With the Reserve Bank expected today to return the Official Cash Rate to where it was in mid-2022 comes a measure of how much of a psychological impact the rate has.
Federated Farmers has published its latest six-monthly farm confidence survey, which shows that profit expectations have fallen and risen almost exactly in synch with the OCR.
The Prime Minister and Finance Minister will undoubtedly try to claim credit for today’s OCR drop, and Christopher Luxon will continue to push his growth agenda.
But the Feds’ survey shows that, at least as far as farming is concerned, debt and its price will have a major influence on how farmers spend and invest over the coming months.
And that means it is the Reserve Bank rather than the Government determining the mood among farmers.
That mood is starting to become optimistic.
If the survey shows anything, it is that the rural sector is ready to open its cheque books.
And that will stoke economic activity in provincial New Zealand.
That may be just enough to save the government at the next election.
The jump in farmer confidence is due to more than just the OCR; higher commodity prices and a relaxation of some of Labour’s tough environmental regulations are also contributing factors.
But the synchronicity of the OCR and confidence stands out.
It also explains why Federated Farmers is putting so much pressure on the Government over the Select Committee banking inquiry.
The survey shows that farmer confidence about future profits began to plummet in January 2022, when the OCR began its fall from 0.75 to the 2.5 percent it reached by July that year.
Confidence began to recover last year with the election of a new government and the assurance from the Reserve Bank that the OCR had peaked.
The recovery in farmer confidence is not uniform. It varies according to the type of farm being surveyed and its location.
Dairy farmers are the most confident. Seventy-five percent expect they will make a profit this year, but meat and wool farmers are the least confident. Only 2.1 percent think they will make a profit this year.
But even that is an improvement. This time last year 26 per cent thought they would make a loss.
There are also big regional variations.
Obviously, given the confidence of dairy farmers, where dairying dominates, the regional confidence is higher.
Thus, unsurprisingly the Waikato-Bay of Penty has the highest confidence at 58.4 and the heavily sheep and beef dependent East Coast has the lowest at 11.9 per cent
Perhaps surprising is the high confidence level of the West Coast, 47.2 per cent, which must be a product of the growth in dairying on the Coast.
What will excite the Government will be that farm spending is bouncing back.
Thirty six per cent of farmers expect to increase their spending this year.
In another sign of the buoyancy farmers are expecting, 41 percent say they will reduce their debt.
All of this points to the role that debt plays in farm profitability and the importance of the Official Cash Rate.
It may be one of the weaknesses of the Reserve Bank Act that it requires the Bank to raise the OCR as inflation climbs and that very often that inflation is driven by the mass of the population who are not farmers but it is the farmers who end up paying the bill.
Of course, the OCR is not the only factor stimulating the increase in confidence.
The election of a National-led Government with at least 11 MPs representing rural or part-rural electorates has produced a different focus from the Government particularly on environmental policies like the Freshwater National Policy Standard.
The survey says regulation and compliance costs have overtaken Debt, Interest, and Banks as the top concerns for farmers, “reflecting continued frustration with complex and costly regulatory requirements.”
This category includes environmental, employment, health and safety, and industry-specific regulations such as animal welfare and traceability.
Debt, Interest, and Banks have moved to second place. Tight lending
conditions and financial pressures remain significant concerns.
Input Costs have risen to third place, with on-farm inflation still high, despite easing general economic inflation.
Fuel and fertiliser prices remain a key pressure point.
Climate Change Policy & the Emissions Trading Scheme (ETS) have returned to prominence, ranking fourth.
Uncertainty around policy direction and the impact on farm operations continue to weigh on farmers.
But it’s the cost of debt and banking practices that are currently dominating farmer politics.
Federated Farmers is due this morning to meet with the joint Finance and Expenditure – Primary Production Select Committees inquiry into banking.
The Feds have been campaigning on a wide range of issues but particularly the Reserve Bank’s capital asset rations.
These are designed to ensure banks have enough reserves to cover a one-in-two-hundred-years financial crisis.
As part of that, the Reserve Bank decided in 2019 to require trading banks to cover rural loans by holding more assets than for equivalent urban loans.
The differences are substantial. For urban loans secured by at least 40 percent of the value of the asset, a bank might have to hold 10-15 percent of the loan value as assets; for rural loans, the bank would be required to secure 60 percent of the loan and then hold 28 percent of the loan value as assets.
Federated Farmers claims this leads to farmers paying interest rates that are 1.7 percent higher than urban housing loans, although the Reserve Bank says the difference is nearer half a percent.
But the passion the Feds have brought to their campaign on the issue and the confidence survey results are real indicators of just how important debt is to farmers.
So today, when the Reserve Bank lowers the Official Cash Rate, there is likely to be celebrations in rural New Zealand and very possibly, sharing in the joy, will be the Government’s rural and provincial MPs who might just feel their re-election chances have improved.
