We got another reason yesterday why New Zealand interest rates will be cut next week, and probably again in the last months of 2016.
NZ dairy giant, Fonterra Co-operative Group told the markets in New Zealand and Australia, that it was maintaining its current lowforecast for its payout for the current season on Monday as global dairy prices remain depressed.
The world’s largest dairy exporter said it would pay its New Zealand farmer shareholders $NZ4.25 ($A4.03) a kg of milk solids in the 2016-17 season, unchanged from a prior forecast.
It is the third year of low payouts to Kiwi dairy farmers. “It is another financially challenging season for farmers,” said Fonterra chairman John Wilson, in something of an understatement with NZ analysts saying 85% of the sector is losing money at current prices.
Mr Wilson said the price reflected the continuing global uncertainty and the high New Zealand dollar exchange rate, which continued to impact the competitiveness of New Zealand dairy exports.
“The recent weakening of the euro, combined with the continued strength of the New Zealand dollar, has meant a price advantage for European export dairy products,” he said in a statement.
That’s also what the Reserve Bank of NZ said in an economic update late last month.
"Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. However, low dairy prices are depressing incomes in the dairy sector and weighing on farm spending and investment.
"There continue to be many uncertainties around the outlook. Internationally, these relate to the prospects for global growth and commodity prices, the fragility of global financial markets, and political risks. Domestic uncertainties relate to inflation expectations and the potential for continued high net immigration, ongoing pressures in the housing market, and the high New Zealand dollar exchange rate.
"Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data,” the RBNZ said.
And yesterday’s data from Fonterra is not what the RBNZ wanted to hear (although it would have known there would be no good news from the dairy giant).
Fonterra also announced yesterday a forecast earnings per share range for the 2017 financial year of 50 to 60 New Zealand cents, making the total payout available to farmers in the 2016-17 season $NZ4.75 to $NZ4.85.
World dairy prices have tumbled by more than half since early 2014, hurt by China’s economic slowdown, Russian sanctions and global oversupply, especially from Europe and the US.
Looking ahead, Mr Wilson said Fonterra expected global milk supply and demand "to come into balance over the course of this season".
Fonterra continues to forecast a 3% reduction in New Zealand milk collection for the current season. It will be the second year of faling milk collections and dairy herd reduction, but not enough to put a dent in the global oversupply.
