By Roger J Kerr
Amidst the Kiwi dollar negative news of a weaker than expected GDP number and a weaker Chinese PMI result last week was wholemilk powder prices lunging another 4% lower in the Wednesday morning Fonterra/GDT online auction.
Given that the rest of the world sees our entire economy as one giant dairy farm, the divergence of the NZD/USD rate from WMP (wholemilk powder) price is somewhat surprising and unsustainable (see chart below).
One cannot expect WMP prices to suddenly reverse direction and climb higher over coming months given the additional milk powder supply coming on to the global marketplace due to favourable grass growth conditions in the US and Europe (it’s not just us in the clover).
In addition, weaker Chinese demand at the higher prices provides an automatic cap for WMP prices.
Therefore, for the NZD/USD and WMP correlation to hold the NZD/USD rate has to fall.
Given that it was stronger than expected Chinese economic data that shoved the Kiwi up from 0.7600 to 0.8400 in January, it will be weaker than expected Chinese data over coming weeks that pulls the Kiwi back down to the WMP price track.
Fonterra announce their half-year profit result this week and there will be interest in their FX hedged position and achieved NZD/USD conversion rate to date. Their FX hedging policy is quite short-term, based on the fact that WMP is supposedly highly correlated to NZD/USD movements.
The price divergence over the last 12 months is a risk that dairy farmer suppliers to Fonterra should be asking some hard questions about.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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3 Comments
Given that it was stronger than expected Chinese economic data that shoved the Kiwi up from 0.7600 to 0.8400 in January,
More likely it was because Bernanke announced QE2 in November 2011. And now that he's making not so discreet noises again that QE3 is coming one has to wonder the damage that will be wreaked on NZ dairy farmer's bottom lines if WMP prices continue to fall.
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