Economists tell farmers stay alert
The blizzard of economic information - good, bad but mostly uncertain - is making the dollarvolatile, but for farmers of all types it seems to roughly translate to ’’you have been warned’’.
Like urbanites, farmers will welcome the prospect of even lower loan interest rates, with the Reserve Bank strongly signalling it will drop the official cash rate (OCR) even further because inflation is uncomfortably low. But the flipside is a high New Zealand dollar exchange rate which is worrying the Reserve Bank and exporters, and on top of a shrinking global economy, forecasts nothing good for farmgate returns.
The Meat Industry Association has warned that exchange rate volatility, which cut into sheepmeat returns last season, looks like it will get worse in the new one. It would not be possible to give farmers an accurate picture on the actual price in overseas markets because any change in market price gets distorted by frequent exchange rate changes.
Association chief executive Tim Ritchie said financial uncertainty in the important European market because of the British vote to exit the EU would ’’significantly’’ hit prices meat exporters get in that market. He said another major sheepmeat market, China, was also being affected by world economic uncertainty, with the value of the New Zealand dollar increasing against the Chinese currency.
However the chief executive of the country’s biggest meat processor Silver Fern Farms was a little more upbeat, while acknowledging that a strong New Zealand dollar was ‘‘not positive’’.
Dean Hamilton said China appeared to have cleared much of the inventory that had overhung the market for 18 months and a slight recovery had been seen in Chinese payments for frozen lamb forequarter prices in the past two months. But it was difficult to be certain of this and much of the gain had been lost in the exchange rate, Hamilton said. Demand and supply dynamics had also to be weighed because consumers thought in terms of their own currencies, not in movements in New Zealand’s currency.
Demand had been ‘‘challenging’’ in the UK and Europe for New Zealand’s main export, lamb legs, for more than 12 months, he said. Also to be watched was the fall in the value of the UK pound against the euro. This could make the UK sheepmeat industry more competitive and a rival to New Zealand.
Hamilton said the MIA’S Ritchie was correct in saying exchange rate volatility would make it more challenging to give farmers the indication they expected of likely returns six to 12 months ahead.
In the dairy farming sector, now in its third year of low milk price returns, the countdown is on to Fonterra’s season forecast update, expected early next month.
Given market and economic signals, the money is on the national milk setter reducing its $4.25kg milk solids forecast. Fonterra declined to comment on the impact of the high dollar on its forecast. The Reserve Bank on Thursday said the high exchange rate was adding further pressure to the dairy and manufacturing sectors, and together with weak global inflation, was holding down tradeable goods inflation.
‘‘This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed.’’
The Kiwi dollar fell to US69.8C after the clear signal that an OCR cut(s) was coming but commentators said it was a minor response given the strength of the Reserve Bank’s message.
Adding to the economics info blitz, a new OECD-FOOD and Agricultural Organisation of the United Nations report has forecast only slow improvement in global dairy prices over the next 10 years.
Labour’s finance spokesperson Grant Robertson said the report suggests New Zealand dairy farmers won’t break even until 2019.
And continuing the theme of uncertainty, trading bank economists differ on Fonterra’s likely forecast. ANZ economist Con Williams said his bank’s 2016-2017 season forecast was still in ’’the high $4s’’.
‘‘But I need to highlight that I also think in August when Fonterra provides an update from their May forecast it’s more likely to be down than up.’’
The ASB said it was sticking to $6kg forecast.
Another red-letter date is the Reserve Bank’s next monetary policy statement on August 11. A bank spokesman said no discussion about economic pressures on the dairy industry, including the exchange rate, were possible until then.
On Fonterra’s forecast update, the ANZ’S Con Williams said every one cent movement in the NZ/US dollar exchange rate was worth 8-10c on the milk price. So if the recent New Zealand-us dollar cross of US73C had been sustained, 30-40c could have been wiped off the milk price to farmers.
Fonterra’s foreign exchange hedging position for the next 12 months seemed to cover about 50 per cent of sales.
‘‘Effectively they (the Reserve Bank) are saying another effect of a high currency is keeping tradeable inflation very low, so we can’t hit our inflation target so we have to take the OCR lower to get the exchange rate lower and get some of that tradeable inflation rate. That’s not so great from a farming perspective because it can influence some of their cost parameters like importing palm kernel extract or energy costs, but that’s only a smaller component.
‘‘The bigger one is revenue (from milk price) and the effect the exchange rate has on that.’’
Williams said farmers had been ‘‘pretty savvy’’ about keeping their interest rate contracts at short term since the global financial crisis which had been ‘‘the right place to be’’ because floating rates had sunk lower and lower.