Exchange rate pushing down farm incomes

Waimarino Bulletin, Volume 5, Issue 21, 28 October 1987, Page 6

Exchange rate pushing down farm incomes

The following comments are made in respect of the average New Zealand sheep and beef farm based on the New Zealand Meat and Wool Boards' Economic Service Sheep and Beef Farm Survey. Changes in the exchange rate affect farm incomes in two ways - 1. By altering the farm gate receipts for exported production. 2. By altering farm input prices for those items imported directly from overseas. Analysis shows the following movements in farm gate prices for a 10 percent movement either way in the exchange rate in 1987, other things being equal:

Assuming that the NZ$ has revalued against the • basket of currencies since the original farm incomes estimates were prepared in July-August 1987, the following adjustment can be made to the 1987-88 farm income estimates. (i) Gross Income For each 10 percent revaluation, gross incomes on average will fall by 12 to 13 percent. Original gross - $128,500 Revised Gross $113,100 Change $15,400 (ii) Expenditure A 10 percent revaluation would lower on-farm expenditure by 1.1 percent. Approximately 15 percent of inputs into farming are imported directly so the "first round effects" of a revaluation would be as follows: Original farm expenditure 1987-88 - $103,700, less interest - $26,200 totals $77,500. Import content $11,600. A 10 percent revaluation

would lower farm expenditure in round figures by $1,100 to $102,600, a decrease in expenditure of 1.1 percent. Summary -

The above summary of the effects of a 10 percent revaluation on the farm income position assumes that 50 percent of the fall in gross farm income is absorbed by lowering onfarm expenditure, with the remaining 50 percent reducing net income. This can be debated for the following reasons: (i) With expenditure already very low it will be difficult for many farmers to further reduce expenditure, therefore a greater cut in net income could occur than shown above. (ii) Where borrowings are high there will be a tendency to want to reduce debt, here every attempt will be made to lower already low levels of expenditure, and to maintain net incomes to enable this to occur. Note: On the figures above the net income per farm, in real terms is the lowest recorded since 1960-61. In the 12 months to September 1987 the following currency movements have taken place against the NZ$: US $ - +32% UK - +17% Japanese Yen - +25%.

De- Revaluation valuation Lamb +22% -18% Mutton +36% -32% Beef +15% -12% Wool +11% -10% Gross farm income +14% -12%

Original Revised Estimate at US 60c at US 66c Gross Income $ 128,500 113,100 Expenditure $ 103,700 (102,600) Expenditure Revision $ - 94,900 Net $24,800 18,200 Ci>.I. 4,399 4,399 Real Net Income per fann $5,600 $4,139