Dec 24, 2007

New Zealand Dollar: A Good Buy? Don't Forget The Kyoto Effect

Both the NZ Herald and Dominion Post are carrying a good analysis by Catherine Harris of NZPA of the factors underpinning the value of the New Zealand dollar during 2007.

One of the topics for debate in 2008 will be whether there has been a paradigm shift in international money markets which means that the New Zealand dollar is not as overvalued as many (including the team at The Hive) have maintained. The likely permanence of high global prices for dairy is the major argument underpinning the idea that the New Zealand dollar is on a new and higher value path.

The Hive does not reject this argument absolutely and looks forward to the debate. We do accept that there is now an almost exact correlation between the global price of oil and global dairy prices (through the effect that demand for bio-fuels is having on dairy herd feed prices). If oil prices power upwards then dairy prices may yet have further to rise.

This is potentially very exciting for the New Zealand economy, but the extent to which we can really cash in is being constrained by the Government's climate change policy response. The #1 reason for haste by Government is to remove the incentive that currently exists to deforest and convert land that is currently covered by trees into dairy farms. Why? Because the Kyoto rules are working against New Zealand. Deforestation will potentially increase the size of the New Zealand liability (now already a minimum of $1 billion). The Kyoto rules do not recognise the fact that dairy farming in New Zealand might create fewer greenhouse gas emissions than dairying in Asia, the Americas and Europe. So even though it might be better for the planet to do more dairy in New Zealand the rules, and now New Zealand Government policy, are discouraging this.