Rural sector can stave off retrenchment

The plunge in the kiwi will help to stave off retrenchment in a rural sector hurt by its earlier strength, say economists.

Bank of New Zealand chief economist Tony Alexander said yesterday it was a "huge positive" for the rural sector that the currency had fallen so far.

Assuming world commodity prices stayed around present levels, a sustained decline in the dollar would boost export returns to farmers, with the timing depending to a degree on exporters' hedging policies.

Alexander said that in recent months farmers pulled back "really strongly" on buying farms and on capital expenditure, such as tractors, after a period of high dollar strength.

"I think the fall in the currency will forestall that decline."

The strength of the dollar last year meant some exporters, including farmers, had been approaching the crunch point of "slash-and-burn" retrenchment - the dollar's drop meant they could step back.

"But I still think farmers will go through a period of consolidation generally on their spending."

Alexander expected any lift in earnings from the dollar's decline would feed through to sheep and beef farmers more quickly than dairy due to Fonterra's hedging strategies.

National Bank economist Kevin Wilson said Fonterra's dairy payout for next season might not be that different from this season's forecast $4 per kg of milksolids.

In January, Fonterra expected the average conversion rate to be US67c compared with US61c last season.

Chief financial officer Guy Cowan said yesterday: "Given that we are now more than three-quarters of the way through the season, any movements in the exchange rate between now and the end of the season in May will have relatively little effect on the average conversion rate for the full season."

Meanwhile, Wilson was "cautiously positive" about the impact on the rural sector, particularly for exports of beef, fruit, lamb and wool.

Beef, dairy and venison prices were reasonably steady, lamb down a little and wool up. International commodity prices usually slackened if world growth weakened but global growth - "quite robust" at around 4 per cent - was not expected to weaken much.

Price stability was uncertain, but there would likely be periods of under and over supply.

While the decline in the dollar may boost farmers' incomes, fertiliser, fuel and machinery were dearer.

Meat and Wool economist Rob Davison said the drop meant farming prospects were "much more positive" than they had been. Export markets also looked "reasonably good".

He had some confidence the dollar would stay around US60c or lower.

The dollar last night was at US60.82c, compared with around US70c in mid-January.

Meat and Wool New Zealand said yesterday about 90 per cent of beef, dairy and lamb production was exported, while total agricultural and horticultural exports were worth $15 billion or 52 per cent of export value in the June 2005 year.