Sharp drop in NZ farmer confidence

Media Release July 13, 2009 1 Sharp drop in NZ farmer confidence as tougher economic times impact commodity prices

Results at a Glance

• Farmer confidence has dropped as higher NZ dollar bites and dairy commodity prices fall.

• Biggest drop registered among sheep and beef producers, but dairy farmers still have lowest confidence levels.

• Majority of farmers intend to consolidate or decrease debt levels, although 28 per cent of dairy farmers have indicated the need for additional working capital this year.

There has been a sharp drop in New Zealand rural confidence as the nation’s farmers face a strengthening currency, alongside ongoing global market and commodity price concerns.

The latest Rabobank Rural Confidence Survey – conducted across New Zealand approximately a month ago – shows 49 per cent of the country’s farmers now expect the rural economy to worsen in the next 12 months. Only 12 per cent expect conditions to improve.

This is the third consecutive survey to see NZ farmer confidence levels decline.

Rabobank general manager Rural New Zealand Ben Russell said the survey also showed that farmers were aiming to consolidate or lower debt levels to ride out the tough economic times and position themselves for better times ahead.

Mr Russell said the rising New Zealand currency had been taking its toll on farmer sentiment, with the NZ dollar now sitting at around US 63 cents compared to US 55 cents at the time of the previous survey earlier this year.

“This challenge is compounding ongoing concerns already being felt about declining commodity prices in some key sectors, along with worries about global economic conditions,” he said.

Mr Russell said that while farmers were rightly concerned about the impact of tough financial conditions upon their businesses, Rabobank remained confident that the food and agribusiness sector would be one of the first to benefit from recovery in the global economy, and that farmers were effectively adapting their businesses to the conditions.

The latest Rabobank Rural Confidence Survey found the number of farmers expecting the agricultural economy to worsen in the next 12 months (49 per cent) had increased from 33 per cent with that view in the previous survey. The number expecting conditions to improve (12 per cent) had declined significantly from 27 per cent previously.

Major reasons given for the decline in confidence were falling commodity prices (nominated as a concern by 57 per cent of respondents), overseas markets/economies (by 41 per cent) and the rising New Zealand dollar (32 per cent). Concerns about rising input prices also still figured as an issue, cited by 17 per cent of respondents.

Mr Russell said the most pessimistic of all sectors was dairy, with more than half of dairy producers (57 per cent) expecting the agricultural economy to worsen, up from 45 per cent in the previous survey. This change had followed Fonterra’s announcement that the forecast milk payout for the 2009/10 season would be 12 per cent lower than the previous season and would remain susceptible to further strengthening of the currency.

However, it was sheep and beef farmers who had experienced the most marked drop in confidence, Mr Russell said, with 44 per cent reporting a pessimistic outlook, compared to just 23 per cent last survey.

“This drop in confidence came despite strong farm gate prices for lamb,” he said. “However, farmers have been experiencing moderating beef prices and an uncertain outlook, given that consumers globally have been trading down from some higher value food items.

“Combined with the strengthening currency, confidence from sheep and beef farmers is reflecting the current market environment.”

A further contributing factor to lower confidence is likely to be a softer rural property market, Mr Russell said, with both land sale prices and farm turnover falling during 2009.

In line with their subdued outlook for the overall rural economy, farmers also had lower expectations for the performances of their own farm businesses over the next 12 months. A total of 35 per cent of those surveyed expected their own business performance to worsen over the next 12 months (compared to 23 per cent last survey), while only 22 per cent expected their business performance to improve (down from 34 per cent).

Mr Russell said the lower expectations around future business performance were understandable given dairy farmers were coming off very strong returns in 2007/08 and sheep farmers had received record lamb prices during the current season.

Overall, farmers’ investment intentions also fell in the latest survey, with 26 per cent now expecting to decrease their total farm business investment (compared to 21 per cent with that expectation in the previous survey). Only 16 per cent of farmers indicated they intended to increase their investment (down from 22 per cent previously).

Mr Russell said dairy farmers were the most inclined to reduce investment, with 42 per cent expressing that view and only nine per cent planning to increase. However, this change in sentiment was to be expected following several years of considerable investment and expansion in the dairy sector, he said.

“Sheep and beef farmers were more optimistic about investment, with an equal proportion (18 per cent) planning to increase and decrease investment and the majority (64 per cent) planning to leave investment unchanged,” Mr Russell said.

On the topic of debt, the majority of farmers were intending to maintain (55 per cent) or decrease (21 per cent) their current debt levels. Of those who expected to increase their debt, 15 per cent intended it to be used for additional working capital while just eight per cent planned to undertake further investment and property purchases.

“These results show that a number of farmers are likely to need working capital support over the coming year, but that most are actively seeking to consolidate or reduce debt,” Mr Russell said.

This is consistent with recent figures released by the Reserve Bank of New Zealand, which showed growth in rural debt for the first five months of 2009 of 4.7 per cent, compared by 9.3 per cent for the corresponding period in 2008.

Dairy farmers had the greatest need for working capital, with 28 per cent expecting to increase debt for this purpose. A total of 13 per cent of dairy farmers were intending to decrease their debt.

Conducted since 2003, the Rabobank Rural Confidence Survey is the only study of its type in New Zealand. The survey is administered by independent research agency TNS Conversa, interviewing a panel of 450 farmers each quarter.

ENDS

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