High dollar negating dairy gains

EXTENDING GAINS: Prices at Fonterra's online dairy auction rose again as the drought continues.
EXTENDING GAINS: Prices at Fonterra's online dairy auction rose again as the drought continues.

Farmers are taking a cautious approach to the recent upswing in dairy prices amid fears the strength of the New Zealand dollar could sap the positive impact the United States drought is having on the market.

Prices at Fonterra's latest online GlobalDairyTrade auction this week rose 2.4 per cent to US$3249 (NZ$3925) per metric tonne. That's the fourth gain in a row and means prices have risen 21 per cent in the past two months.

The upward trend is being driven by the prolonged drought in the US, which is forcing up costs for Californian dairy producers, to the benefit of New Zealand farmers.

However there are doubts in the agriculture sector as to whether these gains are sustainable due to the high level of the kiwi.

The New Zealand dollar recently traded at around US82.65 cents, about 10 per cent higher than in mid-May when dairy prices had dropped.

Woodlands dairy farmer Roger Whyte said the rise in dairy prices was a good sign but the strength of the New Zealand dollar meant he would not see a big difference in the payout.

"Things will trend upwards as long as the dollar doesn't go up any higher to counteract that trend," he said.

His comments come a month after Fonterra, partly citing the high US exchange rate, revised its milk payout forecast range for the 2012-2013 season down 30c to $5.25 per kilogram of milk solids from $5.50/kg previously.

The price Fonterra gets at the online dairy auctions helps determine the payout it passes on to farmers. That, in turn, is closely watched as a lead into the rural economy, which has been subdued since the global financial crisis.

Farmers have chosen to pay down high levels of debt in the past few years, and a higher payout price is seen as a requirement for them to start spending in the broader rural sector.

Economists estimate Fonterra's pay cut translates to about $500 million less in the rural economy.

Whyte advised other farmers to budget based on a reduced payout of around $4.50.

Federated Farmers Southland dairy chairman Allan Baird said the market was recovering but farmers still needed to be cautious.

“Most dairy farmers would prefer to be back above $6 [payout],” he said, adding that with costs around $5, farmers still had to look at how to cut their spend on feed, fertiliser and labour.

The New Zealand dollar is expected to keep rising against the US dollar as US policymakers pump up their economy through quantitative easing, which has previously led to the greenback being weak.

“High dairy prices are buffering the impact of the high New Zealand dollar, but it looks as if the New Zealand dollar is winning the race,” said BNZ market strategist Mike Jones.

“Farm gate prices are still flattish from where they were a fortnight ago. We would still need to see a lower New Zealand dollar to shore up confidence in Fonterra's payout.”