Farmers warned on interest rates and dollar's value

The National Bank is holding its forecasts for product prices paid to farmers but warns that interest rates and the dollar are now expected to drop much later than earlier thought.

Its latest Rural Report released yesterday said: "The timing of change for interest and exchange rates has been shifted from late 2006 to late 2007."

National's rural economist Kevin Wilson said current rates could be expected to persist for at least 12 months. Easing was now not forecast to start until late next year, with the official cash rate expected to slide "quite quickly" to less than 6 per cent after December 2007.

The bank had hoped the New Zealand currency would be approaching US60c by now.

But yesterday's report forecast that a "sharp deterioration" in the dollar would start late next year or early in 2008. It would drop below US60c then recover towards a "fair value" estimated at US60c-US62c.

However, the bank said the balance between supply and demand for New Zealand products appeared to have tilted slightly in suppliers' favour.

"Indicative international prices for New Zealand dairy and meat products are similar or firm on the comparable period in 2005 in NZ dollar terms."

Mid-season prices for pastoral products other than dairy were expected to be around 10 per cent higher than last year.

But the average dairy payout forecast remained unchanged at $4/kg of milksolids.

Dairy products make up the largest single category of merchandise exports.

The bank warned that any forecast improvement in product prices generally would be dented by rising costs.

It said farmers' discretionary spending would remain constrained until at least March-April of next year, when a better fix on actual revenue could be obtained.