Dairy price rise pushed out

Speaking to parliament’s finance and expenditure select committee last week, the secretary for the Treasury, Gabriel Makhlouf, predicted dairy prices would stay lower for longer. This conflicts with a forecast a few days ago by MPI that the farmgate milk price for the year to May 2016 would be $5.62/kgMS; Fonterra is forecasting a milk price of $5.25/kgMS.

Makhlouf told the committee that dairy prices have fallen at each of the five Global Dairy Trade auctions since the treasury’s forecasts were finalised for the Budget Economic and Fiscal Update. He says Fonterra has twice revised downwards its farmgate milk price for the season just finished. 

“While we anticipated continuing weakness in dairy prices in our forecasts, there is now a greater risk that prices could take longer to pick up, with the recovery starting later this year or in early 2016, rather than in the second half of this year as anticipated.”

Makhlouf says while this may not affect production levels and economic activity, it would lower the terms of trade and slow growth in the total dollar value of goods and services. 

The current low dairy prices have been offset to some degree by shifts in the exchange rate, Makhlouf points out. The NZ$ has depreciated against the US$, largely reflecting the improving outlook for the US economy and in expectation that interest rates will soon rise there, and monetary policy ease in NZ.