Dairy leads drop in New Zealand farm prices

A second successive season of dryness of some parts of New Zealand, coupled with the prospect of higher interest rates, has taken a toll on farm prices, with dairy farms leading a decline in values.

New Zealand farm prices fell 4.7% in the December-to-February period, compared with the three months to the end of January, the Real Estate Institute of New Zealand (Reinz) said.

The decline, while still leaving values up 8.0% year on year, reflected the return of dry conditions to, in particular, western areas of the country's North Island, and to west-central areas of South Island.

"Across the country there is an underlying tone of caution" in the farm market, said Brian Peacocke, the institute's rural spokesman, citing the "impact of semi-drought in significant areas of the North Island", which is responsible for most of the country's milk output.

Mr Peacocke also flagged "the emerging reality of interest rate increase in the short-to-medium term future", with New Zealand last week becoming the first developed nation in months to raise interest rates, by 0.25 points to 2.75%.

Rates had been at 2.5% since March 2011, and are expected by many commentators to face further increases, with HSBC saying that New Zealand's economy appears to be poised for rapid growth, heralding a "hiking phase" for borrowing costs.

'Quiet market'

Dairy farm prices fell particularly rapidly in the latest period, by 5.1%, leaving them 3.9% higher than a year before.

Reinz highlighted a "quiet" market in some parts of northern South Island "due to the dry weather", although conditions in the central plateau, on North Island, remained "buoyant".

Some areas are suffering a second successive season of dryness, after the drought early in 2013 billed by Nathan Guy, New Zealand's minister for primary industries, as the worst in 70 years.

Auckland-based Fonterra, the world's biggest dairy exporter, last week highlighted that "some regions of the North Island have and continue to experience dry conditions, with western regions receiving less rainfall than eastern regions".

'Not as widespread'

However, conditions are nowhere near as severe as last year.

"While we are seeing dry conditions impact some regions of the country, particularly Waikato and Northland, these are not as widespread as the same time last season," the co-operative said, reporting growth of 4.9% in milk volumes for the first nine months of 2013-14, to the end of February.

"The South Island has received more consistent rainfall than the North Island and is contributing to strong production levels for the season-to-date."

Indeed, the co-operative's milk collections last month, at 151m kilogrammes of milk solids, were up 10.6% year on year, a reflection of the depth of the decline in output early in 2013.

Price incentive

Fonterra made the comments as it raised to 7.5%, from 6.4%, its forecasts for growth in milk volumes over the full season, to the end of May.

Milk production, even in dry areas, is being supported by use of bought-in feed, with farms incentivised by record prices to raise output.

Fonterra last month lifted to a record NZ$8.65 per kilogramme of milk solids the price it forecasts paying farmers for milk this season.

"The lift in forecast farmgate milk price may have a positive influence on milk supply increasing above our previous forecast."

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