Global trade war 'bad news for NZ'
A global trade war beckons, which is bad news for a small open economy like New Zealand, warns Mark Smith ASB senior economist.
ANZ rural economist Con Williams says the bank is retaining its $6.25/kgMS forecast, but it could rise to $6.35 towards the end of the season.
“That’s based on the current indicators,” Williams told Dairy News.
Williams says a payout above $6 would be great for farmers. It will help cashflow and allow Fonterra farmers, who took bank loans to rescue their businesses over the past two seasons, to repay some of the debt.
“In the past two seasons a lot of Fonterra farmers took loans; when the payout gets above $6 those loans have to be repaid. Any upgrade in milk prices will mean a good portion of that goes into repaying debt.”
While prices are expected to hold this season, which ends May 31, long-term prospects are hard to predict.
Williams says how the supply seasons in Europe and China play out remain to be seen. The high farmgate prices are also trickling to other farmers. A glut in milk production could trigger another price slump.
Williams says recent Global Dairy Trade results, which saw prices dip and then stabilise, weren’t surprising. Short term the market expects whole milk powder prices to settle at US$3200-US$3300/tonne.
The GDT price index rose 0.6% to US$3517, up from US$3463 at the previous auction two weeks ago. Some 22,030 tonnes of product was sold, edging lower from 22,396 tonnes at the previous auction.
Whole milk powder slipped 0.1% to US$3283 a tonne.
The results are indicative of the overall dairy market which is relatively balanced; at present there is neither a shortage of dairy products nor an excess. This situation is likely to persist for the next few months during which time prices will most likely bob up and down from week to week.
ASB senior rural economist Nathan Penny suspected recent increases in the whole milk powder offer volumes had been counterproductive.
Last week’s result cemented recent WMP weakness; at the previous auction WMP dropped 7.7% although a lack of buyers hinted the fall could have been put down to a ‘‘holiday effect’’.
Buyers returned last week but prices stayed low.
While it made sense to take advantage of production flexibility and, in this case, switch to more profitable WMP, that switch had ‘‘slammed the brakes’’ on WMP prices, Penny said.
The recent weak auction results had introduced some downside risk to ASB’s 2016-17 milk price was forecast of $6.50 but it sticking with it at the moment.
