Farmers' incomes eroded by high Kiwi dollar

By NZPA

Wednesday 22nd January 2003

Economists are slashing hundreds of millions of dollars from their estimates of farming income for this year as the New Zealand dollar shows no sign of slipping from US55c.

If the kiwi stayed at current levels, sheep and beef farmers' gross revenue would be a further 5 percent lower than previously predicted, Meat and Wool Innovation Economic Service director Rob Davison said yesterday.

This would add up to $220 million less than expected in predictions made before Christmas. At the time he forecast that sheep and beef farmers would receive an average lamb price of $63.65 and a bull beef price of $3.32/kg.

But Mr Davison also warned that if the New Zealand dollar exchange rate rose 5 percent more than the predicted US50c or 32.5 pence, then the effect on farmers would be a pay cut of as much as another $19,200. Mr Davison said yesterday it looked as though sheep and beef farm profits in the lower half of the North Island would be $10,000 to $15,000 less than the $124,000 to $128,000 predicted, if the dollar stayed up.

"It's pretty exasperating," he said. "Farming's doing everything right at the moment." It had taken the gloss off what was expected to be a good year, though it would still be the second or third-highest year since 1973-74.

Still to go to market in the second half of the farming year to June 30 was about 50 percent of the wool clip, 70 percent of the lamb crop and 70 percent of beef production.

Beef revenue would be particularly hardest hit because of the dominance of the United States market, with wool and crops least affected.

The kiwi's 33 percent 12-month exchange rate rise against the dollar was only partly due to the weak US dollar, he said.

Interest rate differences between New Zealand and rest of the world also had a big impact.

"Higher interest rates available in New Zealand make New Zealand an attractive destination for short-term international money," Mr Davison said.

"While the New Zealand dollar continues to appreciate, short-term off-shore investors in New Zealand interest-bearing assets gain a double advantage.

"Firstly, they gain from higher interest rates, and secondly gain further from any further appreciation of the currency. Because this double gain is being achieved, this encourages further money to flow to New Zealand."

Mr Davison said that the exchange rate at US55c was still below the long run average of US56.3c for the past 17 years, and was not out of the ordinary for New Zealand farmers.

"Fonterra, which deals in United States dollars for 60 per cent of its sales, cited commercial sensitivity when asked about the affects of the rising dollar yesterday.

But a dairy industry observer said Fonterra jealously guarded its financial details from people outside the organisation, but said its returns would be hurt if the dollar stayed at around the 55c mark for the four to five months remaining in the milk season.

Asked if it was likely that Fonterra was hurting already, he said: "No, not until proved otherwise. Even with the loss of some sound people from the Dairy Board there are still some clever heads there."

In less than two years, five out of the eight key industry leaders who reported to Dairy board chief executive Warren Larsen have left the industry.

In addition to Mr Larsen, himself a global leader in dairy industry strategy, the sector lost Nigel Mitchell, Fonterra's global manager of trade strategy, who collapsed and died in May last year, and the cornerstone of its research and development, Dr Kevin Marshall, who has retired.

And at the time Fonterra axed its position of deputy chief executive and lost NZMP managing director Chris Moller, it also lost NZMP's chief financial officer, Peter Schuyt, and its group director of human resources, Jackie Lloyd.

Fonterra would have organised forward cover in case of a rise in the dollar and it also depended on how much product had been sold forward and at what price, the Dominion Post newspaper reported.

International prices for powder, butter and cheese had risen as well until last week, offsetting some of the dollar's losses. In fact, lifts of nearly 20 percent in international skim milkpowder prices and 15 percent in whole milkpowder prices in the run up to Christmas raised the hopes of some dairy farmers that Fonterra might lift its 2003 forecast payout back to $4/kg.

But Massey University agribusiness professor Bill Bailey said this week that world dairy prices, including butter, declined a little last week, with SMP, WMP, and whey powder dropping a little in several European markets. American SMP surpluses overhanging international markets will keep a lid on further rises, unless production this year in Australasia falls further than is currently expected.

According to the chief economist at ANZ Bank, David Drage, hedge contracts in sectors such as dairying may protect farmers for a while from the worst of the rise in the exchange rate. The New Zealand dollar had risen over 5 percent against the US unit since the start of this year.

Unlike the dairy industry, the meat sector usually does not take long term forward cover, and according to Meat Industry Association executive director, Brian Lynch, the strengthening New Zealand dollar usually means a US1c movement translates into NZ75c to $NZ1 off the price of a lamb sold in US dollars.

New Zealand meat exporters may also have to cope with increased competition in their markets outside the United States, because the weaker US dollar is strengthening the position of American exporters in regions such as north Asia.

In Europe, New Zealand's lamb sales have not been eroded as heavily, partly because the euro has also risen 10 percent against the US dollar.

And even though a lot of New Zealand's wool is bought and sold overseas in deals denominated in US dollars, farmers have seen relatively little direct effect at their national auctions.

Wool Exporters Council executive manager Nick Nicholson said a combination of market supply and demand has kept prices holding, and even moving upwards for crossbred and lambs' wools.

And in a plus for farmers from the exchange rate rise, fertiliser companies have announced price reductions.

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