Strong dollar crippling farmer returns

Livestock prices are out of line with the market at the moment and some farmers are taking advantage of present schedules to get stock away before the inevitable drop happens. This situation applies to lamb and beef at the only time of year when the local trade traditionally has more influence than export on what farmers receive, but there are signs of price drops across the board in the last couple of weeks.

 

There’s nothing particularly unusual about high livestock prices which happen every year in the lamb market because of the premiums paid for early new season’s lambs of the right specification for the UK and European chilled Christmas market. But what makes this year different and potentially worse for farmers is the exchange rate effect. The Economic Service’s mid point on which its forecasts for next season are based is US 63 cents, 39p and 0.47 Euro and the first two are approximately 9% weaker than forecast at present with only the Euro cross rate being roughly on a par. The Reserve Bank Governor, Alan Bollard, noted in his last review the 40% rise of our dollar against the US dollar in the last year, the biggest appreciation of any currency in the world.

 

These figures suggest an $80 lamb, as forecast by the Economic Service last month could be a $70 lamb at current exchange rates, while the average $900 prime steer at US 0.63 could be well below $800. Bull and cow will obviously be worth even less. Alliance has already put out a lamb schedule for October and November which shows the price dropping sharply and regularly from $6 per kg at the beginning of October to $5 per kg by the end of November. That finishing point effectively sets the benchmark for January onwards and in an ideal world Alliance would maintain the same price through the peak of the season, in order, as Grant Cuff told me, to enable suppliers to plan ahead and draft when the lambs are at the right weight without having to worry about what the schedule is doing from one week to the next.

 

The market is expected to remain reasonably stable into the new year, but the prices were set more than a month ago when the exchange rate was lower, so processors will need to look at all the factors affecting returns before firming up for the peak production period. Unless one or more of the processors has a brain fade and decides to pay over the odds to fill capacity or gain market share, I can’t see a procurement war simply because the margins since the second half of last season have been thin or non-existent. Processors will be looking to put some respectability back into their financial performance which means farmers won’t be able to play one off against another. The inevitable outcome of all this is lower rather than higher farm gate prices.

 

The usual gripes about companies under selling in the overseas market don’t hold water this year and won’t next year either, because the lower kill numbers match market demand and inventories are under control. Lamb market prices are holding up quite well and consumers are buying at those prices, but there’s no chance of pushing them up any more to increase the amount of New Zealand dollars we receive. The US beef market is holding steady, with lower US cow slaughter numbers causing higher demand for imported beef, but Asian demand is sluggish because of economic concerns. Apart from small market niches, New Zealand beef exports tend to be more reactive than proactive, so we are effectively at the mercy of market conditions and competitive factors.

 

We are literally hamstrung by our exchange rate, until overseas speculators see a safer currency with equally good returns to invest in. It has been beyond the wit of the best financial brains in the country to find a way of lessening our dollar’s exposure to factors beyond our control, so it looks as though we’re stuck with an overvalued dollar, until the rest of the world suddenly realises the risks associated with our level of overseas debt.

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