As world economies teeter, Stuart Davison reads the tea leaves on the prospects for NZ dairy on world markets.
Peak milk approaches in little old New Zealand, global market uncertainty is still rife, central banks are dancing the monetary policy line in the face of inflation and China’s economy remains the counterbalance. Cool, so we know the headlines, what does that mean for dairy and other soft commodities?
Let’s start at the top of that list. NZ milk supplies are looking more price supportive. Expectations for NZ’s total milk production season are pointing to another year of reduction. If our tea leaves are telling the truth, two years of production declines in a row will really stir the global milk market. Such a result would turn the trend of a growing milk pool in the South Pacific on its head, and make the global market think a little harder about dairy prices. This carries some weight considering where the trajectory of European milk production is. Likewise, the United States dairy market is still growing, but only just keeping up with their population. Strike one for price-supportive market measures.
Global market uncertainty has been a buzz word for the first two quarters of 2022, but as we head into the tail end of the year, markets seem more confident. Not enough that hedge funds or other investment funds are shouting from the rooftops, but enough for investors to price in expectations.
For equity markets, that’s moving from the bottom of the screen on the left to the top right, not the opposite, as we witnessed over the first six months of 2022. This is an insight into expectations of economies, albeit still a little blurry. Two strikes for price-supportive market measures. Global monetary policy should be accumulating a lot of your cowshed thought patterns; these policies are far reaching, and the farm isn’t out of reach. You know the story; pandemic, quantitative easing (QE) (money printing), inflation,rate hikes, cooling of inflation. Rate hikes appear as interest rate hikes for those with debt. These control inflation by controlling spending, by burning consumers’ fingers when they buy things or by increasing interest costs so discretionary spending is limited.
With these rate hikes, we know consumers will be less likely to spend on luxuries. Unfortunately, dairy is a luxury for most. Consumers in NZ alone are already spending a little less on dairy, as cheese prices soar. It has been mooted the 30% decline for whole milk powder prices, thus the 30% decline in forecast farm gate milk price in NZ, is a result of dairy procurement teams measuring the risks of inflation on consumers’ purchases.
One positive for NZ dairy because of these rate hikes, is the strengthening of the US$, thus devaluing the NZ$. The devalued NZ$ meant dairy exports earned, which has somewhat cushioned farmgate price expectations from falling further. However, the strengthening of the US$ hurts our trade partners, who buy dairy in US$, termed buying power. Over the last two years, our trade partners have had significant buying power, making imports cheaper. So, rate hikes and currency movements have been two measures, but the cumulative pressure is negative, so two strikes for negative market pressure.
China is in trouble. NZ is one of those economies tied to China; they are our biggest trading partner, and our biggest dairy trading partner. When they suffer, we suffer. Right now, the Chinese economy is stumbling; economic growth expectations have been downgraded, unemployment for Chinese in their 20s is at 20%, and the housing market is about to implode.
Added to the economic issues, China’s Communist party is due to sit for congress elections shortly, creating political tension within the country itself, as well as geopolitical issues such as Taiwan. As a result, the buying power of the Chinese yuan has been reduced.
If dairy consumption follows the trend of the last two years, imports will remain a key part of the market. So, on balance, the Chinese dairy market is somewhat neutral; economic, political and monetary policy weigh one end, but consumer demand and changed consumption levels continue to provide support to the other end of the scale.
After all of that, the market hangs in a precarious spot with pressures on both sides. Added to the global macroeconomic and monetary issues, China’s economy is acting like a duck on a pond: calm on the surface, but paddling like mad. Uncertainty is unlikely to reduce anytime soon.
