With the Field Days in full swing and primary commodity prices at significant highs there is the expectation that the farming sector will increase its marginal propensity to consume – MPC. Some have suggested that farmers are deleveraging (paying off debt) however cashflows currently appear strong and with the recent payouts farmers seem to have a choice – investment is an option. With such high prices it is important that they “make hay when the shines” (sorry about the pun) so more investment is a strong possibility. In theoretical terms this relates to the Marginal Efficiency of Capital. The theory states that it is profitable to invest so long as the MEC (the % return) is greater than the rate of interest (the cost of funds needed to finance the investment). The OPTIMUM level of Investment is where: % MEC = the rate of interest
From the BNZ rural wrap
In addition, contrary to what some would have you believe, not all farmers have piles and piles of debt. Indeed, some have no debt at all. Indeed, agricultural savings seems to be rising in other ways judging by the $1.2 billion lift in agricultural bank deposits over the past seven months. Unfortunately, the lack of flow of funds or farmer spending data in New Zealand means no firm conclusions around spending can be drawn. But lining up the borrowing and deposit figures against the $3.3 billion increase in annual food exports over the past 12 months suggests some scope for more spending.