KEY POINTS:
The New Zealand dollar's continued rise is raising fears for the future of the family-owned sheep farm, and is jeopardising the benefits of rosy international conditions for beef and dairy exports.
PGG Wrightson chief executive Barry Brook said last week's rise in the value of New Zealand's dollar
against the greenback and other currencies threatened New Zealand beef farmer's returns, despite otherwise positive international market conditions.
These included increasing demand from Asia and India and the opportunities created by the US devoting more of its corn crop to producing biofuel.
The kiwi has risen from US68c to US73.45c in five weeks.
Brook said that if it stayed around US70c, there was still the potential for significant flows back to the New Zealand farmgate.
"But if the exchange rate keeps increasing, it's just going to reduce the benefit of those stronger offshore markets," he said.
Brook said some blame for the kiwi's climbing value lay with the Government's emphasis on consumption rather than investment in exporting, and said any increase in the interest rate underpinned the exchange rate, thereby making it harder for exporters, especially farmers.
The BNZ has said there is an even chance the official cash rate - which is now 7.5 per cent - could hit 8 per cent by June.
"What is not helping is the growing level of Government expenditure relative to gross domestic product, which is making it more difficult for the Reserve Bank to use the interest rate mechanism to achieve the desired results."
Brook also said the significant benefits to be had from record high milk powder prices - around double their normal levels - could be reduced by the escalating dollar.
But he predicted a positive payout to dairy farmers next season of up to $5 a kg of milk solids.
Federated Farmers representative Keith Kelly said the currency's upward trend could only compound the pain felt by farmers because of low lamb prices.
"Every spike in the dollar is another nail in farming's coffin," said Kelly, who chairs the organisation's meat and fibre producers' council.
The price of lamb had fallen $15 a head this season because of an oversupply of stock and Australian farmer's decision to slaughter earlier that usual because of their severe drought.
"All predictions for this season were for US61c - which would have meant a $6 to $7 increase," Kelly said.
The added effect of exceptionally high interest rates on farm mortgages made for a "double whammy" that would hit young farmers starting out particularly hard, Kelly said.
A sensible rate was needed to attract new blood to an industry in which the average farmer was almost 60 years old and losing the ability to perform many of the required physical tasks.
"Are we the last generation of family farmers?" he asked.
The Government had failed to understand how much exporters were suffering.
"The main thing we can do is to tell the Government is that its fiscal policies are biting," Kelly said.
Unlike Fonterra co-operative members, sheep and beef farmers had only themselves to fall back on in tough times, although even the dairy giant would not be able to keep hedging indefinitely against rises in the value of the local currency.
Meat & Wool's executive director of economics, Rob Davison, calculated that every 5 percentage point change in the trade-weighted exchange rate would take $20,000 from sheep farms' gross revenue.
"A big component of the lamb price decrease is the stronger exchange rate. A 5 per cent increase in the exchange rate gives about a 9 per cent decrease in price of lamb."
Davison expressed particular concern that the kiwi had also gained in value against the euro, in which about 25 per cent of New Zealand lamb was sold.
"Any increase in the New Zealand dollar against US and other currencies will lower the New Zealand dollar receipts exporters get and particularly impact on farmers.
"And because farm expenditure stays fixed in the middle it would severely erode farm profit."
Affco chairman Sam Lewis said the rising kiwi was also slashing meat processors' margins, and further gains could force sheep and beef farmers to diversify their land use and go into dairy production.
"It's more than a little alarming when you read reports that it could hit US80c."
Since early March, the New Zealand dollar has risen 7.3 per cent, and this, says NZX Agrifax, has cut farmgate prices for beef - which relies heavily on US dollar markets - by 7 to 8 per cent.
Because much of New Zealand's lamb exports went to Europe, a 4.5 per cent rise in the kiwi dollar against the pound and a 4.4 per cent rise against the euro had cut sheep farmers' returns 7.3 per cent.
In dairying, the payout for milk solids had fallen 6 per cent in the past five weeks.