Dairy future bright but . . .

New Zealand’s dairy sector has a bright future, but important challenges need to be managed to ensure it retains its dynamism.

That’s the view of Reserve Bank governor Graeme Wheeler:

Mr Wheeler told the DairyNZ conference in Hamilton that the dairy sector makes a vital contribution to the New Zealand economy.

“Dairy exports make up almost a third of New Zealand’s annual merchandise exports, animal numbers and prices have increased and on and off farm productivity growth has been impressive.” . .

“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable. . .

“If the exchange rate remains strong, it is likely to be reflected in continued low or negative tradables inflation. In such circumstances, the high exchange rate, along with new economic data, will be a factor in our assessment of the extent and speed with which the Official Cash Rate needs to be raised.” . . .

He’s saying that interest rates might not increase as far or as fast as predicted.

Mr Wheeler said that dairy debt almost trebled over the past decade, and currently stands at $32 billion.

“It is concentrated among a small proportion of highly leveraged farms with around half of the dairy debt being held by only 10 percent of dairy farmers”.

Despite the prosperous outlook for the dairy sector, Mr Wheeler warned that even the most dynamic enterprises can lose competitiveness and suffer losses in market share, so there are important challenges to manage.

“On the external front these include the oscillations in global dairy prices, increasing competition from other international suppliers, the risk of slower growth in China, and the need to continue diversifying our export markets, including positioning for the enormous longer term opportunities in the Indian market. On the domestic front, dairy farmers are conscious that high dairy prices can turn around quickly and will need to continue managing their cash flows and borrowings in a prudent manner.”

Another threat is political.

A LabourGreen government would add to costs through the imposition of new taxes, increased compliance and other anti-business, anti-farmer and anti-growth initiatives.

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