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ASB sees dairy price fall hitting dollar, intererst rates

ASB’s latest Farmshed Economics Report says the sheer magnitude of the fall in dairy prices will have the beneficial effects of bringing down the New Zealand dollar (NZD) and holding interest rates at their current level. 

“With dairy prices down by 37% on a year ago, the NZD has finally come under some pressure,” ASB rural economist Nathan Penny says. 

“The NZD has passed its peak. We expect the NZD to trade at around 85USc for the rest of the year. The dairy price falls are also a major reason why we’ve pushed back our interest rate call. 

“All up, these movements go some way to softening the income blow for dairy farmers over the year. In addition, they bring back some balance to the risk picture. The one-way traffic cannot continue indefinitely; any further dairy price falls should induce a lower NZD, less interest rate rises or both.”

The next OCR increase is expected in March 2015 rather than in December.

ASB also says the outlook for the meat sector remains bullish.  

“While the lamb market is quiet, continued tight supply both here and in Australia points toward prices grinding higher over the season ahead,” Mr Penny says. 

“Beef prices also continue to hold up at a high level. In fact, continued high prices appear to have given beef farmers enough confidence to increase the beef cattle herd for the first time in eight years.

"The kiwifruit sector is showing signs of recovering from Psa with export values for the June 2014 year well ahead of expectations.”

More by Nevil Gibson

Comments and questions
2

How does this match with the monthly trade surplus being positive.

It seems from the data available that the amount of farms, the herd sizes and total production have increased in the last 4 years. Does this level the effect of F/G prices returning to average or just above average,

We import a lot of goods, a lower dollar will really really hurt all of NZ.

Low interest rates or low currency cross rates do not fix economic woes anywhere, that is proven, it is not the silver bullet, competitiveness is.

The gods (RBNZ, Govt) here have the balance so far out of quilter, real property is seen as the only safe place to store cash.

Dairy prices are getting hit hard worldwide and it is also having a knock on effect on cattle prices also.