KEY POINTS:
The threat of rising interest rates, a strong dollar and lower lamb prices have seen farmer confidence drop for the third survey in a row, says rural lender Rabobank.
Forty-three per cent of farmers in February expected the rural economy to worsen in the next year, compared with 37 per cent in December.
But a lift in forecast payout by Fonterra has seen more optimism from dairy farmers in the latestbi-monthly survey.
And Rabobank's rural general manager, Ben Russell, said the overall confidence level was still better than in February last year, when 75 per cent of farmers expected the rural economy to get worse.
The new survey was conducted before the latest Reserve Bank rise in interest rates, and Rabobank said the results reflected farmers' anticipation of that rise, and its impact on their borrowing costs and the dollar. More than half expect expect further rate increases.
The dollar had also been strong, floating around the US70c mark this year.
A "mixed" outlook for commodity prices was making farmers nervous, with the biggest confidence decline among sheep farmers. Fifty-seven per cent of them expected the rural economy to worsen, compared with 43 per cent previously.
Falling lamb prices and an expectation of further falls were probably the biggest contributor to this drop, Russell said.
Beef farmers' confidence had also dropped, with 40 per cent being pessimistic - an increase of 5 percentage points.
Russell believed the fact that most beef farmers also ran sheep could be a factor in their pessimism.
However, in the wake of Fonterra announcing it expected to add a further 10c/kg of milksolids to payout, there had been a 7 percentage point drop in the number of dairy farmers expecting conditions to worsen.
Despite the confidence declines, investment intentions continued to remain relatively stable, with 82 per cent expecting to increase or maintain farm investment over the next year.
Seventy-seven per cent of farmers expected their incomes to decrease or stay the same, with the same percentage expecting an increase in costs.
Russell said it was frustrating for farmers that the high dollar was eroding the returns they received.
The Bank of New Zealand has previously pointed out that strong global commodity prices tend to push the dollar up. But Rabobank said it remained confident long-term supply and demand factors for dairy, beef and lamb would remain positive.
