Our farmers are riding to the economic rescue … again.
Strong commodity prices and a low dollar (or pound) has been the winning formula in New Zealand for more than a century, and it looks like it still is.
Perhaps it’s my years as an agriculture reporter talking, but news this week that Fonterra had upgraded its 2019/20 forecast farmgate milk price range up by 30c, to $6.55-$7.55 per kg of milk solids, struck me as a big deal.
For context, Fonterra payouts have ranged between $3.63 and $8.40 per kg of solids since the cooperative was formed in 2000.
It has only been above $7 three times.
Fonterra’s announcement follows a number of upward forecast revisions by economists who pick the combination of tightening global supply and the low kiwi dollar will deliver strong returns over the next two seasons.
That will come as huge relief for the dairy sector, which remains heavily indebted and has been at the centre of concerns about bank lending.
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A dairy slump in the next few seasons could have been catastrophic for the industry.
But somewhat counter-intuitively, the trade war continues to play out well for our exporters.
For all the noise and fears of a global economic slowdown, New Zealand exports to China rose 23 per cent in the year to September according to StatsNZ data out last week.
New Zealand’s total exports rose $216 million (5.1 per cent) from September 2018 to $4.5 billion, according to the latest terms of trade data from Stats NZ.
Dairy and meat (boosted by high demand after China’s swine flu epidemic) have both led the way.
Perhaps you could say that New Zealand got lucky with the way the trade stoush has played out.
But then New Zealand seems to get lucky on commodity exports with a fairly predictable regularity.
We’re geographically lucky. We have water and land and we grow grass well.
We’ve built an economy around utilising those strengths efficiently.
The IMF, which last week downgraded its growth outlook for the Asian region, now has New Zealand clearly at the head of their pack next year.
In its Regional Economic Outlook, the IMF said growth in Asia could moderate to 5 per cent in 2019, and 5.1 per cent in 2020.
When you look at just the advanced economies in the region, New Zealand is now solidly the best performer and expected to remain that way next year.
The IMF has our GDP growth rate at 2.5 per cent for this year and 2.7 per cent next.
That might be slightly more optimistic than many local economists but then the IMF’s cheery outlook (subject to three downward revisions already this year) also applies to the other economies it measures.
It currently has Australia as next best economy (1.7 per cent growth this year and 2.3 per cent next) and South Korea third (2 per cent and 2.2 per cent).
Despite big downward revisions for Singapore and Hong Kong, Japan remains the slowest – with forecast growth of just 0.5 per cent.
The IMF data also shows New Zealand winning the race to the bottom on central bank rate cuts this year.
The Reserve Bank has already shaved 0.75 per cent off the official cash rate this year.
There has been some concern that Reserve Bank’s double interest rate cut (50 basis points) in August might have backfired by further rocking business confidence.
But the strategy has paid off with a timely fall the value of the Kiwi dollar.
At around US64c, it is now trading much lower than the levels our commodity prices would normally warrant.
The expectations of higher agricultural returns won’t provide an instant panacea for our domestic woes.
The economy will likely continue to slow for some months and coupled with low inflation that’s likely to mean at least one, possible two more rate cuts.
That should keep downward pressure on the currency for at least the next dairy season.
Unless we cop a nasty drought (and soil moisture levels around the country are currently very good) things look promising for a regionally led economic recovery.
By the standards of many economic commentators (including me occasionally) this is not all good.
It is a reminder that New Zealand’s economy remains more or less adrift on a turbulent sea of commodity markets that we can not control.
Experts can also give you plenty of reasons why the long-term direction for international trade is worrying for New Zealand.
We are getting a taste of trade war downside in the growing concerns about the future of Tiwai Point aluminium smelter.
Global manufacturing output has been hit much harder than food production and that’s not been good news for metals demand.
Aluminium prices have slumped and we’re back debating whether to further subsidise Aussie mining giant Rio Tinto to save 1000 Southland jobs.
Perhaps we should be thankful we’re not more reliant on hard commodities.
Its true we can’t be complacent, we need to continue to diversify, develop our service economy and look to move our exports up the value chain.
But right now continued global enthusiasm for animal protein looks like it might to see us through another economic cycle and buy us time to keep working on all of the above.
And if it does, I’ll take it.