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Bayleys Research


FALLING COMMODITY PRICE PAIN EASED BY DOLLAR BUT DAIRY STILL HURT

FALLING COMMODITY PRICE PAIN EASED BY DOLLAR BUT DAIRY STILL HURT

The fall in commodity prices accelerated in October according to the latest figures released by the ANZ Bank. Local exporters, however, were insulated from the fall out as a result of a sharp decline in the value of the New Zealand Dollar on the world exchanges.

The ANZ index charts the value of New Zealand’s primary exports both in terms of world prices i.e against a basket of currencies and also in New Zealand Dollar terms.

In world value terms the index peaked in July 2008 at 223.5 having risen by 46% over two years from a July 2006 figure of 152.3.

Since July the index has fallen for four consecutive months shedding 15% of its value to sit at 189.8.

The impact in the fall in commodity prices on New Zealand farmers, however, has been softened by the decline in the value of the New Zealand Dollar. The local currency which in July had an average value of 75.5 US cents was worth an average of only 61.4 US cents in October. The result has been that in $NZ the value of commodities has risen by 1.5% over the four month period to sit at 165.7, the second highest level ever recorded by the index.

The reduction in the value of the $NZ, however, has not cancelled out the fall in dairy commodities, the sector which has primarily been responsible for both the spike in values and subsequent reduction.

Between November 2005 and November 2007 when the Dairy index peaked at 291.9 the sector’s commodity price, in world terms, increased by 109%. Subsequently prices have fallen by nearly 35% with the index reading 190.6 in October. When converted to New Zealand Dollars the index peaked in August 2007 at 200.7. Despite the fall in the value of the local currency the October index had fallen to 161.2, its lowest level since May 2007.

A weakening global economy points towards a further reduction in the value of commodities particularly as, despite the recent correction, they remain at historically high levels. While a further weakening of the New Zealand Dollar is also likely it is unlikely to fully compensate farmers.

The impact is likely to be felt most acutely by the dairy sector where the surge in the value of the end product led to a record payout in the 2007/2008 season. The result has been a significant increase in the value of dairy land, and indeed in the value of other pastoral farms suitable for conversion.

As a result of the fall in commodity prices however the initially forecast 2008/2009 payout of $7.00 has already been lowered to $6.60 and many forecasters are now predicting that the final payout will be below $6.00. Although this is still high by historical standards, it will not support a further appreciation in land values which are more likely to fall in the short term