Liam Dann: Double blow sours farming outlook

The kiwi dollar has been treated as a commodity currency. Photo / Kenny Rodger

Climbing kiwi and tanking commodity prices putting huge pressure on farmers Four months ago there was cause for optimism in the dairy sector.

After a steep fall - in line with every other market in late 2008 - dairy prices appeared to have hit bottom. They bounced up twice - in March and April.

The dollar was averaging US55c and expectations were for more falls. There was some genuine hope that the nation might skip the more extreme depths of the global downturn - saved, in that great Kiwi tradition, by the cockies.

But since then both the currency and the commodity price - crucial for Fonterra, dairy farmers and the whole economy - have turned for the worse.

The US and Europe have offered their dairy farmers emergency subsidies, a move which puts immediate downward pressure on global prices.

Meanwhile the kiwi dollar continues to be lumped in with the aussie as a commodity currency and has roared away as a safe haven for those wary of the battered greenback.

The hard commodities that Australia exports, like copper and aluminum, are still in a rally. Dairy is not.

It doesn't seem fair. But then the global economy is not fair and it certainly isn't geared towards assisting New Zealand's economic recovery. Fonterra's forecast payout for this year - $4.55 per kg of milksolids - already looks grim to those farmers up to their neck in debt after converting to dairy or expanding operations in the last few years of the property boom.

If the current trend were to continue then there is a real risk that the dairy payout could fall further.

Fonterra's board is likely to have been conservative in its prediction and will face a great deal of pressure from its farmers to hold its ground.

But that forecast was made on the assumption of an average US59c exchange rate - a level below which the kiwi has not dropped since mid-April.

In theory a correction of the dollar will come - but theory isn't what it used to be.

Farmers are nervous. And the banks that have leveraged them in to those positions that are starting to look unsustainable are nervous too.

Both commodities and currency continue to be extremely volatile and almost impossible to predict. That does mean there is a chance that things could swing back to positive territory in a hurry. Let's hope so because the margins for many farmers are getting too thin for this trend to continue for long.