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A cow stands in flood conditions - Source: NZPA / Nigel Marple
Winter 2009 is undoubtedly shaping up as one of the toughest for dairy farmers in many years.
Prices for milk powder on Fonterra's online auction fell for the third month in a row this month...signalling that the $4.55 payout forecast in May may not yet be the bottom price for this part of the dairy cycle.
It's a long way from the $7.90 payout of 2007 and it's going to be tough for many farmers who have come to the industry in the last few years and have high debt.
They will have been counting on a payout figure, at the very least in the $5 range. They are going to need to have very understanding bankers.
It is still possible prices could rebound. Fonterra did say this week they are starting to see some demand come back. So something over $5 could yet happen.
However ,there clearly is a risk that the payout could go lower.
That is a worry for the economy and the hopes of an export-led recovery. Dairy makes up 7% of our annual GDP.
At least other commodities like meat and wood are performing better and picking up the slack, though tourism remains a great unknown going forward.
Compounding the problem for dairy is that the Kiwi dollar has remained stubbornly above 60 US cents.
The reasons for this are well documented.
New Zealand's currency is seen (rightly or wrongly) as a commodity currency - because of our dairy exports - and is up bought up by investors when the US greenback is out of favour.
It's a similar story for Australia and Canada which are leading commodity exporters, albeit hard commodities like iron ore as opposed to soft commodities like milk power.
But some strange things have been happening lately.
According to OM Financial, the New Zealand dollar has historically tended to move in line with fluctuations in dairy prices. For example, when dairy prices were booming in 2007, the dollar was up around 75 US cents.
However, while the Kiwi dollar has moved down with the dairy price through late 2008 into 2009, things have been different over the last few weeks.
The Kiwi has not dropped away with dairy prices as one might expect.
Why the change?
OM Financial say it's the continued attractiveness of New Zealand's interest rate yield and the relative health of our economy compared to the likes of Ireland and Spain where unemployment is way over double figures.
Apparently the yield of 5.86% on a New Zealand 10-year bond is still very attractive to offshore investors as it doesn't carry the same sovereign risk as countries offering similar rates like Brazil or Mexico.
New Zealand, remember, just had its credit rating upgraded slightly by Standard and Poor's.
Therefore, OM Financial says it seems that until investors stop being interested in our interest rate yields, the Kiwi is unlikely to fall away in a hurry.
The problem is that New Zealand needs to attract foreign capital given our lack of local funds.
The Reserve Bank Governor Allan Bollard signalled earlier this year he probably wouldn't cut the Official Cash Rate below 2% partly for this reason.
Clearly having falling commodity prices and a strong dollar is not ideal for New Zealand and its hopes of an economy recovery.
But as things stand there seems to be little we can do about it in the short term.
Dr Bollard has affectively ruled out currency intervention again, although I did recently read an international story somewhere suggesting New Zealand was still one of the countries seen as most likely to intervene in its currency.
