confidence has come back slightly from last quarter, it's still significantly higher than the levels recorded throughout 2015 and early 2016," she said in a statement.
Moynihan said main driver of the fall in overall confidence was reduced optimism in the sheep and beef sector sectors, which were both likely to face a tough season.
"Lamb prices have reached the seasonal peak, with the lucrative United Kingdom and European Union Christmas trade now finished, and returns have been around 10 per cent lower than last year," she said. On the beef side, global prices are under pressure - and the beef schedule was likely to weaken in 2017, Moynihan said.
"The high New Zealand dollar, particularly in relation to the British pound, is also making life difficult for sheep and beef farmers - which is unfortunate considering the improving market demand in other overseas markets - and the pessimism surrounding this sector appears to be the biggest contributor to the lower expectations for the performance of the broader agricultural economy," she said.
Sheep and beef farmers were significantly less positive about their own businesses than last quarter, but dairy farmer expectations for their own business have lifted for the third consecutive quarter.
Growing conditions have been good for a number of horticultural industries and this - combined with on-going strong demand for horticultural produce in export markets, especially for kiwifruit and pipfruit - would account for the continuing high confidence levels among this sector, she said.
Fonterra last month raised its farmgate milk price to $6.00 a kg of milksolids- well beyond DairyNZ's break even point of $5.05 a kg - andMoynihan expected farmers to retire debt.
"With dairy farmers' confidence levels in their own business performance so high we might have expected even stronger investment intentions among this group, however, with an average of $2.60 kg/ ms of debt having been accrued by dairy farmers across the industry during the downturn, repayment of a portion of this debt is likely to be a focus for many," Moynihan said.
The survey covers 450 farmers each quarter.