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Bruce Wills says fiscal policy settings are to blame for the high dollar because the productive economy isn’t driving it up; it is government policy and spending choices. Your view?

Posted in Rural News

By Bruce Wills*

With drought being declared farmers will be looking at their costs with a fine tooth comb.

Of course a Feds membership is one to tick because it does get results.

One big one in a week devoid of much good news were Horizons’ councillors voting 10-2 to support the review of the Environment Court decision on the One Plan. 

There is still lot of water to flow under the bridge, but it is a start if you excuse a pun.

Given interest.co.nz reminds its users to push their banks hard, one conversation I had with a member rammed this home. To kill time on the recent Dairy Council tour of Northland his bus decided to do a financial ‘show and tell.’ To his amazement he owed the least but to his horror he was paying the most interest. 

His first action on getting home was to ring his bank and doing that saw his interest rate cut by 65 points.

He will probably need it because unbelievably, the West Coast is within a week of calling its first drought meeting. By next week I expect much of the upper North Island will officially be in drought. 

Federated Farmers has worked hard with the media to prevent the public assuming declarations are all about farmer welfare.  Social media is great but some of the comments I read following the Northland declaration are pretty callous, as they are wrong.

For farmers a drought declaration recognises that events have gone beyond their individual control but it is not their fault. Federated Farmers activated its 0800 DROUGHT (0800 376 844) feed line and the industry good bodies like Beef+Lamb NZ and DairyNZ have made farm support advice available. 

A declaration also means the Rural Support Trusts can coordinate and deliver farm advisory and counselling services. This advice is invaluable as it aids business recovery while helping individual families to cope with immense stress; both business and personal. 

Technically, Inland Revenue also has discretion on things like Income Equalisation. This allows it to accept later deposits than is usual but it needs to be arranged by a farm’s accountant. 

Another thing declarations do is that it confirms to the banks just how bad things are.  If farmers keep their banks fully informed it means they will work with them in return.  If not and you are a member please call us.

While benefits called Rural Assistance Payments are available, in reality, very few farmers qualify. These are strictly administered for genuine hardship and at the height of the 2010/11 drought fewer than 100 farmers out of some 25,000 commercial scale pastoral farms got one. That said, support from the Ministry for Social Development and Inland Revenue may prove beneficial to farm workers and their families. 

But all of this makes me shake my head at the New Zealand dollar. 

DairyNZ confirmed that Northland’s February milk production was some 20 percent down on 2012 while in the Waikato it was about 15 percent down.  The latest overseas merchandise trade statistics are in a word, ugly.

With a fair proportion of the dairy season left to run dairy farmers are either on once a day milking or looking at drying their cows off. Once that takes place it is the end of milking until August.

Drying off depends on feed and Federated Farmers Grain & Seed has identified enough feed in the South Island to fully support the North island. We are working with feed manufacturers to get feed economically into the North Island. This could extend the season for dairy but could also help sheep and beef farmers to get their remaining stock up to target weights too.

Driving to Wellington from the Hawke’s Bay I noticed two things. One was that the condition of livestock appeared to be very good but there were not many about. 

When you put dairy together with the way meat and fibre farmers have rapidly destocked over summer, New Zealand’s two leading exports are under the gun.

The North Island is now the centre for New Zealand’s sheep and beef cattle industry so New Zealand’s number two export is under as much pressure as the number one export. 

And we are not alone in the production misery stakes.  I spoke to our colleagues in horticulture, our number six export, and found they were finding things increasingly tough too.  

When you put all of this together I agree with the Reserve Bank’s Graeme Wheeler; our economic fundamentals provide no justification for the overvalued Kiwi dollar.  Of course we could print money but that is like throwing a hand grenade into a confined space. Like Wheeler, farmers believe our fiscal policy settings are to blame because the productive economy isn’t driving up the dollar; it is government policy and spending choices.

Of course we can expect short-lived uplifts in commodity prices but that will reflect supply concerns but won’t deliver a cash boon for farmers or the economy.

While not prone to bad news, I know the droughts over 2007-9 cost New Zealand $2.8 billion and were widely seen as tipping points for the last recession. It is why I stick by my observation that the dollar is a balloon and these drought declarations ought to be the sharp pin. 

If investors ignore reality that export income is being hit hard then they do that at their own peril. The financial effect of drought will cascade throughout our farming communities and is one message those investors keen on the Kiwi need to heed.

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Bruce Wills is the President of Federated Farmers. You can contact him here »

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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16 Comments

Fed farmers has become a very

Fed farmers has become a very effective lobby group for farmers. It does not mean that whats good for farmers is good for the rest of the country.
 In 1979 we were a $1.10 to the US$ and we were doing fine, whats changed?
 
 When I was young we always kept the sheds full of hay and had a silage pit which was buried for years. Now, Im amazed how few farmers have feed in reserve, every thing is pushed to the max, every inch of grass accounted for.
 Droughts are a fact of life you need to leave a little fat in the system. We need to move away from being so production focused.
 
  The 40 billion of Ag debt must be hurting ,especially with this cost structure, an unwise amount of debt.
 
 All exporters are struggling because our cost structure is too high, even with the high dollar, so why not do something about our cost structure first? That would be a help in good years and bad strong or weak dollar.
We are learning the impliction of Labours crazy spending and the new guy's are not much better.

Not just farmers though,

Not just farmers though, everything has become "just in time".
We lack resiliance in the system and economy and in fact for instance the second a utility tries to talk about having some it gets screamed down. Oh wait thats the cost structure you talk about isnt it?
oh dear.
regards
 
 
 

Fully agree

Fully agree Andrew......Farmers have forgotten the merits of storing up feed. Droughts or dry seasons are always going to occur they are just part of the cycle. You have to farm to the conditions that your area presents from time to time. You also have to have plans in place to manage all the variables that can occur.
 
