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.
However uncertainty remains and the 1.4% fall in whole milk powder (WMP) could have other implications, they say.
ASB rural economic Nathan Penny told Dairy News that in the short term they have been largely assured that Brexit impacts will be modest and at a higher level Brexit doesn't mean too much in dairy markets.
The pulling back of supply in New Zealand, Australia and more recently the EU should be the bigger global factor affecting markets.
"We don't think Brexit has changed that picture," Penny says.
However if growth falls because of Brexit and it spills over to China and other dairy importers, that could affect dairy demand and prices in the medium future. He says the 0.4% drop last week was "pretty modest" compared with the currency market moves, sharemarkets dropping by double digits and the pound at 31 year lows against the US dollar after the Brexit vote.
NZ also had a reasonably firm end to the season with May production up 2.5%. But the season as a whole was down and ASB has pencilled in a 5% drop in NZ in the season just started.
"We think the low milk price will bite increasingly hard and that will lead to lower production."
UK production is dropping the hardest and EU production has started to fall on a seasonally adjusted basis.
"We think it's a case of European farmers sharing the pain NZ farmers have been feeling," he says.
ASB is holding its forecast of $6/kgMS but Brexit has delayed temporarily the expected lift in dairy prices. If those types of disruptions continue it may be harder to reach that number, Penny says.
Westpac senior economist Michael Gordon says in light of the Brexit turmoil the GDT result was as good as we could hope for.
Since the Brexit vote there had been fairly large swings in international markets.
"Typically commodity prices don't seem to react well to uncertainty. It is not necessarily good or bad outcomes as such, just the wide variety of possible outcomes tending to weigh on commodity prices, whether it is oil, iron ore, wheat, milk and so on. There was a risk we could have seen a deeper dip in dairy prices; we didn't get that, though beyond that whole milk powder was trickling lower."
