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17 Mar 2015
New Zealand: Perfect storm hits dairy prices - ANZ
FXStreet (Bali) - ANZ takes a look at the disappointing overnight Fonterra GlobalDairyTrade auction, in which the average price was down 8.8%.
Key Quotes
"The overnight GlobalDairyTrade auction did not disappoint pessimists, with the average winning price down 8.8% to USD3,136 per MT. Prices for all of the products on offer fell, with weakness in near-term delivery. Whole milk powder prices dropped 9.6% (to USD2,928 per MT), with falls reasonably evenly spread across contract periods. Falls were despite the quantity on offer sold, at 20,258 MT, being the lowest since mid-May 2013."
"A perfect storm of factors appear to be the culprit, including recent food safety issues, lacklustre demand from major export markets, and increased potential supply – both from competitor producers (one of the by-products of the lower euro) and with recent local rainfall likely to extend the domestic season. Whole milk powder prices are still 29% higher than at the end of last year, but are well below the USD3,500 per MT level in August needed to guarantee the $4.70 per KGMS 2014/15 payout."
"It is still early days and this current pessimism could blow over, but prospects of a return to a circa $6 payout for 2015/16 are looking less assured. With the demand for credit low, the return to circa 7-8% of GDP current account deficits in NZ looks a stretch."
"However, a sustained period of low dairy prices will impact on the terms of trade, degree of inflation pressure and NZD. Our four prong criteria for OCR cuts have yet to be met (continued low core CPI readings, sustained NZD strength, further non-OCR measures to address housing strength, dairy prices failing to recover further). However, the direction of risk is clear."
Key Quotes
"The overnight GlobalDairyTrade auction did not disappoint pessimists, with the average winning price down 8.8% to USD3,136 per MT. Prices for all of the products on offer fell, with weakness in near-term delivery. Whole milk powder prices dropped 9.6% (to USD2,928 per MT), with falls reasonably evenly spread across contract periods. Falls were despite the quantity on offer sold, at 20,258 MT, being the lowest since mid-May 2013."
"A perfect storm of factors appear to be the culprit, including recent food safety issues, lacklustre demand from major export markets, and increased potential supply – both from competitor producers (one of the by-products of the lower euro) and with recent local rainfall likely to extend the domestic season. Whole milk powder prices are still 29% higher than at the end of last year, but are well below the USD3,500 per MT level in August needed to guarantee the $4.70 per KGMS 2014/15 payout."
"It is still early days and this current pessimism could blow over, but prospects of a return to a circa $6 payout for 2015/16 are looking less assured. With the demand for credit low, the return to circa 7-8% of GDP current account deficits in NZ looks a stretch."
"However, a sustained period of low dairy prices will impact on the terms of trade, degree of inflation pressure and NZD. Our four prong criteria for OCR cuts have yet to be met (continued low core CPI readings, sustained NZD strength, further non-OCR measures to address housing strength, dairy prices failing to recover further). However, the direction of risk is clear."