Quantitative easing has finished and central banks are lifting interest rates.
Improving economies and higher employment will generate more inflation, a prospect that rattled Wall Street recently.
NZ’s floating and short-term interest rates will stay down for a while yet, probably all of 2018, but longer-term rates, three to five years, will begin to rise this year.
So dairy farmers should factor in a higher cost of finance in their two- to four-year plans.
NZ dairy debt of $40 billion, higher interest rates and a high NZD mean more pressure on farm budgets.
“My advice to dairy farmers therefore is to get your financial house in order now,” he said.
China’s interest rates are also rising and its consumer prices are subdued so that will dampen demand for dairy products.
The dairy industry has a concentrated risk in China, which takes 27% of NZ exports, but that of itself is no reason to be worried.
Even if China doesn’t take the highest proportion of NZ exports, its buying strength exerts huge influence over world markets.
NZ’s major economic indicators are all favourable now compared with their 10-year histories – GDP 2.7% (1.9%), unemployment 4.5% (5.4%) and CPI 1.6% (1.9%).
But there are labour shortages, capacity constraints, environmental concerns and a need to turn more milk into higher-value products.
The Government is committed to reducing immigration, changing labour laws and lifting minimum wages, which will then flow on to higher wages.
“Wage pressure and higher inflation are not too far away,” Steel said.
Economic growth in NZ would continue to motor along as businesses and farmers get on with production, despite low confidence in the Labour-led Government.
The dairy industry has shifted from milk growth from farm conversions and herd expansion to higher per-cow production and more value-add products.
Farmers will find ways to grow their businesses while environmentally restricted, through cost control, smarter management and better productivity.
Steel thought NZ’s weather influence over world dairy markets was diminishing.
European milk production was seven times that of NZ and more of it was being sold on world markets.
Europe’s 6% increase in production in December was equivalent to a 20% movement in annual NZ production, which would certainly move the markets.
“That European increase is holding down world powder prices more than the NZ production loss is acting to push them up.”
However, the Euro is strengthening and that will help NZ exports be more competitive.
BNZ’s forecasts on milk payout for the next two dairy seasons are $5.70 to $6/kg in 2018-19 and $5.90 in 2019-20.
