- Dairy price bounce takes some pressure off beleaguered farmers
- But high NZ dollar puts pressure on exporters
- Central Bank may be forced to cut rates to rein in high dollar
A sharp bounce in the price of milk is a welcome sign for Manawatu dairy farmer Andrew Hoggard. But it is a headache for New Zealand's central bank as the ensuing surge in the 'kiwi' dollar threatens to undermine the export-led economy and force more rate cuts.
Whole milk powder prices – the staple of New Zealand’s dairy export basket - reached one-year highs this month as a global supply glut showed signs of easing.
"Things are still very volatile out there but there are enough signs around us that we can err on the side of thinking it's potentially the start of a recovery," said Hoggard, whose dairy farm north of the capital city of Wellington handles 550 cows.
Indeed, the price recovery is bringing some relief to farmers - 85 percent of whom are still operating at a loss - and giving a boost to the dairy sector, which accounts for around a fifth of New Zealand's export revenue and remains the backbone of the Pacific island nation's economy.
The trouble is the milk bounce is fueling an upswing in the New Zealand dollar, making it tough for other exporters and sectors such as tourism - a potential risk for the economy which grew at its fastest pace in two years in the second quarter.
That is putting the onus on the Reserve Bank of New Zealand to cut rates again from the current record low 2.0 percent - if not at Thursday's meeting, then soon after as the high local dollar is also crimping already low inflation.
"We expect further policy easing to be signaled, leaving the door well and truly open to a November cut. The strong NZD will continue to make it difficult for the bank to meet its inflation objective," said ANZ chief economist Cameron Bagrie.
The central bank, which has cut rates twice this year, has repeatedly said the kiwi needs to be lower to support the export-led economy. In fact, at its August rate review the RBNZ said it opted to cut rates by 25 basis points to a record low of 2.0 percent as "additional monetary policy stimulus is needed to help lower the exchange rate."
STRONG KIWI PRESSURES EXPORTS The kiwi, as the New Zealand dollar is popularly known, has been underpinned this year by the country's attractive policy rate compared to negative or ultra low rates in Japan, Europe and the United States.
It is around 17 percent higher against the U.S. dollar from a year ago, and is heading toward parity with its Australian counterpart for the first time since the two currencies were free floated.
This is pressuring sectors such as meat exporters, which make up over 10 percent of New Zealand's overseas sales.
Murray Brown, general manager sales for Alliance Group Ltd., a New Zealand meat cooperative, said the kiwi's move was too "big a hurdle" for exporters to recover through prices and a lower currency "would definitely be better."
Tourism, which at NZ$30-billion-a-year is New Zealand's biggest export earner, is another sector facing a bumpy ride.
"A strong New Zealand dollar does provide a headwind for tourism," said Tourism Industry Aotearoa Chief Executive Chris Roberts.
To be sure, the kiwi is also taking some of the gloss off the bounce in the dairy sector, which has been crunched in recent years by a slowdown in major consumer China and the supply glut.
Dairy prices are still around half of what they were in 2013 even after a 30 percent jump since early August. .
On Wednesday, dairy giant Fonterra Wednesday raised its forecast payout to its farmer shareholders for the current season. But Fonterra Chairman John Wilson cautioned that the high New Zealand dollar "is offsetting some of these gains" in milk prices..
All of this may prompt RBNZ Governor Graeme Wheeler to deliver an explicit easing message on Thursday.
"Governor Wheeler isn't going to stop the runaway kiwi train by shouting at it, more action will be required," said OM Financial economist Stuart Ive.
