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.
This is despite the softer run of Global Dairy Trade (GDT) auctions through winter, with flagship whole milk powder process slumping 30% since March.
ASB is sticking to its forecast farmgate milk price of $10/kgMS. But last month, Fonterra revised its milk forecast range, citing several factors including short-term softening in global demand and the general impact of inflation on purchasing behaviour.
Fonterra's new 2022-23 milk price range is $8.50/kgMS to $10/kgMS, a drop of 25c on each end of the range.
This reduces the midpoint of the range from $9.50/kgMS to $9.25/kgMS. Bedi says at this stage in the season, where uncertainty is heightened, that is an appropriately wide forecast.
She notes that the futures market price for 2022-23 currently sits just north of the new midpoint at $9.35 "so there isn't much in the new range and Fonterra's comments to rankle expectations".
"The recent downward trend in global dairy price is the driver.
"Auction prices have softened since the season began in June, with Fonterra suggesting higher inflation has disrupted usual purchasing habits."
Bedi notes that while ASB is still retaining its $10/kgMS forecast for the season, there is some downside risk to that number.
"But we expect the farmgate price for the season to end up well in the top part of the new guidance range."
Fonterra chief executive Miles Hurrell agrees, saying that the co-operative believes the longer-term outlook for dairy remains positive.
The global production remains tightly constrained: EU production is sharply lower as it winds down from its peak production months, with the upshot that less milk has flowed onto the export market.
For example, year to date milk powder exports out of Europe were down 20% as of the end of the second quarter.
Bedi says it's tough to predict exactly how the NZ season will shake down, but output was down 5.5% in July and mixed pasture growth points to weak production continuing over the first half of the season.
Also, milk powder inventories in China have also started to come off their highs, just as a record heatwave is hitting local farmers hard and set to put further pressure on access to feed.
"Suffice to say, global dairy supply is set to remain very, very tight over much of the season," says Bedi.
"On the demand side of the fence, we continue to expect global dairy demand to hold up relatively well, despite the headwinds facing the global economy."
While weaker Chinese demand has been a feature of the market lately - helped by decent inventories - Chinese growth forecasts are looking okay for the second half of the year and the constraints on local production should see import demand lift, notes Bedi.
"There is much proverbial water to pass under the bridge and plenty of risk to our forecast, but our punt is still that soggy supply and relatively resilient demand should see auction prices regain much of their ground in the coming months."
