New Zealand has emerged as a standout in a weak global economy, mainly due to surging Asian demand for its dairy exports. But another sharp fall in the price of dairy products at auction suggested the outlook may be souring.
According to GlobalDairyTrade, a trading platform set up by Fonterra, the average price of dairy products offered at auction dropped 8.9 per cent from two weeks earlier. The latest drop extended price falls to nearly 35 per cent since the record high in February. Dairy makes up about 30 per cent of New Zealand’s goods exports.
“Prices have fallen in 10 of the last 11 auctions,” said Raiko Shareef, a currency strategist at Bank of New Zealand. “We had long forecast lower prices for our key commodity, but even we are a little taken aback by the magnitude in the year to date.”
The Kiwi dollar began falling right after the auction, and was delivered a second blow by a report showing lower-than-expected inflation in the second quarter, taking the currency to US87c, down more than US1c on the week. Traders saw the tame inflation reading as making a rise in interest rates less certain.
The steep dairy price falls were partly linked to China, which over the past several years has stockpiled milk powder imported from New Zealand, weakening demand from producers such as Fonterra. Dairy prices also have fallen as more supply has become available. In New Zealand, production has bounced back following a drought last year, while favourable weather in Europe helped push milk output up 6 per cent in the first quarter from a year earlier.
ANZ said in a note to clients that dairy price falls on the scale being seen now represented a material change to New Zealand’s risk profile.
The country has been outperforming most major economies thanks to booming demand in Asia for dairy and meat exports.
The Reserve Bank of New Zealand recently became so convinced of the economy’s health it began to raise interest rates.
Source: The Australian