Farm incomes hammered

Farmers are bracing for tougher times by cutting back on non-essential maintenance and other expenses. Picture / Wanganui Chronicle

Farming, which represents 15 per cent of the economy, has less money to spend, slowing growth and stoking expectations that the central bank will reduce interest rates this year.

A Meat and Wool New Zealand report said lower prices meant the average profit for sheep and cattle farmers would tumble to a seven-year low this year.

For Neill Blackmore, who runs 3000 sheep on 237ha, less income means delaying non-essential expenses and employing fewer workers.

"I've cut back on things like drainage and a shed for equipment," Blackmore, 56, said from his Southland farm. "Things are tight. A lot of people will make a loss this year."

Fergus McDonald, of Tyndall Investment Management, said the farming report "is further evidence the economy is going to be slowing and will probably be bringing forward the timing" of a rate cut.

"At some stage, the market will start anticipating a move down in interest rates," he said.

Early this month, Reserve Bank Governor Alan Bollard lowered his forecast for 2006 economic growth to 1.7 per cent from 2.4 per cent. That estimate might have to be cut again after Government figures last week showed retail sales stalled in January.

"The Reserve Bank is being too bullish," said Shamubeel Eaqub, an economist at Goldman Sachs JBWere.

He predicted economic growth would slow to 1 per cent this year from 2.3 per cent in 2005, prompting the central bank to trim the key interest rate from a record high of 7.25 per cent as soon as September.

Falling demand for wool and meat had exacerbated farming problems. Meat and Wool said wool prices would sink to a 40-year low this year. In the six months to December 31, prices fell 12 per cent, two-thirds of which was due to a drop in world prices as demand declined in China, where textile companies faced more stringent quotas from Europe and the US.

It said lamb prices would slump 15 per cent on average, to less than $53 an animal this year. It blamed oversupply from Australia and the UK and weak consumer confidence in Europe.

"Lamb farmers are really facing significantly lower prices from a year ago," said Doug Steel, an economist at Westpac. "It's going to pull back spending in the rural areas and that will flow through the economy."

A January survey by Rabobank found that sheep farmers' confidence was at a record low. About 83 per cent of farmers expect their economic situation to deteriorate and just 12 per cent plan to spend more this year.

"There will be some real sharp pencils out on what is being spent," said Rob Davison, executive director of Meat and Wool's economic service.

He said the average pre-tax profit at sheep and beef farms would fall 33 per cent to $52,100 this year. Gross revenue would drop 8.3 per cent to $281,000.

- BLOOMBERG