Dairy prices head south, as interest rates head north and the NZD remains strong, say ASB. Improving sheep sector incomes not out of the woods yet

Dairy prices head south, as interest rates head north and the NZD remains strong, say ASB. Improving sheep sector incomes not out of the woods yet

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The record dairy price run has come to an end, according to the first ASB Farmshed Economics Report.

“Overall GlobalDairyTrade auction prices have declined a tad under 20 percent since February,” says ASB Rural Economist Nathan Penny. “And this may be enough to take the cherry off the top of this season’s record farmgate milk price.”

“Driving prices down is a stellar late season production run. We expect milk production to be up 11 percent this season compared to last, so in this sense, production giveth, but it also taketh away.”

Meanwhile, lamb prices continue to improve, with prices averaging 18 percent higher than the same period over 2013.

“We expect lamb prices to continue to rise over the remainder of the year due to improving international demand and tight local and Australian supply. However, prices remain below the five-year average for this time of year, with the lingering effect of drought still slowing down production.

“With wool prices going nowhere fast, it’s going to be another season before the sheep sector incomes return to pre-drought levels,” says Mr Penny. 

Turning to the financial markets, interest rates are marching upwards following the RBNZ’s March Official Cash Rate increase. Moreover, the RBNZ has signalled more increases to come. “We agree that another 25bp rise is on the cards this month, but are not as convinced about the extent of subsequent hikes implied by the RBNZ forecasts.”

The NZD has lifted around 5 cents against the USD since the end of January as commodity prices hit or neared record highs and the RBNZ began lifting the Official Cash Rate.

“A firmer USD is the key to a lower NZD/USD exchange rate in 2014.  However, if the USD remains weak then the NZD/USD may stay stronger for longer.”

Outlook

ASB expects dairy prices have further to fall says Mr Penny. “Overall prices have roughly another 10 percent to come down from today’s level before they begin to stabilise and recover.”

“Looking at the meat and wool sector, we expect lamb prices to keep rising over the remainder of the year, while beef and wool prices are set to tread water.”

Interest rates are set to rise steadily over the next two years concludes Mr Penny. “In contrast, we expect the NZD to ease back from current highs.  Although, crucial to this outlook is an improving US economy and a firmer US dollar.”

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