PM says he's surprised currency has not fallen yet in line with 10-20% fall in dairy prices in recent weeks; says relative tightening of NZ monetary policy something for RBNZ Governor Graeme Wheeler to "keep and eye on"

PM says he's surprised currency has not fallen yet in line with 10-20% fall in dairy prices in recent weeks; says relative tightening of NZ monetary policy something for RBNZ Governor Graeme Wheeler to "keep and eye on"

By Bernard Hickey

Prime Minister John Key has expressed concern about the New Zealand dollar not falling after a slump in dairy prices in recent weeks, but he remains confident about the dairy industry's long term future.

Speaking on the eve on a Globaldairytrade auction where milk powder prices are expected to fall a further 10%, Key told reporters in Parliament he was surprised the New Zealand dollar had not fallen.

Whole milk powder prices have fallen 15% this year while the New Zealand dollar has risen as much as 5% over the same period, frustrating many dairy farmers and exporters expecting the automatic stabiliser effect of the currency and lower interest rates to soften the blow.

Fonterra slashed its 2015/16 payout forecast on January 28 by 45c/kg to NZ$4.15/kg and economists have further cut their own forecasts in recent days for both this year and 2016/17. See David Hargreaves' piece on Westpac cutting its 2016/17 forecast by 60c/kg to NZ$4.60/kg. Last week ANZ cut its 2016/17 forecast by 50-75c to NZ$5.00/kg and also trimmed its 2015/16 forecast to NZ$3.95/kg.

The New Zealand dollar was steady at 66.6 USc in mid-morning trade, despite expectations of another sharp fall on Globaldairytrade tonight. The relative strength of the New Zealand dollar followed a speech earlier this month from Reserve Bank Governor Graeme Wheeler that was interpreted as hawkish by financial markets, who see the Governor as a reluctant cutter.

The strength also follows fresh monetary policy easings by Japan and Sweden into negative interest rate territory, and more dovish comments about future interest rates by the US Federal Reserve and the European Central Bank. The combination has resulted in a relative tightening of monetary policy in New Zealand, particularly once added to a rise in foreign funding costs for New Zealand banks that ANZ has estimated to be the equivalent of a 25-50 basis point rise in the Official Cash Rate.

Key was asked if he was concerned that the currency had not fallen.

"I am slightly surprised given what the futures are showing, and generally speaking when the globaldairytrade auction is down the currency comes down a wee bit and actually it's been rallying in the last 24 hours, so actually I am a little bit surprised more than concerned," Key said.

Asked he was concerned about the Reserve Bank's reluctance to cut when others were cutting and creating a relative tightening here, he said: "Well, it's something for the Governor to keep his eye on. "

Key is generally reluctant to comment on the currency, but did say in September 2014 that he agreed with the Reserve Bank that the currency was over-valued and the 'Goldilocks' level was around 65 USc. Dairy prices are currently almost 30% lower than when he made that comment. Here is our September 2014 article.

'Good long term play'

Key was also asked what his message to dairy farmers was who now faced three years of losses with payouts under NZ$5/kg.

He said dairy farmers he spoke to in Southland over the weekend were generally upbeat.

"But once you get into a payout under $5, which we have now have been for a few seasons, then those farms that are carrying debt find it very difficult to be profitable at those levels, in fact, largely impossible. So the challenge for us is just to continue to do the things we are doing," Key said.

"The banks will work constructively for the most part with dairy farmers. I think from our perspective we've just got to keep increasing access to international markets and increasing the amount of science and innovation in that sector," he said.

Key said there had been a build up of dairy inventory in China, Russia remained closed and the petro-economies were buying less dairy.

"Longer term, if we look across all of the consumption based parts of our economy, particularly the agricultural, horticultural sector, the outlook is really strong. Because we see all of these middle-income consumers emerging, not just in China but right across Asia in general. So the medium term picture is really good," Key said.

