Economics : No longer on the sheep’s back

Exporters became nervous, as the kiwi dollar inexorably rose towards US$0.70 in March. The squeeze on their margins tightened further, over the next few months, and the kiwi nudged over US$0.80 before events overseas late in July triggered sharp drop to US$0.76-US$0.77. Even so, the dollar had not appreciated that much at the peak of previous cycles since the currency was floated in 1985.
Not surprisingly, the value of the country’s exports decreased 3.8 percent ($331 million) in the June quarter, following an increase of 0.9 percent ($79 million) in the March quarter. Only four of the top-10 export commodity groupings recorded increases and the quarterly trade balance was deficit of $9.3 billion.
Treasury analysts nevertheless saw no signs of the strong dollar doing much harm to export receipts. Exports were weaker than expected in the June quarter, Treasury acknowledged in its monthly review of the economy in August, “but so far there is little sign of widespread adverse effects from the strong exchange rate, although some industries may be affected more than others”.
Treasury noted that export values were down 3.8 percent from March. But the fall was mainly due to an eight percent fall in the value of meat exports, largely because of fall in price.
Only some export categories appeared to be adversely affected by the strengthening of the exchange rate, Treasury said. It cited the examples of timber and seafood exports, both of which experienced fall in price and value.
But the dairy boom has tended to disguise the extent to which primary producers are feeling the pinch. Dairy products, by far the country’s number one export revenue earner, accounting for around 20 percent of total exports, and prices for dairy products on international spot markets “have rocketed into unprecedented territory since October 2006”, the Ministry of Agriculture and Forestry enthused in its latest ‘Situation and Outlook for New Zealand Agriculture and Forestry’ report. “This has lifted expectations for the farm-gate dairy payout in the coming 2007/08 season.” MAF is forecasting dairy payouts of between $5 and $5.50/kilogram of milk solids for the next four dairy seasons, based on the expectation that international dairy prices will remain higher than prices in recent years, but not as high as prices at June this year.
Dairying is booming because the doubling of international dairy prices in the past year has far outpaced the rate of exchange-rate appreciation.
But other parts of the primary sector have not enjoyed similar boom and the great bulk of the export sector is under pressure from the high exchange rate.
Meat and forestry are the country’s second- and third-biggest export earners respectively. Both are feeling the pinch.
Log prices have risen in recent months, benefiting forestry owners who have suffered over recent years, and MAF expects this to be the beginning of sustained rise in log prices. But several timber mills have closed in recent months, victims of the combined triple whammy from the high exchange rate, weak US timber market and rising log prices. Recovery is expected to be slow and the American housing market is forecast to remain depressed for some time.
In the meat business, static international prices and high kiwi dollar have resulted in second slaughter season of poor lamb schedule prices. Lamb prices at the farm gate for the just-completed 2006/07 farming year averaged $53 head, ominously low compared with previous years. According to Meat and Wool New Zealand economists, continuation of early-July exchange rates for the whole of the 2007/08 farming year would reduce lamb prices further to $50 head (-6 percent), beef prices would fall 12.5 percent and strong wool prices would fall 11 percent, even if offshore prices lift (as expected) as international supplies tighten. Gross farm revenue would decrease nine percent in the 2007/08 season, and farm profit before tax would plunge 49 percent to $23,400 for the average commercial sheep and beef farm. That would be the lowest inflation-adjusted sheep and beef farm profit in 50 years.
The currency had eased to around US$0.76 by 30 July, when Meat and Wool New Zealand issued those figures from its latest economic outlook. The organisation’s chairman, Mike Peterson, welcomed the depreciation. Sheep farmers would have welcomed it, too.
If the exchange rate centred on US$0.70 instead of US$0.80 for the 2007/08 season, according to the projections, the lamb price would increase to $61 head (+15 percent). Beef prices would lift an estimated 20 percent and sheep and beef farm profit for the ‘average’ farm would lift to $59,800.
As Peterson pointed out, the prices sheep and beef farmers already were receiving were lower than last year, in New Zealand dollar terms, and any retrenchment resulting from exchange-rate pressure would “ripple through the whole economy”.

Bob Edlin is regular contributor to Management.

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