It’s opening forecast range originally had a midpoint of $8, but that’s been slashed to $6.75 in the past fortnight.
That’s a more than 15 per cent decline, and at $6.75 it would make for the lowest payout since the 2018/19 season.
Farmers have certainly seen worse, with payouts going as low as $4.40 and $3.90 during the 2014/15 and 2015/16 seasons.
However, in recent years costs have increased, the compliance burden has grown and $7 isn’t what it used to be.
Wage bills are up, and with interest rates at levels we haven’t seen since 2008 those carrying high debt will be feeling particularly challenged.
Fonterra pointed to reduced demand for whole milk powder from China as the culprit for lower prices, which once again highlights the vulnerabilities of our small economy.
China is New Zealand’s biggest customer, accounting for 22 per cent of our total exports. For merchandise only (so excluding services sectors such as tourism) this jumps to 28 per cent.
Dairy products such as milk powder represent slightly more than a fifth of our total exports, and almost a third of those go to China.
As a nation, we’re quite concentrated in terms of what we sell, and who we sell it to. That leaves us exposed when a major customer such as China runs into its own economic headwinds, as is the case today.
Don’t underestimate the impact of these lower prices on the economy. That’s a hefty cut, with $1.00 shaved from this season’s payout forecast.
While most economists were expecting one, few thought it would be as big as that.
Many farmers, such as those with high debt levels or higher cost structures (for example, those in regions where irrigation is required) could find themselves in a loss-making position now.
This will impact the broader economy, flowing through to reduced spending on goods and services, lower activity, and a reduced tax take.
It could also put some downward pressure on the currency, given the historic relationship between global dairy prices and the NZ dollar.
This is an important shock absorber, as a weaker NZ dollar can partially offset lower international prices and make our exporters more competitive.
On the other hand, it doesn’t help the Reserve Bank in its fight against rising prices.
A lower currency means imported goods become more expensive, adding to inflationary pressures and keeping interest rates higher as a result.
New Zealand’s economy is small, open and highly dependent on export earnings from a relatively narrow group of products that we sell to an equally concentrated group of buyers.
For investors, this is a timely reminder of the need to hedge our bets with a healthy exposure to international assets.
This provides an insurance policy against any challenges we might face, and any currency weakness that might follow as a result.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