Streamlining farming practices has to be relevant to the conditions associated with an area. The factory farming regime forgets to factor in periodic weather events that can and do occur. The more debt a farm has the less room to manoevre when issues arise.  If your working the farm to the bone each year and not building up reserves of feed and other necessities then your setting yourself up for hardship at some future point.
For some unusual reason all the issues that can cause problems often happen altogether or in a close timeframe. Such is the way of agriculture.
 
I really don't think this National Government is going to tackle the issues of cost structures. There is an incredibly amount of apathy in Political parties to ignore the compliance and regulatory costs that are causing problems. No-one ever said there is intelligence in Parliament mind you.
 
 

If investors ignore reality

If investors ignore reality that export income is being hit hard then they do that at their own peril. The financial effect of drought will cascade throughout our farming communities and is one message those investors keen on the Kiwi need to heed.
 
Interesting. Are the government's investment banking counterparties ill-informed in their desires to purchase our debt as they will necessarily be when they partially sell our energy assets?

There are I believe a number

There are I believe a number of significant chicken and egg debates re the exchange rate. Certainly government borrowing offshore to fund its deficit lifts the exchange rate, causing distress and loss of profits to trading industries, including our very important farmers. So it is tempting to say that cutting government expenditure is the answer (assuming increasing taxes was not the farmers' first choice). Even if cutting such expenditure in a significant manner was easily politically manageable (It's clearly not; despite the Nats' rehetoric, expenditure has of course climbed significantly under their governance), I suspect the exchange rate would climb even higher in a totally open exchange rate and monetary environment under those circumstances.  Foreigners would find other channels- primarily the commercial banks, as in the past- to invest in NZ in various forms.
Also a high exchange rate causes more unemployment, lower profits, and so lower taxes, than a more competitive exchange rate. So the overvalued exchange rate causes the excess government expenditure over taxes. Not so much the excess government expenditure causing the high exchange rate.
In logic then, take steps to lower the exchange rate to a competitive rate, and the opposite positive effects occur. Sales and profits up; employment up; welfare down, government expenditure in balance; and at a more sustainable share of GDP.
It may not matter. The drought may cause foreigners to head for the hills with their cash; and that may not be a bad thing in itself. (Although the drought is likely to be very bad, I gather, and I certainly wouldn't wish it on our farmers).  It may force the government to be a little more creative in its monetary and exchange rate management, and I wish they would so so without a drought forcing their hands.

Hmm, food for thought there.

Hmm, food for thought there. So a higher than ideal exchange rate sets off a sequence of positive feedback effects that take it higher.
 
Perhaps we need a good scare story to create a sense of crisis that in turn sets off a sequence of positive feedback effects that take the dollar down, down, down. Oh, no, hold on a minute, that might not be a good idea either.
 
Having said that there seems to be a line of research that a bit of boom and bust can sometimes be a good thing.

Not so much research as

Not so much research as conjecture, especially in the Austrian camp. Pain is considered good especially by those who dont have to suffer it....funny that.
I dont see we want the exchange rate to go down too much (say < 0.7), but some yes seems on balance a good thing, say 0.75.  If the OCR is a good control for that then dropping it in 250 basis points and gauging the effect seems quite a doable approach.
regards
 

Yes there is a lot of

Yes there is a lot of conjecture, much of it assuredly self serving and along the lines that pain is good for other people.
 
However, I was thinking more about the research into such periods as late Victorian Britain where the railway boom and bust left behind a cheap transport sytem that was probably one of the more significant causes of the dramatic increase in wealth that took place.

Yet lots of those tracks were

Yet lots of those tracks were ripped up as they didnt make money, same here in NZ...so it was a waste, real capital was lost, I dont see how that is good for our economy write now ie this has no context in a County's economy today IMHO.
regards

The idea is that if useful

The idea is that if useful stuff is left behind and the debts are written off then the unduring legacy can still be a positive. Mind you, those Victorian engineers made such durable stuff, London still runs on their sewers and water systems.

A good scare story is much

A good scare story is much better than the actual scare because it will lead us to start the correction that is necessary sooner rather than later when the necessary steps will become much harder.
Taking steps on other economic pressure points such as immigration and non resident property ownership earlier would have reduced the Auckland property nightmare for first home buyers as a perfect example.
Imagine if Greece had been given the shock a year or two earlier and they would not be goning through the heartache they let themselves into finally.

Yes, the "boom and bust is

Yes, the "boom and bust is good" idea  rests on the theory that small, frequent and discrete forest fires are preferable to infrequent major conflagrations. 

Except its conjecture, just

Except its conjecture, just where is the evidence that would turn this speculation into a justifiable theory.
regards

The idea appears to offend

The idea appears to offend you. The ideas of Minsky that stability breeds complacency which leads to instability seems perfectly plausible and inoffensive to me.
 
If you want speculation I would suggest that the high dollar is because of the brilliance of four hundred rather deranged men in turbans living in caves who set out to destroy the American Empire by provoking it into engaging in massively expensive extensive conflicts with long supply lines. They did this because, from their point of view, it was how they destroyed the Soviet Empire.

I read one Reserve Bank

I read one Reserve Bank report that said that after agricultural production and prices, housing was the next biggest influence on the exchange rate. So the housing boom in our city's affects our rural economy too, because it is slowing the exchange rate response to the drop in output from the rural economy. I am little busy to search for the article but maybe someone can find it?

Found it, "We show that the

Found it, "We show that the NZ $ exchange rate can be explained quite well by the movements in commodity prices, relative price inflation and the NZ current account since it was floated in 1985 (P.15)". And the corresponding graph on page 6 has to a contender for the best of the week.  http://www.rbnz.govt.nz/research/analytical/an2012_2.pdf