Market Takes The Scenic Route
ANZ agri economist Matt Dilly looks at the impressive run of global dairy prices this year.
The GDT Price Index is 12.3% below a year ago. Price declines this season have been orderly but persistent.
Wholemilk powder prices fell 2.9% with an average price of $US2,655/T. There were small declines in most other products, the exception being skim milk powder which posted a 1.2% rise. Nothing too dramatic in what was an unusually long auction of over 3 hours compared to the norm of around 2 hours.
Another small price decline adds downside risk to Fonterra’s milk price forecast range of $6.25 to $6.50. Likewise for our $6.30 view. We’ll see if Fonterra provides any update on its milk price view at its AGM tomorrow, we don’t expect any change so soon after the previous forecast update in October. A generally lower NZD is helping, but not enough to fully offset weakness in international prices. If international prices do not show any improvement from current levels then the season’s milk price is likely to come in below current forecasts. Indeed, ongoing price declines raises the prospect of this season’s milk price slipping below $6.
From a macroeconomic perspective, this is all consistent with our thinking that NZ’s terms of trade is unwinding from its recent record high and will contribute to a widening in the current account deficit. For the RBNZ, wholemilk powder prices are below its $US3,000/T medium term assumption. Dairy prices remain one for the dovish column come Thursday’s MPS, against the likes of stronger than expected GDP and inflation.
Ongoing milk supply expansion in the EU, US and a strong start to the NZ milk season are key factors behind the fact that the GDT Price Index has not posted a positive result since the end of last season in May. GDT volumes at this auction were 20.9% higher than a year ago, reflective of the very positive start to the NZ season with good grass growth and cows are in good condition. Also, latest M Bovis tests have shown minimal new cases of the disease and some recent rain is keeping the threat of a looming El Nino weather pattern at bay for now (but these things remain on the watch list over coming months).
Slower economic growth indicators in China, concern around US-Chinese trade relations, and wobbly equity markets continue to raise questions around the outlook for demand. Meanwhile, a stronger USD and a slump in oil prices are not helpful, likewise lower international grain prices.
More positively, a winding down of the EU’s skimmilk powder stockpile and the prospect of slower EU milk production ahead on tighter feed supplies seems to have helped at least stabilised skimmilk powder prices over recent months, while drought conditions in Australia continue to hurt milk production there.
• Doug Steel is a BNZ senior economist.
