Difficult balancing act protecting farmer incomes

Extreme weather patterns are a big worry. The US Midwest’s worst drought in 50 years is pressuring already volatile farm commodity prices. 

The region is a key world grain producer, with good soil, favourable climate, up-to-the minute technology and an educated workforce. The drought-diminished output of corn, wheat and soybeans will begin to affect the world food chain. 

Europe isn’t faring much better. A heat wave in Russia (the region’s largest grain producer) and the UK’s dry spring and wettest summer since records began in 1912 have also hit grain crops hard. 

The agricultural food chain is interlinked: if one area is impacted so will others be. An example is pork, the supply of which in the US is at its lowest since 1975 due to rising feed costs. Pigs eat mostly corn and the cost of feeding a pig to slaughter weight is now greater than the price a farmer gets for pig meat, hence a rush to slaughter and a tightening supply.

But the recent bumper grain crop in Canterbury could benefit our grain producers with higher prices overseas. New Zealand’s agriculture exports are rising but offshore commodity prices remain volatile making our returns hard to forecast. 

Also, farm expenses in every category are on the rise, therefore help is needed and the time is right for the Reserve Bank to start slowly start bringing down our base interest rates; the calls are growing louder for a cut following a 25 basis point cut early this month by the Australian reserve bank.

The Australians cut their base rate from 3.5% to 3.25%, causing the Aussie dollar to drop rapidly against the US dollar and, to a lesser extent, our currency to drop against the US dollar, because the global market sees the Aussie and Kiwi dollars as interlinked. As our base interest rate sits at 2.5% there is room for a 25-point basis point cut soon, likely to help bring our currency down over the long term short-term to bring interim relief for Kiwi exporters. 

The Reserve Bank wants to keep interest rates up for fear of inflation. But our inflation is at a record low. And lower interest rates mean consumers will get less return on their savings at a time they’ve been told to save more – hardly a great incentive when interest rates are at record lows. 

Lower mortgage rates will help many but may also put upward pressure on house prices – something the Government is trying to avoid because of inflation problems and housing affordability.  

Again this is a difficult balancing act. It is not as simple as saying reduce the interest rates or print more money because these things affect the whole economy and can be catastrophic. The kiwi dollar is strong because the fundamentals of our economy are stronger than those of the US and Europe.