Dairy drags confidence down

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A slump in dairy farmers' confidence has seen Federated Farmers' new-season Farm Confidence Survey move into negative territory, with pessimists outnumbering optimists with regard to prospects for the general economy and farm profitability.

Commodity prices have fallen over the past few months, especially for dairy products which were down 30 per cent from February to June (and dropped further after the survey closed). With the exchange rate remaining stubbornly high, it's not acted as a buffer and this will be putting pressure on dairy farm incomes, albeit off a strong base from 2013/14's bumper season. Meat & fibre farmers' confidence has also fallen but remains positive, reflecting better international prices for sheepmeat, beef, and wool.

Production was generally good during the 2013/14 season, bouncing back from last year's severe drought. Most farmers expect to further increase production this coming season although some are concerned about the risk of an El Nino weather pattern causing a summer drought.

Most of the recent business confidence surveys have seen a pull-back in confidence levels, which is no surprise considering we are now in an environment of increasing interest rates. Farmers are particularly sensitive to higher interest rates, not just because the sector has high debt levels, but because higher interest rates are also underpinning the exchange rate which impacts on farm incomes. It is therefore no surprise that farmers are more pessimistic than the overall business community both about the prospects for the general economy and for their own businesses.

Despite being more pessimistic about their own profitability this has yet to be reflected in farmers' spending intention. Most farmers will still be making a profit so the pressure to slash spending is not as high as it might otherwise be. Other farmers might be looking to hold or increase spending to boost production while some might be finding it hard to reduce spending due to higher input prices.

Most farmers remain cautious about their debt, with little change in the proportions of farmers overall expecting to increase, reduce, or hold debt at current levels. Fewer dairy farmers expect to reduce their debt, reflecting lower expected discretionary incomes, but this is offset by more meat & fibre farmers expecting to reduce debt.

The agricultural labour market remains tight with farmers reporting greater difficulty finding skilled and motivated staff.

Regulation and compliance costs remain the biggest issue for farmers, with considerable anxiety about the impact of policies being implemented by regional councils on water quality and water allocation. This is followed by the exchange rate and by debt, interest rates, and banks, both of which have moved up sharply in concern from January.

Farmers' highest priority for the Government is monetary policy, followed by compliance costs, and fiscal policy. More farmers than usual want the Reserve Bank and the Government to do more to prevent interest rate increases and reduce the high, overvalued exchange rate.

As with the last survey the overall results mask both industry and regional variations.

In a turnaround from recent surveys dairy farmers are the most pessimistic across all the indicators. Meat and fibre is now the most optimistic.

The headline results from the Farm Confidence Survey:

A net 7 per cent of respondents expect general economic conditions to worsen over the next 12 months.

A net 4.3 per cent of respondents expect their own farm's profitability to worsen over the next 12 months.

A net 43.9 per cent of respondents expect to increase production over the next 12 months.

A net 12.9 per cent of respondents expect to increase on-farm spending over the next 12 months.

A net 23.7 per cent of respondents expect their farm debt to reduce over the next 12 months.

A net 21 per cent of respondents found it harder to find skilled and motivated staff over the past six months.

Respondents' biggest single concern was regulation and compliance costs, cited by 23.7 per cent of respondents.

Respondents' highest priority for government was monetary policy, cited by 19.6 per cent of respondents.

The web-based survey was in the field from June 30, to July 11, and attracted 872 individual responses. The next survey is in January next year.