New Zealand Dollar: Dairy Price Forecast Hikes Support a Positive Outlook
- Written by: Gary Howes
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- NZ dairy prices at 8-year highs
- Outlook remains supportive of NZD
- But other near-term domestic uncertainties persist
Image © Adobe Stock
Expectations for higher earnings from New Zealand dairy exports should contribute to a steady recovery in the New Zealand Dollar over coming months, say analysts.
ASB - the New Zealand lender - have raised their forecasts for New Zealand dairy prices, meaning the country should see its export earnings rise over coming months, even as the country battles with heightened uncertainty posed by the Omicron variant and inflation.
"We’ve lifted our farmgate milk price forecast for this season to $9.25 per kgMS," says Nick Tuffley, Chief Economist at ASB.
"Given the weak NZ growing conditions and the failure of overseas producers to offset softer local production, we concur with the market view that the supply outlook is likely to remain tight beyond the end of the season," he adds.
New Zealand's Global Dairy Trade price index from Fonterra shows milk prices have reached their highest levels since February 2014, presenting a significant boost to New Zealand's export earning dynamics.
ASB expect tight supply will continue into the 2022/23 season, "we open next season’s farmgate milk price forecast at a lofty $8.80 per kgMS," says Tuffley.
- GBP/NZD reference rates at publication:
Spot: 2.0430 - High street bank rates (indicative band): 1.9714-1.9857
- Payment specialist rates (indicative band): 2.0245-2.0328
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Dairy is the largest export goods sector in New Zealand and is worth about NZ$19BN a year, accounting for 1 in every 3 dollars New Zealand earns from the goods export trade.
Stronger dairy prices will improve New Zealand's trade dynamics and offers a fundamental source of support for the New Zealand Dollar as a result.
"Elevated dairy prices are supportive of our forecast for NZD to lift to 0.75 by year-end," says Joseph Capurso, Head of International Economics at Commonwealth Bank of Australia, which is ASB's owner.
Currently the New Zealand to U.S. Dollar exchange rate is at 0.66, while the Pound to New Zealand Dollar exchange rate is at 2.0430.
Until March 2020, New Zealand exported US$14.3BN of dairy products, which supported NZ$7.4BN of direct value added to the New Zealand economy.
Fonterra's Global Dairy Trade (GDT) price index shows New Zealand dairy prices have risen to an eight-year high in February amidst ongoing strong demand and poor global production conditions.
Fonterra is a co-operative owned by New Zealand dairy farmers and is the country's largest dairy company, handling more than 90% of New Zealand’s milk production.
The February 01 Fonterra auction beat analyst estimates by rising 4.1%, with an average price of $4,630/MT being recorded.
"There’s little doubt next season will kick things off on the front foot given the near-term direction of global dairy supply, particularly with demand still looking robust," says Tuffley.
Despite the supportive dynamics presented by New Zealand's biggest export, the New Zealand Dollar has been trending lower against the U.S. Dollar since mid-2021 and against the British Pound since November 2021.
The price action confirms the New Zealand currency remains beholden to global market conditions which remain shaky.
The poor start to 2022 for global stock markets has played a great part in the New Zealand Dollar's soft performance of late.
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Expectations for higher interest rates at the Reserve Bank of New Zealand (RBNZ) have meanwhile apparently been fully digested by currency markets, explaining why the currency is not benefiting from expectations the central bank is set to lead in the race to tighten policy.
Uncertainty as to how the economy will perform during an Omicron outbreak is meanwhile adding another cause for caution when approaching the NZ Dollar outlook.
"A key uncertainty is how the labour market will be affected by omicron," says Satish Ranchhod, Senior Economist at Westpac. "We are still in the early stages of the outbreak, and we cannot say with any certainty how severe the health outcomes will be."
Finance Minister Grant Robertson has noted that under a mid-range scenario around 350K people forced to self-isolate (including those who are infected and close contacts), equivalent to 12% of the labour force.
"The Omicron outbreak in early 2022 will be disruptive for the labour market and, while its impacts are assumed to be temporary, it will place additional strains on already-stretched labour market capacity and wage inflation," says ASB's Tuffley.
"Domestic cost pressures are also on the rise. Most notably, many New Zealand businesses are struggling to source workers, and wage costs have been pushing higher as businesses compete to attract staff," says Ranchhod.
Despite the domestic uncertainty, the prospects for dairy prices and higher interest rates at the RBNZ are likely to provide a significant backstop to any New Zealand Dollar weakness going forward, while analysts at both Westpac and ASB see a more protracted recovery in the currency shaping up in the second half of 2022.
