KIWI dairy exporters are struggling with the high New Zealand dollar but savers and importers continue to win from the Reserve Bank of New Zealand’s decision to lift the official cash rate (OCR).
The RBNZ announced a 0.25% hike in the OCR to lift the rate to 3.5% but signalled further rate rises were unlikely because of the slowing economy.
The New Zealand dollar fell more than a cent to US85.80¢ after the announcement on Thursday.
«With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall,» RBNZ governor Graeme Wheeler said.
«It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level.»
The RBNZ’s view that the exchange rate will drop from its current »unjustified» level will be a relief to farmers but the immediate rise in the cash rate to 3.5% will hurt, as the continued high exchange rates squeeze exporter margins.
Federated Farmers of New Zealand general policy manager Nick Clark said: «There is a lot of concern about exchange rates and interest rates.»
In common with Australian exporters, there «is frustration that with the fall in commodity prices, the exchange rate hasn’t come back as expected», he said.
Dairy prices have fallen about 35% since the start of the year.
«We thought there was probably a case to keep the OCR on hold today,» Mr Clark said on Thursday, citing weaker economic indicators and falling commodity prices.
It is not only the exchange rate that exporters are concerned about but also the effect of the OCR increase on interest bills.
«Part of the concern is the interest bill farmers will have to face,» Mr Clark said.
«There is about $NZ53 billion ($48.7 billion) of debt in the farming sector, two-thirds of which is in the dairy sector and about half of that debt is held by 10% of dairyfarmers.»
Of further concern is the all important Fonterra milk solids payout price (the farmgate price Fonterra pays for a kilogram of milk solids), which looks to have fallen dramatically ahead of its announcement after next week’s Fonterra board meeting.
«It’s looking more likely to be about $NZ6 [from $8.40 last year],» Mr Clark said.
«For a highly leveraged dairyfarmer, $6 is about the break-even point once interest is paid.»
The concern is shared outside of the farming sector.
ANZ New Zealand senior economist Mark Smith said: «Dairy prices are down around 35% since January and forestry is weak.
«Exporters will be very quietly cheering [the likely halt in rate hikes] from the sidelines, although the currency is very high and unjustified.»
ANZ New Zealand’s rural economist, Con Williams there was also concern that the rate hike would hit the sector early as a high proportion of dairyfarmers were on short-term interest rates «which will be passed through pretty quickly».
On the other side of the ledger, importers, savers and overseas travellers continue to be supported by the New Zealand dollar.
Mr Smith said: «In the context of the longer-term average, it is still very favourable for the import sector.»
Interest rates are also getting better for savers in New Zealand, at the expense of borrowers.
«Borrowers will be paying a bit more, as we’ve seen some rates going up. We could well see pressure on deposit rates going up,» Mr Smith said.
Source: The Australian Dairy Farmer
