Other currencies didn’t fall against the US dollar at the same time, meaning overseas buyers of New Zealand’s farm exports were put in a stronger buying position.
Penny compared the fall to just over US$0.65 to the fall from 0.70 in mid-June to around 0.67 in early August.
That was part of a wider currency fall which had the Chinese yuan falling by a greater amount against the big dollar.
Chinese consumers are big buyers of NZ farm exports, especially dairy, meat and horticulture. The yuan weakness showed up quickly in the Global Dairy Trade auctions.
“We saw lower Chinese demand and prices fell about 9% in three auctions as buyers got a bit shy,” he said.
“The latest fall in the dollar was because the Reserve Bank was very dovish and we notched that up on our own so that’s a good story for exporters.”
Agriculture commodity prices have been buoyant but might have peaked.
“They might have done their bit so the lower dollar is very timely.”
The kiwi dollar has fallen more than 10% against the US dollar since mid-April.
The lower exchange rate is also showing up in the high lamb prices – above $8/kg for October supply – and likely to help the beef farmgate price hold up the greater volumes of US domestic supply that is making the industry here a tad nervous.
The lamb price might fall into the low $7s or high $6s range in peak season but that is still a fantastic level, he said.
Sheep and beef farmers are paid as they supply stock so get a near-immediate farmgate price benefit from the lower dollar while dairy farmers have delayed payments subject to quite long-term currency hedging.
Penny believes Fonterra’s 2018-19 milk price forecast of $7/kg MS is too high because of where international prices sit – ASB’s call is $6.50 – but it will get the benefit of expected further falls in the dollar as it hedges the currency to cover forward sales.
ASB was reviewing its payout forecast before the dollar’s latest fall but is comfortable with it now.
A weaker Chinese yuan also has an impact on gold kiwifruit and apple returns because of the size of that market though apples are protected more by good sales in euro and yen, he said.
Some of the major trading banks are reducing their dollar forecasts further after the RBNZ indicated a rise in the OCR will not happen till at least 2020, with potential for a rate cut in the short term if warranted by slow economic growth.
Till a few weeks ago Westpac strategist Imre Speizer expected the kiwi to fall to around US$0.64 about the middle of next year on higher US interest rates and currency. He now expects that point to be reached by the end of this year after the RBNZ’s dovish comments.
Westpac believes the RBNZ might be a shade pessimistic – its growth expectation for the second (June) quarter is 0.5% compared to Westpac’s 1% estimate. The figure won’t be known till late September.
For much of this year ASB was quite bullish on the dollar with a year-end forecast of US$0.72, more recently pushed lower to 0.68, and now under review again with Penny expecting a lower number.
The most aggressive calls for a lower dollar have come from the ANZ Bank. Between its August 6 and August 13 Market Focus reports it well and truly crunched its forecasts.
The new end-of-month forecasts (with the previous numbers in brackets) are:
Against the US$ December US$0.62 (was 0.67), March to December next year 0.61 (was 0.66/0.65).
Against the A$ December A$0.89 (0.96), March 2019 0.87 (0.94), December 2019 0.87 (0.93).
Against the Euro December E0.53 (0.57), March 2019 0.50 (0.54), December 2019 0.48 (0.51).
Against sterling December stg0.45 (was 0.49), March 2019 0.44 (0.47), December 2019 0.43 (0.45).
Against the Yen December Y65.10 (was 70.4), March 2019 62.2 (67.3), December 2019 58.6 (62.4).
They are from the August 13 levels of: US$0.6585, A$0.9057, E0.5790, stg0.5165 and Y72.65.
They are big changes with potentially excellent farmgate price prospects though the economy would have to cope with much higher import costs.
The BNZ, also in its August 13 Market Outlook, remains much less dovish.
Its forecasts for December are US$0.70, A$0.93, E0.59, Stg0.51 and Y77.0.
For March and December next year, the respective forecasts are US$0.70 and 0.70, A$0.93 and 0.93, E0.57 and 0.54, Stg0.48 and 0.45 and Y75.6 and 71.4.
Low farmer confidence is in line with general business sentiment but Penny said there are good, rational reasons for this despite the good price returns – a poor winter and spring last year followed drought in many areas impacted on production, Mycoplasma bovis has been a big worry in some regions, there are compliance issues on water and environment and the US/China trade dispute.
Some of those issues remain but the pointers from a good winter and prospects for spring are that production levels will be higher and there is more information on M bovis.
ASB believes the sector can step up and provide some spending growth as the household sector slows down.
“We’ll be watching farmer spending and investment over the next six months though it might be more for next year.
“Returns are still good and the better weather and lower dollar might help lift the mood.”
