Friday, July 1, 2022

Dairy exporters feel the pinch

Dairy exporters will continue to feel the squeeze from high exchange rates for the next year, Treasury said in its latest half-year economic and fiscal update. The Government’s economic forecasters expect ongoing conversions of sheep and beef farms to dairying, along with further productivity gains and investment, to underpin growth of around 3% a year in dairy export volumes in the medium term., helped by deepening links with Asian export markets. Forecasters expected a hefty growth boost from the Canterbury rebuild, low borrowing costs, ongoing solid demand and higher prices for primary exports in the first half of the forecast period (which extends to 2016/17). “The high exchange rate will continue to constrain the New Zealand dollar earnings of exporters and import-competing firms,” Treasury said.

The external-sector analysis started with an expectation of good export growth (1.9%) in the 12 months to March 2013, helped by continued favourable weather conditions for the country’s main commodity exports, which were driven mainly by dairy exports, helping to boost a run-down in inventories in last year’s September quarter.

However, agricultural conditions were assumed to ease back to normal in 2013/14. The overall pace of growth of goods exports was forecast to drop to just 0.5% in the year to March 2014 – its slowest pace since March 2009.

Net export volumes were expected to make a positive contribution to economic growth, due to a slowdown in the Canterbury rebuild and a decline in the exchange rate.

The relative price of our goods exports to the price of goods imports – the goods terms of trade – were forecast to remain at historically high levels over the next five years, but an increase in the global dairy supply and an easing in global commodity demand thanks to weak economic growth among our trading partners had eased our goods terms of trade back from a 40-year high over the past year.

A recovery in global dairy prices over the past six months was forecast to be reflected in an increase in the goods terms of trade in the first quarter of 2013, with goods terms of trade expected to surpass their June 2011 quarter peak later this year.

“With Chinese per capita consumption of dairy products forecast to increase as Chinese incomes rise, global demand for dairy products is likely to strengthen over time,” Treasury predicted.

Global production costs were also expected to rise, a consequence of tighter environmental standards and increased land-use competition from biofuel and food industries putting upward pressure on global dairy prices of the next year, Treasury said.

“The ongoing scarring impact of the US drought on global meat supply should support prices until the later years of the forecast period.”

Treasury also acknowledged a raft of global downside risks which threatened that outlook, based on information from International Monetary Fund forecasts, with higher interest rates for farmer borrowers among the impacts.

Slower-than-expected world growth and less liquidity in the world would mean Australian and NZ banks faced a higher premium on their international wholesale borrowing, while at least some of the increased funding costs would be passed on to households and businesses.

Weaker-than-assumed global activity would also flow through to NZ in the form of lower prices for key commodity exports, particularly dairy, meat and forestry products, it said.

The good news was that NZ was still exposed to the relatively fast growing parts of the global economy, such as Asia and Australia, despite them being forecast to experience lower growth.

NZ’s terms of trade and demand for exports would therefore not fall by as much expected.

But lower terms of trade would lead to lower incomes, resulting in a more subdued outlook for household spending. An increased cyclical weakness in the near term would result in a higher unemployment rate, dampening pressures on wage growth and lowering incomes.

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