Global dairy prices and NZ dollar rise
There has been some welcome news for farmers this morning, with prices rising 3.8 percent at the latest GlobalDairyTrade auction.
But there is growing concern the rising New Zealand dollar will erode earnings for farmers and other exporters.
Whole milk powder increased by 7.5 percent to US$2156 per metric tonne.
The positive auction result helped push the Kiwi above 70 US cents.
The major driver of the positive auction result was a 7.5 percent increase in the price of whole milk powder.
Analysts say the price increase was stronger than futures trading had indicated it would be.
Economists at Westpac say it is possible the increase was due to lower volumes being offered for sale as the season draws to a close.
It is predicting a milk price for farmers of $4.60 next season, but says it could go higher if the auction prices keep improving.
Analysts at AgriHQ today lifted their forecast for next season. They are now forecasting $4.45 per kilogram of milk solids.
That is based on whole milk powder rising from US$2156 today to US$2450 by January next year.
AgriHQ's Susan Kilsby says: "The higher milk price forecast for next season is primarily driven by the expectation that dairy commodity prices will continue to rise in the coming months."
AgriHQ's forecast for this season's milk price remains unchanged at $4.09/kgMS. That contrasts to Fonterra's own forecast price this season of $3.90/kgMS.
It is estimated farmers need a pay-out of around $5.25 to break even this season.
One major concern for exporters is the rising New Zealand dollar.
The Kiwi rose to 70.30 US cents in overnight trading. It is now sitting at its highest level since the middle of June last year. If it remains at these levels it will erode earnings
The Trade Weighted Index (the TWI is a basket of the currencies of New Zealand's major trading partners) is at 73.80. The BNZ says that is 4 percent above the RBNZ's projections for the TWI's average for this current quarter.
The Kiwi was helped by the promising auction result. But it had also been pushed higher by the relatively high interest rates on offer in New Zealand. Higher interest rates encourage offshore investors to deposit their money in New Zealand.
New Zealand's Official Cash Rate is at an historic low of 2.25 percent. But that is still much higher than the key rates on offer in the United States, Europe and Japan.
The markets believe the chances have faded of an interest rate cut next week. They now are expecting that it is more likely to occur in June.