"The short term picture is just dealing with these issues and, in fact, everyone thought and the world factored in that production would be lower out of New Zealand as a result of El Nino and in fact ironically it hasn't been," he said.

"My own personal view is that dairy is a good long-term play and that's because you can just see these consumers emerging. But there are always fluctuations and sometimes these things take a little bit longer."

'How long can they hold on?'

Key said a lot of dairy farmers could hold on for a long period of time.

"There will be some that will be under real pressure. But the banks generally work quite constructively because it's actually in their interests to work constructively with farmers," he said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

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I wonder what his short position was at 10am this morning, pre this signal.

Yes, as do a lot of us. Not normal surely for a PM to be commenting on currency exchange rates when he holds a large position in his "blind" trusts over in EU/London...

Normal market rebalancing is not occurring.......so is there something more sinister going on in the trading world of currencies and WMP futures contracts or is this a reflection that NZ is seen as a safe haven ??

We have a world where the people who lend to business can do other trades against that business.

I agree. Everybody wants a weak currency at the moment in an attempt to get through the downturn. I have been surprised by the strength of the kiwi. It all looks like an interest rate cut is on the way as part of the global currency war.

And some countries have been so aggressive in forcing down their currencies , its termed the "currency war"

.

The world of finance ruled by incompetent, unelected monetarists is full of surprises.

A small history lesson may be in order.

Great link!! Thanks

The NZD is the 10th most traded currency in the world. 90% of the trading has nothing to do with our economy so the price is mostly unrelated to anything happening here. There's obviously enough demand to support the price.

It's likely that traders are expecting worse news to crop up elsewhere so dumping NZD is probably not at the top of their list at the moment.

Don't be a naive dictator. The NZ's value has EVERYTHING to do with what's happening here: can't you see that our interest rates are uniquely high compared with other relatively stable world economies.
And the capital of these overseas investers is not going to depreciate: the strident proclamations of the RBNZ Governor to not reduce the OCR has ensured that.
In fact the recent forecasts of Roger Kerr of Pw in these columns predict a likely rise of the dollar towards the likes of 0.69 a little way down the track which will ensure a healthy gain on their capital.
And like it or not Roger's contrarian view has been more correct than not compared to the highly-modelled predictions of the economists of our four big banks: will the banks' economists'fall on their swords if Roger's predictions pan out ?

There's enough money in those accounts to cover the banks in the event of a collapse. What I would like to know is how much is actually local savings. I suspect were sitting pretty high on debt and traditionally very low on savings.

Low dairy prices should lead to the RBNZ governor lowering the OCR and the NZ dollar dropping. But as the governor is so sure that his predictions for inflation are going to be correct this time and hence not dropping rates, our interest rates are still very attractive overseas and so our dollar remains high.

High interest rates in NZ will attract speculative inflows of capital - thats Exchange Rates 101 - the RBNZ is continuing its dismal history of too little too late and too much too soon - I believe Governor Wheeler believes his prediction that the World really is flat will prove correct this time.

in voice

http://www.farmingshow.com/on-demand/audio/bill-english-minister-of-fina...
Jamie Mac No.1 fan chatting to Bill:
.... its going to be a three season down Bill, you just can't carry on capitalising cash losses against your balance sheet.....

and earlier
http://www.farmingshow.com/on-demand/audio/john-key-the-pm-120216/

A tip to sell ?

Careful what you wish for. NZD at US 46c ?? It went down from 88c to 62c and has taken a brief pause, so if we are half way down (the likeliest statistically, I believe) that suggests another 26c drop may be on its way....

Then what's left of all our houses, farms and businesses etc will be so cheap they will be bought by foreign interests

Yep and when it happens it will probably happen fast.

62 -26 = 36. Historically the NZD-USD rate has never* been below 39 which suggests that it's unlikely to happen even when things really turn to custard. Certainly seems the interest rates are about the only thing holding us up at 62 at the moment though and there's plenty of space between 60 and 40.

