NEW ZEALAND-High dollar not helping our sheep, dairy prospects
Buyer reaction to high lamb prices coupled with a higher currency could be dual barrier for sheep farm earnings going into the next 12 to 18 months.
The currency could also cap emerging recovery in prices for dairy commodities as well, says ASB Bank rural economist James Shortall as he promotes a cautious view of the industry over this period.
Because of its agricultural base, Shortall says New Zealand will continue to well in world markets affected by the credit crisis and recession, as people still buy food. But he sees a "double whammy’’ of the recession putting a limit on demand and price growth, while at the same time the perception of NZ’s economy being better placed for recovery than our major rural sector trading partners will result in overseas investors pushing the dollar to higher levels.
This might surprise New Zealanders as they face up to a deteriorating economy and a Reserve Bank expected to cut the Official Cash Rate (OCR) by another 50 basis points (bp) to 2.5% at the end of the month in a bid to, among other things, keep the dollar from spiking higher.
New Zealand might be struggling, but the others are doing worse and that will be the biggest currency influence. Shortall says this factor puts "out of whack’’ the typical safety vale in the economy of the dollar falling in line with lower commodity prices.
"We think the OCR will bottom out at 2% and the dollar could come back in the short term. There might be a murky patch between now and later in the year, but we think it will increase again in three to four months.’’
ASB forecasts put the dollar in the US$0.60 to 0.65 range going into next year, up on the current 0.5722 (late last Friday morning) but still well below the mid to higher 0.70’s range it was in last year.
The dollar also came back slightly last week on the other major cross rates, to stg0.3836, E0.4344, and to Y56.86.
The ANZ-National Bank rural economist Kevin Wilson says a lower price, higher dollar outcome would not be a good scenario but accepts that anything can happen. " Even if you say there is just a moderately low probability of it occurring, doesn’t mean it won’t happen.’’
The ANZ-National view is that the NZ dollar is over-valued given the high debt levels here and the wide current account deficit, which would normally mean a weaker dollar. "At the moment we’re not seeing that and that shows how weak the US dollar is. People are seeing good reasons to invest in New Zealand.’’
On the product price front, ASB’s Shortall expects the in-market export lamb price to come back slightly from the current very high levels. Trade is being helped for the minute by a low sterling encouraging exports of UK lamb into Europe, leaving the UK market busy for NZ exports.
For beef and dairy, it might be a case of swings and roundabouts. A substantial US dairy cow cull will bring plenty of beef onto the US market, putting price pressure on other suppliers. However, fewer dairy cows will also lower US milk production and result in US milk powder stockpiles being used in the domestic market. Expected lower production in the UK and Europe will also help the milk price go higher, but Shortall says not to expect any big gains for a time yet.
