We have seen a continuation of the steady rally in prices on the Global Dairy Trade platform and milk prices, even this late in the season still have some room for improvement if the financial experts are right.
The consensus seems to be for a farmgate milk price of at least $6.60 to $6.65/kg MS with better to come next year. Rabobank has reset next season’s opening price at $7.15/kg MS.
Some commentators are wary of the international situation but despite American utterances, a lack of progress on Brexit and a slowdown in the Chinese economy prices are holding up and not experiencing much volatility.
In March our exports hit an all time high for any month, up 19% from March last year to $5.7 billion, led by dairy products and followed by meat and forestry.
Dairy exports were up $264 million or 22% to $1.4 billion.
That rise was led by milk powder, up $226m on a year earlier. There were contrasting movements in other dairy commodities. Cheese exports rose $42m while butter exports fell also by $42m.
The rise was quantity-led but unit values also rose, up 6.5% on March 2018.
And despite fears about Chinese consumption it soaked up the lion’s share of the rises. It’s imports from New Zealand were up 52% to $1.5b for the month.
However, the international waters are still murky with United States president Donald Trump threatening anyone buying Iranian oil. China and Japan both buy oil there. That’s likely to have a domino effect if the US does act. It could disrupt trade between sellers and the oil-buying countries. It could also force up oil prices, meaning some of our customers have less to spend on dairy products.
But the elephant in the room, now capital gains, water and fertiliser taxes have been scotched, is the Reserve Bank’s plan to force banks to double the amount of cash they hold in reserve to see them through tough times.
That’s likely to make banks think twice about lending to the rural sector and push up the interest they charge.
It’s ironic the Reserve Bank is deliberately pushing interest rates down to encourage business investment.
However, it has long fretted about the size of the debt on dairy farms, which hold $42b of the rural sector’s $63b debt so it’s unlikely to encourage banks to lend more to farmers, especially dairy farmers.
And the cash reserve plan will help it there. Banks see farmers as riskier propositions than other borrowers like house owners so will put the interest rates up to reflect that.
And they will be under pressure from their Australian investors who are likely to have little sympathy for Kiwi farmers. The requirement for banks to hold more cash will cut into their returns so they will also want interest rates to go up.
Just how much it will cost farmers depends on which experts are best at doing their sums but it could be anything from $120m to $800m a year.
And according to Federated Farmers vice-president Andrew Hoggard that could be enough to force some farmers off the land.
It’s not a done deal yet and this is an instance were all the trading banks will push back against the Reserve Banks plans and the move could be abandoned or softened depending how much clout is brought to bear.
But that’s not all.
There’s another elephant, maybe not in the room yet but pushing through the door.
On April 18 the Reserve Bank said it had in December joined the Network of Central Banks and Supervisors for Greening the Financial System to focus on climate and environment risk and transition to a low-carbon economy.
“The Reserve Bank is strongly committed to the work of the NGFS,” the bank’s financial system policy and analysis head Toby Fiennes said.
It might sound like a bit of idealism but it has major implications that will be realised in measurable monetary terms.
For instance, the latest NGFS report says there is a strong risk that climate related financial risks are not fully reflected in asset valuations. That could affect land prices and interest rates.
That and other measures will be reflected in policy and could also affect who banks are likely to lend to.
It could also see the imposition of conditions or setting of criteria borrowers must meet to show they are mitigating the adverse climatic and environmental costs of the activities the borrowed money will be spent on.
And it’s not to be dismissed lightly. Big hitters like Chinese, European and Australian central banks and the likes of the Organisation for Economic Co-operation and Development and the World Bank have signed up. The notable absentees are the Americans.
Get those farm environment plans ready.
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