*(Never = back to the 1970s at least... I don't have data pre about 1975)

Aha, rats, never was that good at arithmetic. I thought I got a different answer last time, that would explain it.

As regards never, we have all sorts of money stuff going on around the world that has never happened before.

Perhaps our very knowledgeable PM with his undoubted expertise on currencies is yet to be enlightened over the tsunami of dirty money that is capable of swamping anything this country does in the trading area.
Frankly he needs a swift kick and be dragged screaming and kicking into the real world.

'nuff said.

Yes, and I'M SURPRISED that the prime minister can keep a straight face when he says that HE'S SURPRISED that the NZD didn't fall in line with the 10-20% fall in dairy prices.

Complaining about the currency is simply a distraction from failed domestic policies and provide a convenient means of avoidance . Rather than focus on high end differentiated products this government has perpetuated /supported a milk powder and Chinese middle class policy. The notion that a weaker currency will improve New Zealands trade balance or somehow make us all happier is flawed If New Zealand requires the support of a weak currency all it suggests is that the fundamentals are weaker than assumed .Crushing domestic puchasing power or becoming another Iceland is an interesting concept. Remember offshore investors /speculators do not vote

who would have thought?

http://www.stuff.co.nz/business/farming/76929565/landcorp-to-end-sharemi...
Landcorp will end its sharemilking contract with Shanghai Pengxin Group at the end of May 2017.
Landcorp chief executive Steven Carden intimated that the contract was not performing well commercially.

http://www.nbr.co.nz/article/landcorp-wont-renew-sharemilking-contract-s...

http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10805023

when this element held such value in obtaining OIO approval, or seemed to at the time..

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1078...

http://milknewzealand.com/wp-content/themes/nz/images/Decisionrequiredun...

http://www.interest.co.nz/news/71265/key-defends-shanghai-pengxin-invest...

Henry , a condition of the consent is that SPGLactively promote Landcorps consultancy business in China in addition to its products, and that New Zealanders would participate in the management structure overseeing the farms.Will this continue or have SPGL simply acquired Landcorp genetics and technology , whilst fleecing the OIO with a very tailored application . It is time for the OIO to review the original application , as this company is not all it appears.

Yes, not all it appears - but then as I think Henry is implying - it always looked/appeared to many as a poor OIO process/approval anyway.

Wonder when the government will wake up and admit the PRC government is smarter than them.

Pat
point 10
page 32
The Applicant must maintain its contractual relationship with Landcorp in materially the same terms as contained in the Agreements. The Applicant must dispose of the property in accordance with condition 22 if:
(a) the Agreements are terminated (other than termination at the expiry of the Agreements) and not replaced with new agreements that are materially the same as those that were terminated; or
(b) the Agreements are varied in a material way.

a pdf for saving, non?

and then we have
......but we don't want it ?
http://www.farmingshow.com/on-demand/audio/steve-carden-chief-executive-...

This will be interesting to see how this is going to play out.

Many will be scratching their heads as to what is in the best interests of NZ.

NZD is only half equation,USA is other half and it's perhaps a bit softer lately ,,one possible reason may be China selling reserves which some say is mainly in USA dollars there by flooding market a bit .

Maybe its time for farmers to start thinking ahead? Convert the farms that are within say a 50km radius of a main town or city to build houses. More money in it for them and it could then fund their next venture in another industry. Move with the times as they say, everyone else is told to do by this government.

Councils have rules on subdividing. ;-) Lifestyle blocks were essentially farms at some point. We used to lease a farm on a city boundary in the 80's. The city based elderly owner (who had never farmed), said that it was being kept in the family trust for future housing as one day the city would need it for housing and that is how they would make their real money. Went past it a few years ago and the old man's prediction had come true.

I am not at all surprised the Kiwi$ remains strong ................. just look at our interest ratescompared with our peers .

John Key knows this too , he is not stupid