ASB Farmshed Economics
Cash is king for farmers
• Despite a better milk price forecast, farm cashflows will remain weak this season.
• But falling interest rates are putting cash back in farmers’ pockets.
• Meanwhile, the hot air has been let out of the NZ dollar.
Despite Fonterra’s better opening season milk price forecast, farm cashflows will still face pressure this season, according to the latest ASB Farmshed Economics Report.
“While Fonterra’s opening season forecast of $5.25/kg offers a glimpse of light at the end of tunnel, we expect average cashflows this season to fall by around $1.38/kg or around 22 percent,” says ASB’s Rural Economist Nathan Penny.
“As a result, dairy farm cashflows are likely to continue to remain tight for the next year even if this season’s milk price does exceed expectations.”
On the positive side, lower interest rates are putting cash back in farmers’ pockets. “We think the Reserve Bank is likely to follow up this month’s OCR cut with another in July. In fact, risks are rising that the Reserve Bank doesn’t stop there. Markets, for example, have factored in a 75% chance of a July cut and an 80% chance of another cut by March 2016.”
“With the NZ interest rate outlook confirmed as down, the hot air has been let out of the NZ dollar. Over the last four weeks, the NZD has fallen over 4 cents (5.5%) against the USD. This is lifting New Zealand’s competitiveness in global markets as well as boosting farmer returns in NZ dollars,” concludes Mr Penny.