NZ dollar drops to four-year low on concern low Fonterra payout will dent economy

File photo / NZ Herald

The New Zealand dollar dropped to its lowest in more than four years on concern about the outlook for the economy after Fonterra Cooperative Group yesterday announced a low payout to dairy farmers.

The kiwi touched 71.27 US cents, its lowest since March 2011, and was trading at 71.74 cents at 8am in Wellington, from 72.42 cents at 5pm yesterday. The trade-weighted index fell to 75.26 from 75.92 yesterday.

Fonterra yesterday cut its forecast payout to farmers for this season by 10 cents to $4.40 per kilogram of milk solids, from a record $8.40/kgMS last season, and said it expects to pay $5.25/kgMS next season as prices for dairy products stay lower for longer than expected.

Dairy products are New Zealand's largest commodity export and the weaker payout is expected to dent economic growth this year.

"There is some near term cash flow implications for dairy farmers in that the 2015 payout has been revised down, it means that the income to dairy farmers over the next few months will be a lot lower than it was a year ago and probably a lot lower than many of them had expected, so that's going to put pressure on farm spending and debt," said Peter Cavanaugh, client adviser at Bancorp Treasury Services.

"The reduced income for the biggest sector of the economy means there will be less spending, so it has a negative flow on effect into the domestic economy, in terms of GDP (gross domestic product) and consumption so it weakens the outlook."

Today, building consent data for April will be released at 10:45am and the ANZ business confidence survey is scheduled for publication at 1pm.

The New Zealand dollar slipped to 93.79 Australian cents from 94.16 cents yesterday, dropped to 65.56 euro cents from 66.31 cents, fell to 46.86 British pence from 47.14 pence and declined to 88.96 yen from 89.75 yen.