Rural confidence slumps to 4-year low: Rabobank survey

Australia's rural confidence levels have declined to a four-year low as dry conditions around much of the nation - compounded by the continued effects of high input costs - take their toll on farm sentiment.

The latest quarterly Rabobank Rural Confidence Survey found just 19 per cent of Australia's farmers expected the agricultural economy to improve over the next 12 months, down slightly from 20 per cent with that view in the previous quarter. However, the number of farmers expecting conditions to worsen in the coming year increased to 37 per cent from 29 per cent last quarter.

Farm sentiment is now at its lowest level since 2002, when much of the country was in the depths of drought conditions. Confidence has declined steadily over the past 12 months after rising strongly in the early part of 2005.

Rabobank head of rural banking Neil Dobbin said the weakness in confidence comes as a result of the "generally poor potential prospects for winter cropping programs around much of Australia".

Crop farmers in Western Australia and Victoria have been particularly hard hit and, while South Australia enjoyed a good start to the season, a dry period in June and July has adversely affected that state's crop prospects.

"Rain in spring across the nation will be critical to provide a satisfactory conclusion to the winter cropping season and to ensure adequate pasture and on-farm water supplies for livestock," Mr Dobbin said.

The survey showed that the dry conditions are having the biggest impact on Australian farmers' confidence levels. Of those farmers expecting the agricultural economy to worsen over the next 12 months, 57 per cent cited drought as the reason, significantly up from 26 per cent last quarter. Higher input costs also continue to be a large concern, cited by 32 per cent of respondents (compared to 42 per cent last quarter).

Mr Dobbin said there was no doubt that higher input costs were continuing to depress farmers' confidence levels, with the higher interest rate environment also adding to the burden.

"While the recent interest rate rise on its own won't have a significant impact on sentiment, the prospect of further rate rises is playing on the minds of many producers," he said.

Concern about the direction of commodity prices continues to moderate with only 21 per cent of respondents identifying this as a reason for weakening confidence, down from 33 per cent in the last survey period and 46 per cent six months ago.

"The increase in commodity prices is the major bright spot for Australian farmers with significant rises observed over the past year for grains, oilseeds and sugar and some improvement in finer wool prices," Mr Dobbin said. "It is unfortunate that many primary producers may well not be in a position to capitalise on these."

Farmers' income expectations and investment intentions have also declined, consistent with the decline in headline confidence. However, the decline in both these indicators was much less dramatic than the fall in overall confidence, with a majority of producers expecting stable or increasing investment and incomes over the next 12 months.

Overall, 35 per cent of respondents expected to have higher incomes over the next 12 months, compared with 39 per cent with that expectation in the previous survey. The number of producers expecting lower gross farm incomes increased to 28 per cent compared to 18 per cent last quarter.

The fall in income expectations comes after a mixed year for farm incomes in 2005/06. Overall 38 per cent of farmers reported higher gross farm incomes in the 2005/06 financial year compared with the previous year, while 34 per cent reported lower incomes in this period.

The number of farmers expecting to increase investment in their farm business was relatively stable at 27 per cent, compared with 28 per cent in the previous quarter. However, the number of farmers expecting their investment to decline over the next 12 months increased to 16 per cent from 12 per cent in the previous survey.

The survey found rural confidence plummeted in Western Australia, with a dramatic decline observed in Tasmania. Falls were also seen in Victoria and South Australia.

Mr Dobbin said the extremely dry conditions across much of Western Australia had resulted in confidence falling to record lows in that state.

"While recent rains have improved the outlook in southern areas of the state, the prospects for a reasonable state-wide crop remain bleak," he said.

Confidence remains low in Victoria with average to below-average prospects for winter crops in most areas, together with lack of water for livestock and the prospect of reduced water allocations for irrigators over spring and summer.

There was also a decline in confidence in South Australia.

"After an excellent start to the season, drier conditions around much of the state have adversely affected sentiment," Mr Dobbin said.

On the positive side, there were slight improvements in sentiment observed in New South Wales and Queensland, however, confidence remains weak in both states.

Mr Dobbin said widespread winter rainfall in New South Wales, after a very dry autumn, had contributed to the improved outlook with many farmers hoping to capitalise on the improved commodity price outlook. However, he said, decent follow-up rain was essential for a good finish to the season.

Rural confidence in Queensland continues to be underpinned by the positive sentiment among the state's sugar producers with some improvement also observed among beef producers.

Sentiment was weaker across all sectors with significant falls observed among grain and dairy farmers.

The dry conditions in the grain growing areas of Western Australia, South Australia and Victoria have resulted in the fall in confidence. The fall in sentiment has occurred despite strong rises in international grain and oilseed prices, Mr Dobbin said.

Confidence has also declined among dairy farmers with the slight fall in dairy prices, together with the uncertain prospects for both good pasture and water allocations for irrigators, negatively affecting outlook.

"Sentiment among beef and sheep producers remains weak despite a reasonably favourable price outlook for both sectors," he said. "Again here, the dry conditions are continuing to bite, affecting the condition of sale stock and with producers having to bear the cost of hand-feeding."

The survey showed sugar growers remain by far the most optimistic primary producers in the nation despite a moderation in outlook in the last survey period. "The fall in international prices in the last few weeks together with wet conditions affecting cane harvest have been impacting confidence," Mr Dobbin said.

The majority of farmers continue to be pessimistic over the direction of interest rates. With the survey taken largely prior to the recent interest rate increase, 83 per cent of respondents had expected higher rates over the next 12 months, up from 57 per cent last quarter. Only one per cent of respondents expected lower rates over the next 12 months.