KEY POINTS:
New Zealand commodity prices are at record highs thanks to the surge in dairy prices, but rural economists warn 2007 will remain a tough year for farmers and exporters.
Rabobank said in its latest New Zealand Agriculture in Focus report yesterday that the strong dollar, and high interest rates and input costs, would continue to plague the rural sector this year.
The ANZ Commodity Price Index for January - published today - is up 1.3 per cent from December, 11 per cent better than a year ago and 7.9 per cent higher than the previous peak of May 2005.
"Underpinning the latest strength has been the rapid rise in dairy prices," said ANZ chief economist Cameron Bagrie.
The dairy component of the index was up 4.9 per cent last month, after rises of 9.8 per cent and 8.9 per cent in December and November.
If dairy is stripped out of the index, it drops 0.3 per cent in January following a 0.9 per cent rise in December.
The surge in dairy prices - generally paid in US dollars - is influenced by such factors as the Australian drought.
Despite the gains, Fonterra is still forecasting a flat payout of $4.05/kg of milk solids for the entire June-May season, saying the strong kiwi dollar is hitting the ability to pay more.
"The big message from that jump in commodity prices is it is helping buffer the downstream effects of the high New Zealand dollar on the export sector and, most noticeably, the dairy sector," Bagrie told the Business Herald yesterday.
However, he said the higher prices were in turn helping prop up the currency because they were bolstering the economy.
"It [the strong dollar] hasn't just been a strictly interest rate or yield story ... if it hadn't been for those high commodity prices, the New Zealand economy would have been very vulnerable with the currency up around US70c."
Kiwifruit (up 3.1 per cent), logs (up 2.7 per cent) and seafood (up 0.9 per cent) also had solid gains in January, but there were falls for skins (down 11.9 per cent), wool (down 2 per cent) and aluminium (down 1.1 per cent).
When the results are converted to local prices, the NZ dollar commodity price index was up 0.7 per cent for the month of January and 12.1 per cent annually.
Meanwhile, Rabobank warned: "The coming year is likely to test the stamina and hardiness of New Zealand farmers and exporters with little respite likely from domestic economic conditions."
"The ability to adapt to a changeable, and often harsh, environment is a cornerstone of New Zealand agricultural success and these skills will be required through 2007," said senior analyst Hayley Moynihan.
However, Moynihan stressed Rabobank's belief that the medium-to-long-term prospects for agriculture remained positive, based on factors such as good demand, efficient production systems and the quality of New Zealand food.
She also said New Zealand farmers could continue to benefit this year from a range of situations, such as the Australian drought.
Bagrie also warned of the potential for a tough year. "When you look at the bottom line I think there's going to be more red ink printed over the next 12 months."
He said that while cash flow did not look "that flash", farmers' equity in their properties remained "remarkably" solid. "You want to be cautious but it's not exactly a gloom and doom story."
Bagrie added that precious metals had benefitted from China's industrialisation and there was clear potential for New Zealand agricultural exporters to reap rewards from a new wave of Chinese growth in the years ahead.
