Talk Money: December 16, 2015

Tony Field (Paul Henry)
Tony Field (Paul Henry)

Dairy prices have edged up this morning at the latest Global Dairy Trade auction. But they did not rise by as much as the markets were expecting or farmers were hoping.

The average price rose by 1.9 percent.

Whole milk powder prices increased by 1.8 percent on average to US$2,304 per metric tonne.

That compares to this year's high point of $3,272 back in February and the low point of $1,590 in August.

It is a long way from the $5,000 price that whole milk powder reached back in 2013.

Fonterra needs to see whole milk powder prices rebound to $3,000 to be confident about its forecast payment to farmers.

THE PAYMENT TO FARMERS

It is predicting a payment to farmers of $4.60 per kilogram of milk solids. It is also forecasting a dividend for shareholder farmers of between 45 and 55 cents. Some of the dividend will be held back by Fonterra for investment, but it means a fully shared up farmer is looking at a payment of around $5.00.

The problem with that is the average farmer needs a payment of $5.40 to break even this season. Those with high debt levels need an even bigger payment.

The Reserve Bank says only one in five farms is expected to break even this season. Four of out five will face negative cash flow.

Half of farmers made a loss in the 2014/15 season. So a second poor season is going to put real pressure on many farmers.

Loans to farmers have risen by around 10 percent, with dairy debt now totalling $40 billion.

The RBNZ has been so concerned about dairy debt that it recently asked the banks to run stress tests to see how they would cope with a rise in defaults.

Depending on the scenario, 2 percent to 14 percent of farmers could default.

The RBNZ has asked the trading banks to work with farmers to try to help them through the downturn.

Some farmers have postponed new spending and it is the reason that herd numbers are down.

New figures show the number of dairy cattle in New Zealand slipped to 6.4 million in June, compared to 6.7 million a year earlier. It is the first time the numbers have fallen since 2005.

THE DOLLAR

The New Zealand has edged down this morning.

It was trading at 67.52 US cents, compared to just over 68 cents yesterday afternoon.

The Kiwi lost ground along with other currencies as the US dollar rallied. Tomorrow at 8am New Zealand time the Federal Reserve will announce whether it is hiking interest rates for the first time in almost a decade.

Higher interest rates would make it more appealing for investors to put their money into US banks. That will drive up the value of the US dollar.

A rate hike is widely expected. So much of the focus will be on what Federal Reserve chairwoman Janet Yellen has to say about the future path of interest rate movements.

The currency markets could be volatile tomorrow because the traders will interpret and reinterpret every word she says.

The Kiwi was sitting at 93.98 Australian cents this morning.

It was trading at 44.83 pence, 82.13 Japanese Yen and 61.78 Euro cents.

Watch the video for the full Talk Money segment.

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