Sharp drop in dairy auction prices

03:58, Apr 02 2014

Dairy prices are expected to continue falling, but it is too early to tell what the wider economic impact will be, economists say.

The price index dropped 8.9 per cent in the latest global dairy auction this morning, continuing a run of declines that has resulted in prices drop 18 per cent in two months.

Economists said dairy prices had been expected to fall this year anyway, although not as sharply as witnessed at the latest auction.

Bank of New Zealand senior economist Doug Steel said the drop since February was big enough to have a "material effect" on economic growth. However, the bank had already factored a fall in prices into its economic forecasts.

"The fact that about 30 per cent of our merchandise export goods has fallen 18 per cent over the last two months is clearly negative for export returns, even if it takes a while to show through in the data," he said.

The movement of the New Zealand dollar would determine where the pain landed, Steel said.


The dollar fell from a peak of US87 cents yesterday evening to US86c this afternoon after the announcement.

If the dollar followed dairy prices down it would cushion dairy farmers, but would also result in New Zealanders paying higher import prices, Steel said.

"The benefit of a floating currency is when things go a bit pear-shaped, exporters don't carry the can in its entirety."

Westpac economist Anne Boniface advised against "hitting the panic button" over the recent price slump.

Falling milk prices and the high dollar were "clearly a combination that will tend to reduce inflation pressure" and if sustained could mean fewer official cash rate (OCR) rises would be required over the next two of years, she said.

"If the RBNZ was thinking that 200 basis points of hikes are required over the next two years, it may now be thinking more along the lines of 175 basis points."

ASB said 2014 was shaping up to be similar to 2012 in that in both years, the late-season surge in production came as a surprise.

"Normally at this time of the year, production begins to wane and dairy auction volumes reflect this fall," an ASB economic update said.

"In 2012, the boost came from summer rain and the accompanying excellent growing conditions. This season the boost is coming in the form of Fonterra's $8.65 milk price forecast, although growing conditions were similarly good earlier in the season."

Craigs Investment Partners analyst Arie Dekker said it was too early to say what the impact would be on the Fonterra Shareholders Fund, which was up 2c to $6.12 per share in afternoon trading.

"However, the firm conclusion in general is those prices are weakening. Taking some pressure off commodity prices would be helpful for investors," he said.

Federated Farmers dairy chairman Willy Leferink said the size of the drop was a surprise, but farmers had bigger worries than dairy auctions at the moment.

"At the moment farmers are extremely worried about the drought, much more than about global dairy auctions.

"There's very little they can do about Global Dairy Trade and farmers tend to concentrate on the things they can control."