Cream evaporates for dairy farmers
The exchange rate is increasing the pain for dairy farmers, who face a $3 billion drop in income as dairy prices continue to slide.
Dairy prices fell 4.9 per cent at the GlobalDairyTrade auction yesterday and are down nearly 29 per cent in United States dollar terms to US$3595 a tonne since their recent peak of US$5042 on February 4.
The picture is even worse when the New Zealand dollar is added to the equation.
While a fall in the price of New Zealand's biggest export commodity would normally be expected to weaken the dollar, the combination of a rising official cash rate (currently at 3.25 per cent) and a weak US economy has seen it rise from US80.7 cents on February 4 to US87.7c today.
This means that when adjusted to the New Zealand dollar, prices have fallen more than 34 per cent.
The continued decline is putting pressure on Fonterra's forecast farm gate milk price of $7 a kilogram of milksolids for the season just starting.
ANZ has lowered its forecast for the 2014-15 season to $6.25/kg, 75c (10.7 per cent) lower than Fonterra's initial forecast in May.
The forecast for the season just ended is $8.40/kg.
"This represents an approximate $3b fall in dairy incomes from the record 2013-14 season," ANZ's economists said in a report.
The bank is forecasting dairy farm profitability to $1180 a hectare, 21 per cent below the seven-year average of $1485/ha.
"With interest rates rising and approximately 65 per cent of debt on short terms, combined with a drop in the milk price into the low $6s/kg, this quickly starts to see discretionary spending evaporate."
ASB said the biggest price falls at the latest auction were in short-term contracts, but prices on longer-term contracts also fell, suggesting buyers were confident of ample supply well into the new season.
"On top of New Zealand's bumper season, European production this year is thought to be several per cent higher than last year, and US production for the first quarter of 2014 is up about 1 per cent over last year," the report said.
"Furthermore, the outlook for feed in the US looks good, suggesting US production growth can continue."
Falling prices and rising interest rates are hurting dairy farmer confidence, the quarterly Rabobank rural confidence survey shows.
Dairy farmers were the main drivers of an overall drop in farmer confidence, with 25 per cent of the country's primary producers now having a positive outlook on the performance of the agricultural economy in the next 12 months, down from 42 per cent in the previous quarter.
Dairy is now the least confident of all the New Zealand agricultural sectors in terms of future outlook.
Sixty-three per cent of dairy farmers with a pessimistic outlook blamed falling prices, while rising interest rates were cited by 22 per cent.
"With the Reserve Bank now hiking the official cash rate three times over the past three consecutive months, and clearly signalling further rises are likely, it is not surprising that interest rates are weighing heavily on farmers' minds," Rabobank New Zealand chief executive Ben Russell said.