Winston Peters: A long hard battle ahead

Northland MP Winston Peters.

In April this year farmer confidence reached its lowest level since 2007, particularly for dairy farmers.

In July farm prices dropped to their lowest level since 2012, and down a third from their peak in 2014. In recent weeks Fonterra increased its 2016/17 milk price forecast to $5.25 per kilogram of milk solids (kg/MS).

With a sector in desperate need of some positive news, this was welcomed. However, the increase must be placed in context. It comes after three years of low payouts in which dairy farmers have been below break even, and there is still huge volatility in the market.

There is light at the end of the tunnel, but many dairy farmers are still stuck in the tunnel, and they're not alone. Small rural communities that are heavily dependent on the sector have felt the pain also, and it is on-going.

Total dairy debt has spiralled to $40 billion, with more than half of that loaded on to 20 per cent of farmers. Federated Farmers' dairy chairman Andrew Hoggard has said New Zealand dairy farmers are among the world's most indebted.

Eleven months ago Fonterra needed to average US$3000 ($4250) a metric tonne to hit a $4.60 milk forecast, which ended at $3.90.

There is a huge question mark over that $5.25 forecast, with whole milk powder languishing at US$2681 a tonne well into the 2016/17 season.

Fonterra's cash flow may improve in the short term if projected price increases do in fact materialise, but the industry is still too dependent on global volatility in commodity prices, and geopolitical factors that are beyond New Zealand's control.

In spite of the higher milk price forecast the dollar remains just below US72 cents, and neither the Reserve Bank nor the National government know what to do about it.

The government likes the high dollar because it makes imports cheaper, which creates an illusion of wealth, despite debt growing at $370 a second.

The Reserve Bank should take a leaf out of Singapore's book.

They have low inflation and a steady currency compared to our rollercoaster Kiwi dollar.

Singapore has an exchange rate-based monetary policy, which should be a model for our export-based economy.

Unfortunately, we are also seemingly in an economic cold war between East and West, which affects milk demand and prices.

Massively subsidised US and European milk has been washing into our markets as a result, and until this is resolved there is a lid on price recovery.

At the same time the government ignores the opportunity of securing a trade deal with Russia, the world's number two dairy importer.

Any optimism should not be used to disguise some of the deeper realities facing the sector. The road to recovery will be a long one.