We’ve heard about Greece and China. This time, in a Q+A session, we asked BNZ Chief Economist Tony Alexander to explain why international dairy prices are so low, whether farmers should be able to farm through them, and what it means for the New Zealand economy. Here are his answers.
What’s behind the fall in international dairy prices?
There are a variety of reasons why prices are low. We have the slowdown in China’s economy, which is reducing demand for commodities in general, and China looks like they’re more over-stocked in dairy products than people had originally thought. In other parts of the world, we’re also seeing production increasing, and associated with that European production quotas came off in April this year. So people are thinking that’s surely going to beef up their output. Across in America, too, production has been fairly good recently. Then, of course, the previous high prices have caused a bit of a back-lash from consumers as well. People in New Zealand have been wondering for a while why they’re paying so much for milk. Now there’s a bit of a pull-back on the demand side as well, and none of these factors look like they’ll be changing in the very near future.
Primary Industries Minister Nathan Guy recently said that New Zealand farmers will be able to farm their way through low dairy prices. Do you agree?
Yes definitely. The price of dairy products falling swiftly in a short period of time isn’t something new. We’ve seen it before, and it’s a useful reality check. I’m definitely of the view that the overall dairy sector will be fine going through this. Because of our high dependence on China, now we’ll forever face greater volatility in dairy prices, simply because of the Chinese inventory cycle; everybody buys at once and everybody stops buying at once. There are also plenty of farmers out there ready to use the situation to buy more land, because there’s likely to be some indebted people who’ll need some of their property taken off their hands. It’s the same case as in the past; the last ones into the dairy boom pay the most for the animals and the land, and with the highest debt, are most at risk of being caught out. There will be a handful who are finding it particularly difficult, there always are.
When can we expect to see prices bounce back soon?
For dairy, we need to remember that when prices fall sharply the chances are they’ll recover strongly at some point as well. Once the Chinese are buying again, rebuilding their inventories, we’ll see prices rise 30 percent over a period of two to three months. That will happen someday, but it looks like it won’t be happening in the very near future. That’s the big change we’re seeing – people aren’t so optimistic. There’s a feeling that no, they’re not going to rise right now, and you’re seeing that with the recent Fonterra job cuts. But, eventually, yes they will bounce back.
What’s the long-term outlook for New Zealand?
The long term demand outlook for New Zealand dairy product is very positive. With milk, there are different set of fundamentals at work compared to, say, Australia’s export commodities of iron ore, coal and gold. Australia has ridden the boom of China’s investment phase. Whereas, New Zealand has a positive long-term outlook based on the growing incomes of Chinese families and the 650 million other people in ASEAN countries as well. That’s why there is no shortage of capital in New Zealand and overseas wanting to get exposure to our dairy sector, and it’s also a strong mitigant to the dairy sector falling much further.