ANZ Bank, the country’s largest agricultural lender, expects Fonterra Co-operative Group to pay farmers $5.75/kg milksolids (MS) for the 2016-17 season, with 50-60 cents of that attributed to the benefits from the declining local currency flowing through into the payout.
The bank’s forecast for next year is a step up from its forecast for Fonterra’s milk payout for the current 2015-16 season of between $4.25-$4.50/kg MS, which is below DairyNZ’s $5.40/kgMS estimate for the average farmer to break even.
The kiwi is headed for a 13% decline against the greenback in the 2015 calendar year, as a slump in dairy prices weighed on the outlook for the country's largest export and pushed down interest rates, while a stronger US economy lifted the greenback. It recently traded at 67.65 US cents, down from 77.97 cents at the start of the year, and from a peak of 88.35 cents in the middle of last year.
ANZ expects the kiwi to fall to about 59 US cents by the end of calendar year 2016 as the US continues its gradual pace of interest rate rises following its hike this month.
“A big part of the improvement in the farmgate milk price next year is around a lower New Zealand dollar view,” ANZ rural economist Con Williams said. “The second part of that is also that we do expect some improvement in international dairy markets as you move through the 2016-17 season although when and how much is still very much up for debate.”
Part of the currency benefit will come directly from lower spot rates, and part will come from the delayed benefits of foreign exchange hedging policies flowing through to the payout, Williams said.
Beef exports are also likely to benefit from the lower kiwi, as the US is traditionally the largest market for New Zealand.
Other New Zealand commodities likely to benefit from the lower kiwi include forestry and wool, which both count China as their largest market. The lamb market is now also more sensitive to movements in the kiwi/US rate given exports to China have expanded over recent years, he said.
