Westpac senior agri economist Nathan Penny says today’s 66c NZD is something of a windfall for sheep and beef farmers, but it may not last.
A 10% Fall in the value of the New Zealand dollar (NZD) against the United States dollar (USD) over the past year has made substantial contributions to commodity prices, some of which has flowed down to the farm gate.
In late February 2021 the NZD touched US74.4c and has since made its way in ups and downs to 66.4c currently.
If that fall was fully reflected in farm gate prices it would be worth close to $1/kg in milksolids and 60-80c/kg in meat prices.
In reality, the export companies hedge their foreign exchange requirements, and the calendar year brackets, two dairy seasons and two meat industry financial years.
Nevertheless, pastoral farmers are very fortunate that higher-than-normal commodity prices have not caused the value of the NZD to rise, as is usual.
The current farm gate milk price expectation is over $9/kg milksolids, lamb is at $8.50 and prime beef $6.
In the national accounts, the December 2021 Situation and Outlook Report from the Ministry of Primary Industries (MPI) said dairy export revenue is forecast to rise 10%, or $2 billion, in the current financial year, compared to FY21.
Meat and wool revenue is forecast to rise 6%, or $660 million.
The combined export revenue is estimated to be $32b, compared with $29b in FY21.
However, MPI does not estimate what proportion of that rise stems from currency exchange versus rising commodity prices.
ANZ senior strategist David Croy said the NZD is being buffeted by opposing crosscurrents, including rising commodity prices, 6% annual inflation, record unemployment and the rising official cash rate (OCR).
While 2021 was a bad year for the NZD, he expected it to slowly appreciate during 2022 to lie at US70c by year end.
Some US2c of the fall in the NZD occurred over January, during which time the S&P/NZX50 index also lost 9.5%, although it has since recovered about 3%.
But as central banks react to high inflation by tightening policy, global risk appetite and subsequently markets and economic growth, may experience a hard landing.
“In the past, episodes like that haven’t been kind to New Zealand or the NZD,” Croy said.
The low value of the NZD presents an excellent opportunity for export companies like Fonterra to lock in exchange rate risk for 12 or 18 months ahead.
Westpac senior agri economist Nathan Penny said the low NZD value meant more for next season’s milk price than the current season.
“Late last year we opened our 2022-23 seasonal milk price forecast at $6.90 and then by the end of the year we increased that to $7.50 purely on the NZD influence,” Penny said.
“As the NZD has moved lower in January, there will be upside risk to that $7.50.”
He said the lower NZD was reflected more quickly in farm gate prices for meat and wool.
“It is very influential on meat revenue and it has more immediate pass-through,” he said.
“Today’s 66c NZD is somewhat of a windfall for sheep and beef farmers but it may not last.”
Higher inflation, policy changes by central banks and sharemarket wobbles around the world were all holding down the NZD, he said.
BNZ currency strategist Jason Wong said if the NZD was going to perform then 2021 would have been the year.
“We had rising commodity prices, the global macro-environment was positive and our central bank was lifting interest rates ahead of other countries,” Wong said.
“Instead, the United States Federal Reserve started to speak more hawkishly and the tightening cycle began.
“From mid-year US interest rates started to rise and the USD reached new cycle highs.
“Whatever was happening in New Zealand was pretty much ignored.”
Over the past four months, the NZD cross rate against the Australian dollar has fallen from 97c to 93c currently, and Wong said the reasons lay with the perceived faster economic recovery in Australia.
Over the same period the NZD has lost 4c against the Euro and about 3.5p against the British pound.
“These rates are driven by what central banks are going to do and we believe the NZD is a little oversold at present, but not strongly so,” he said.
Wong said low NZD values against most major currencies are an opportunity for exporters to fix their foreign exchange requirements.
