High commodity prices and the low New Zealand dollar value have favourably positioned farmers and orchardists at the beginning of the new financial year, rural analysts say.
Export prices are looking good across the board, except for wool, and the historically unusual combination with a low USD/NZD exchange rate means bright prospects for farm gate returns.
Milk is expected to stay above $9/kg milksolids, lamb at $10/kg and beef steady around $7/kg in the spring, Westpac senior agricultural economist Nathan Penny has forecast.
High commodity prices normally result in a higher NZD, but not at present.
Monetary tightening, higher interest rates and inflation and global financial worries have strengthened the US dollar as a safe haven for investment.
Smaller, riskier currencies such as the NZD have therefore fallen in comparison.
“The present combination of high commodity prices and low exchange rate is unusual – we often get one without the other,” Penny said.
Meat schedule prices rather quickly reflect the low NZD whereas milk price forecasts are seasonal and Fonterra hedges most of its foreign exchange requirements for up to 18 months in advance.
Penny said he believes commodity prices will stay high for the rest of this year and into the next.
However, the Westpac currency strategists forecast the NZD at US65c in September and 68c in December.
Those rates look a long way from today’s US61c, especially when the NZD dollar dipped in response to the lift in the Official Cash Rate (OCR) of 50 basis points, to 2.5%, by the Reserve Bank.
Read: NZD weakness lifts prices tide
While analysts are happy to explain how the high commodity prices and low dollar benefit our foreign earnings, they do not have a firm fix on where the NZD will go.
“The cross rate of the NZD against the USD is still very much a global story, as currency traders worry about energy prices and the likelihood of recession,” ANZ senior strategist David Croy said.
“It is tricky right now and we have a forecast of the NZD at US66c by the end of the year, but that is based on the expectation that the USD will weaken.
“Historically it peaks early in the tightening cycle, hence our pathway prediction, but that hasn’t happened.”
Croy said the increase in our OCR was overshadowed by the US consumer price index going to 9.2% when market expectations had been for something in the 8% range.
“The USD is still strong and Europe looks to be headed for recession, so the NZD remains in the risk-off position,” Croy said.
That sentiment is stronger with BNZ currency strategist Jason Wong, who said the NZD may dip below US60c within the next three months.
But farmers don’t want to get carried away with the currency benefits, as global recession will eat into commodity prices as food demand drops.
The expectation that the USD will weaken is more of a story for next year, not this one, Wong said.
A recent ASB commentary said it is going to be a while before the Kiwi takes flight again.
“A fresh bout of risk aversion among investors and aggressive moves by the Federal Reserve to boost US interest rates have helped snuff out any tentative lift in NZD/USD.
“Fonterra will have done something like 60%-70% of its hedging for the season but, with the NZD dramatically underperforming what we once forecast, the impact on its effective exchange rate for the season will be significant.”
The delaying effect of the hedging helps fix the farm gate milk price above $9 for this season.
