It was good to wake up to find the Global Dairy Trade has not followed other primary industry sectors on the downhill slide with a +1.2% lift. After the previous auction’s drop the indications for this sale were not looking promising so any lift has to be welcomed.
This is the first lift in the overall weighted average since January 21st although different products have been moving around. The key product for New Zealand, whole milk powder (WMP), had a +2.1% lift.
Of the other three main monitored products butter has the greatest lift of +4.5%, cheddar cheese +0.2 % and only skim milk powder had a fall of -0.8%. After the four previous auctions ranged from -1.2% to -4.2% there is still quite a bit of catching up to be done as the benchmark average price at US$2,969 is still below the US$3,000 which is considered to be the price New Zealand producers need it to be at to achieve viable farmgate prices.
However, given the current world situation prices are not in such a bad position especially when the $NZ value is factored in. It is likely the auction has been well supported by Chinese interests as they begin to restock as their logistics get on top of the backlog that had built up at ports and warehouses.
While the covid-19 influence is going to put a damper on next season it is not yet being shown in the various banks forecasts with most of the banks outlooks close to what they are predicting for this season.
Of all the banks Rabobank stands out still sticking to its $7.60 for this season. Update: Rabobank changed its payout forecast to $7.35 in Mid March. But given they are also forecasting a 19% drop in wet milk equivalents for China, if this transpires it will make achieving the forecasted prices difficult. However, it is early days yet.
On the global scene both the EU and the USA are looking to have approx. 1.1% lifts in production for the last three months compared to last year, while Australia and New Zealand are down, Australia by -0.8% for the last three months and here in New Zealand for the whole season we are looking at a drop of between -0.8% and -1%.
The fate of what farmers end up receiving in all sectors is going to be greatly influenced by how the NZ$ performs. The trough this season to date has been 56 US cents for NZ$1. Rabobank have predicted a trough of 54 US cents in the third quarter before a currency recovery begins. The dollar is currently sitting at 59.85 US cents. Given the economy is going to be in some form of retrenchment for at least the next year a 54 US cent dollar is likely to be welcomed.
Primary sector exports are going to be crucial in getting New Zealand through this next year or two and imports which will be adversely affected by the low dollar are likely to be secondary to the benefits received by exporters.
Given the low price of oil and there is likely to be a reduction in world demand of fertiliser, thereby lowering the price of major inputs, costs may not be dramatically affected. New cars and tractors however, are likely to be costing more.
The more critical area of concern is going to be around New Zealand’s debt repayments as the low dollar will mean more NZ$ are going to be required to pay back US$ borrowing. How that is going to impact upon the New Zealand economy I’ll leave to wiser heads, but I imagine it will be more of a ‘slow burn’ problem for the generations that come behind us, rather than an immediate problem. In the meantime today’s continuing reduction in new covid-12 cases is the best news we could have, and hopefully this continues.