The US’ central bank, the Federal Reserve, may yet hold the key to spilling some wind from the sails of the kiwi if the US dollar were to strengthen after a rate hike, albeit not until the end of the year.
Westpac senior economist Anne Boniface said while international dairy prices had "improved significantly" in recent months, the strong kiwi continued to take the gloss off farmgate earnings.
"Not only for New Zealand dairy farmers, but also for agricultural exporters more generally," she said in her fortnightly agri-update.
The kiwi remained well above 70c against the US dollar, despite the Reserve Bank last month strongly signalling it was likely to cut interest rates further from here.
Mrs Boniface correctly picked the Reserve Bank would leave the official cash rate unchanged last Thursday, at the record-low 2%, but maintained "when push comes to shove" the Reserve Bank would cut the rate in November to 1.75%.
"However, the fortunes of the kiwi and greenback probably hinge more on the outlook for interest rates in the US at the moment," she said.
In contrast to the Reserve Bank, Mrs Boniface said the Federal Reserve was "widely expected" to raise US interest rates in the coming months, most likely in December.
"When it does, this should give the US dollar a boost and take some of the heat out of the New Zealand dollar.
"This would come as a welcome development to New Zealand exporters across the board," she said.
Last week several analysts raised issues about the strength of the New Zealand dollar, Fonterra noting its strength was undermining gains made in global dairy prices.
Mrs Boniface said last week’s global dairy trade auction saw "prices take their foot off the accelerator", with the overall headline index edging up 1.7%, while the key whole milk powder prices were flat, down down 0.2% to $US2782 ($NZ3786).
"That result was a clear disappointment to the futures market, which had been hinting at another double-digit price gain," she said.
Last Thursday, Fonterra posted a 65% boost to its after-tax profit, to $834 million, for its 2015-16 season as the benefits of cheaper milk flowed through into the profit margins of its branded products.
The day before its result, Fonterra raised its forecast milk solids per kilogram farmgate payout by 50c to $5.25, offering some hope to the majority of Fonterra farmers facing the prospect of a third season not breaking even.
Mrs Boniface said it appeared last week’s auction gains were enough to persuade Fonterra to upgrade its forecast to the $5.25.
Mrs Boniface said the horticulture sector, and kiwifruit in particular, had been a standout performer of New Zealand’s agricultural exporters lately.
"Export volumes and prices are both up strongly on the back of robust consumer demand and the success of new cultivars developed following the [bacterial kiwifruit vine disease] PSA, leading to record returns to growers," she said.
Zespri expected to sell 82 million trays of green and 47 million trays of SunGold kiwifruit this season, with the gold variety in particular likely to see solid demand from key markets, she said.
Mrs Boniface outlined some challenges ahead for the beef sector, especially from giant producer Brazil.
In the near term, international beef prices were likely to be underpinned by relatively tight global supply as beef exports from Australia and, to a lesser extent, New Zealand contracted.
"However, we are more pessimistic on prices further down the track," she said.
There was increasing supply from the US and the likely re-emergence of Brazilian exports into key markets, and those issues combined were likely to increase competition for New Zealand’s beef exporters and weigh on prices, she said.
In the dairy sector, Mrs Boniface said it was likely that New Zealand production would remain a crucial influence on global prices this season.
"To date, this season has started off on a fairly firm footing in many parts of the country," she said.
While Fonterra’s season-to-date milk collection was running almost 4% behind the same period last season, in context, the three months to August comprised less than 10% of milk collected during the season.
"Weather and pasture conditions over the next few months will be even more important than usual in determining domestic production," she said.
New Zealand farmers had ‘‘gone back to basics’’ in efforts to trim costs as much as possible, given the low payout environment during the past two seasons.
"That’s meant cutting back on spending on supplementary feed and relying on pasture growth to drive production," she said.