Farmer confidence continues to fall amid scepticism any RMA reform will improve things. Fed Farmers weighs in on RBNZ mandates

The Federated Farmers have published a couple of reports lately worthy of some comment. The first to be looked at is their biannual survey on farmer confidence. The information from the survey does not raise any eyebrows as it is consistent with the trend that has been increasing over the latest 12 months or so. Namely, confidence has continued to fall.

The survey led with responses with questions largely relating to economic conditions, government regulations and farm income and spending. The critical areas were: The January survey registered a steep decline in profitability, with a net 28.4 percent of respondents reported making a profit currently, down 26.7 points on July 2022. A net 81.8 percent of farmer respondents expected economic conditions to deteriorate over the next 12 months, 0.9 points down on the survey six months ago.

When asked to list their top three concerns, those who took part in the survey put climate change policy and the Emissions Trade Scheme at No 1. Debt, interest costs and bank pressure leapt to second place and at No 3 is regulation and compliance costs - a catch-all for the wave of reform, regulation, red tape and costs swamping the sector.

Andrew Hoggard, President of Fed Farmers used the RMA with its new proposed draft as an example “It took 30 years for the existing RMA and amendments to swell to a bloated and tortuous 800-plus pages. The call was for something simpler, less cumbersome and costly but the proposed new legislation is just as lengthy." The lack of specific concerns around climate change (as opposed to legislation about it) is perhaps more an indication of the survey questions which likely needed to match, at least in theme, those that have been done in the past. However, climate it does seem to have filtered through with 5.4 percent of respondents expecting their production to decline over the year (4.9 percent down on six months ago). The survey also took place during a more benign weather period, i.e. before the flooding that has occurred in northern parts of the country and also pre southern regions starting to feel the effects of potential drought. If done again now the percent expecting falls in production might be higher.

The second release from the Feds was their submission to the Reserve Bank on the consultation document “Supporting New Zealand’s Economic Stability Toitu te Ohanga”. This is a second public consultation on the five-year review of the Remit that guides monetary policy decisions.

Since being brought into force in 1991 the Reserve Bank Act has undergone several modifications. Initially its sole focus was to maintain the inflation rate (CPI) between 1%-3% with the caveat that some tolerance could be handled for short-term fluctuations outside the band especially if created by external events. The RB and governments have been criticised for just using the Official Cash Rate (OCR) as the ‘blunt’ instrument to achieve this and generally disregard other perhaps more social impacts which result from this.

However, since 2018 there have been a couple of changes to the RB mandate. The first was the addition of “The Reserve Bank of New Zealand Monetary Policy Amendment Act (2018)”. This addition brought supporting “Maximum Sustainable Employment” (MSE) into the picture. While it was likely always sitting in the background the amendment made it more explicit. While broader than just the unemployment rate this is the measure most used to monitor what is occurring in social circles. Just what the ‘correct’ rate should be is a little difficult to ascertain. However the evidence based on rates and RB behaviour seem to be that a band between 3% and 5% is in the comfort zone. Currently the unemployment rate is 3.4%, the lowest in at least 15 years. The RB defines MSE as the “maximum amount of employment the economy can sustain without creating inflation”.

The second change occurred in 2021. The Reserve Bank of New Zealand Act 2021 came into effect on 1 July 2022, replacing the previous RBNZ Act 1989. This change is more structural than directional with the setting up of a committee to oversee the running and direction of the RB.  “We are now overseen by an independently-appointed governing board responsible for all decision-making (except decisions made by the Monetary Policy Committee). The Reserve Bank Governor is a member of the Board as well as Chief Executive”. Perhaps it was this broadening of influences that lead to the introductions of the RBNZ applying restrictions upon commercial bank lending for housing. Regardless, the Loan-to-Value Ratio (LVR) restrictions while initially failing to achieve the desired results have along with the increasing OCR put the brakes on house prices.

It appears that the Feds would rather the RB get back to basics and just focus upon inflation (price stability) as it feels the MSE is an unnecessary distraction, a view it seems the leader of the opposition also holds.

The holding of this view by Federated Farmers is rational and understandable. Farmers wealth is created largely offshore and any inflation (within New Zealand) erodes farmers competitive advantage when dealing with other countries. Keeping the RBNZ’s foot on the inflationary throat is certainly to their advantage especially if competing countries are less determined in reducing it (this further aids NZ farmers competitiveness).

The Feds view is that other government agencies should be tasked with looking after the unemployment issue, they say; “However, as the Reserve Bank has recognised, having too many objectives for monetary policy (i.e., too much flexibility) should be avoided as they generate difficult trade-offs when they come into conflict. Monetary policy may not be the best way to handle multiple goals, with other government policies better placed. Too many objectives also risk reducing clarity and accountability. As we have previously observed Federated Farmers considers that including an objective for MSE pushes the boundaries of flexibility too far”. 

Although the RBNZ has been tasked with taking into account a broader view of the economy and was given some additional ‘tools’ to provide it with more flexibility, the reality is whether or not the MSE will create any changes to behaviour by them other than a bit of ‘hand wringing’ if and when the unemployment rate rise as a result of increasing the OCR (which is a likely outcome although the need for labour seems to have delayed this to date).