Dairy prices tipped to swing

"I think we will see prices up and down, there is no trend emerging," he told Dairy News.

He says there is more milk in the market and demand remains strong. But the situation remains volatile. While not as bad as the global economic crisis of 2008, things remain uncertain.

Last week, an economist warned slow global growth could harm the export sector. New Zealand Institute for Economic Research principal economist Shamubeel Eaqub says the fall-out from the European sovereign debt mess will depress export growth.

It will weigh on exports and tourism, which had been a buffer. Investment will remain depressed because banks will find it harder to raise capital overseas.

"New Zealand's fledgling recovery will be severely hampered by the rapidly worsening global economy," Eaqub says. "If the Euro area splits, New Zealand firms should prepare for another global crisis. This would restrict access to capital and push up global borrowing costs, in addition to an even weaker export outlook. New Zealand would likely experience another recession and the Reserve Bank would need to cut interest rates. We place the odds of such a scenario at about 25%", says Eaqub.

He also believes interest rate rises are off the table until mid-2013. "Faced with the darkening global outlook and weak domestic activity, the Reserve Bank will not raise the official cash rate (OCR) until mid-2013.

"Inflation will be contained as excess labour market capacity keeps a lid on wage growth and firms hold prices low to remain competitive. If the global situation worsens, the RBNZ will have to cut the OCR."

But the ASB says despite the economic uncertainty, New Zealand's is in a good space. "New Zealand's agricultural sector is enjoying some of the best conditions for many years." The bank expects the 2011-12 dairy payout to be the third highest on record.

In October Fonterra dropped its milk payout forecast for the 2011-12 season by 45c, blaming a continued softness in commodity prices and a stronger New Zealand dollar. It announced a revised payout forecast of $6.70-$6.80/kgMS, comprising a lower farmgate milk price of $6.30/kgMS, down from $6.75. The season's distributable profit range forecast of 40c-50c per share remained unchanged.

Fonterra's 2010-11 payout of $8.25/kgMS before retentions is the highest in the co-op's 10-year history.