December 7, 2007

 

New Zealand dairy prices may remain high in 2008

 

 

New Zealand's key commodities - which had world prices at record highs last month - will continue to have a bright outlook, but dairy prices will come off their highs in 2008, Australian economists say.

 

It seems likely dairy prices will come off their current high in 2008 given a supply response from key markets, according to Sydney-based Macquarie Research.

 

But the general outlook for dairy and other "soft" commodities remained bright given the rise of biofuels and the ongoing growth in demand from emerging economies. The outlook will provide a solid foundation for growth in New Zealand, according to Macquarie Research.

 

The ANZ commodity price index rose 0.8 percent in November bring the gain to 36 percent over the year, underpinned by skyrocketing dairy prices which are now double what they were this time last year.

 

NZ's biggest dairy company, Fonterra, has predicted a $6.40 payout for its 10,000 farmers in the current season ending in May 2008, a lift of 47 per cent on the 2006-2007 payout of $4.35.

 

It will represent a jump of over $1 billion in farmer revenue for the season, and assure the "average" Fonterra farmer of a payout around $700,000, based on an early prediction of 1.25 billion kilograms of milk solids production.

 

But farmers have been widely speculating about a final payout closer to $7/kg milksolids for the 11,600 Fonterra suppliers, which actually comprise fewer than 10,000 individual farmers.

 

The Macquarie team said the surge in commodity prices, particularly dairy, had been a critical factor underpinning the resilient outlook for the wider economy.

 

The Fonterra payout - progressively being paid to farmers through the season - should boost investment and growth, according to economists.

 

The US Department of Agriculture (USDA) is forecasting an increase in American cow numbers and production per animal in 2008, which could increase dairy product supplies and lower prices on the global market.

 

In Australia, where drought had crippled the world's third largest dairy exporter (after NZ and Europe), investors should be wary of the effect of any turnaround in conditions on that side of the Tasman, which could also boost supplies in world markets.

 

But cuts in European Union exporter subsidies and increasing domestic demand there meant the EU would reduce its supply to global markets.

 

Greater supply from producers in South America may move to make up the shortfall, but these markets are not yet as well developed, the economists said.

 

With the price of oil hitting historical highs and energy security becoming a greater issue, some governments were subsidising crops for production of biofuels, and higher prices for corn would also increase dairying costs.

 

Increased demand from emerging economies meant they were expected to remain resilient and income growth should remain healthy.

 

Slowing demand for these commodities from "mature" markets in developed countries was unlikely to offset rising demand from the rest of the world.

 

A strong outlook for soft commodities - crops and other foods such as milk, meat, and grains - would provide a solid foundation for growth in New Zealand, "one of the few economies where food price inflation is, on balance, beneficial to the economy".

 

While this effect would be inflationary, it also would provide a tremendous stimulus to incomes and export-oriented production.

 

The Reserve Bank would be wary of any added stimulus to demand and inflationary pressures, with the benchmark for interest rate cuts likely to be very high.