June 13, 2007

New Zealand's dairy farmers urged to curb spending

The governor of New Zealand's central bank warned dairy farmers benefiting from high export prices not to overspend to help contain inflation and stop the economy from overheating.

Alan Bollard, governor of the Reserve Bank of New Zealand, said "that dairy farmers should be conservative with this year's windfall as any spending, or even investment, of the extra income would add to domestic demand pressure on inflation".

Bollard's statement came a day after the central bank intervened for the first time since the New Zealand dollar was floated in 1985 by selling the currency to stem a recent rally. Last week the New Zealand currency reached a post-float high against the US dollar after the RBNZ raised its key interest rate to a record 8 per cent to curb inflation. The central bank justified the rise in part by the surge in world dairy prices.

Fonterra, the New Zealand cooperative and the world's biggest dairy exporter increased its payment projections last month to farmers for the coming financial year by 27 percent. The central bank estimates that this will add NZ$2 billion (US$1.5 billion) to the revenues of farmers, or about 1.5 percent of gross domestic product.

Reactions arose from the industry as a spokesman for Fonterra stating farmers are sensible spenders.

Frank Brenmuhl, chairman of Dairy Farmers of New Zealand, representing about two-thirds of the country's 12,000 dairy farmers, said the governor's statements were "quite extraordinary" and farmers have always been cautious on their revenues, otherwise they would discontinue their business.

He said the statement will be treated by industry players in "a certain degree of scepticism."

About half of New Zealand's agriculture is accounted by dairy which are enjoying a strong growth as some products have doubled in demand particularly in emerging economic giants such as China.

Meanwhile, the rise dairy in prices is due to a shift by US farmers from cattle feed to biofuels. The increase was also brought by tougher subsidy rules by European farmers and Australia's prolonged drought.

Some economists have questioned the currency market intervention, saying a central bank did not have the means to counter a huge influx of money from foreign investors who are shifting into higher-yielding markets such as New Zealand as part of the global carry trade.