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ASB Farmshed Economics Report

ASB Farmshed Economics Report


Special Quarterly Edition
24 March 2015


Special edition: Cherry picking in the USA and the US dairy renaissance

A better milk price will have to wait until next season after all

Parity against the Australian dollar is a possibility for the NZ dollar this year

Special topic: Cherry picking in the USA: The US dairy renaissance

The NZ dairy production outlook is not as bad as first feared according to the latest ASB Farmshed Economics Report. Prices have moved to reflect this changing view – up sharply in February on the plunging production fears, and then down by a lesser amount as those fears eased.

“The net result sees prices heading in the right direction,” says ASB’s Rural Economist Nathan Penny. “But, because we have revised up our NZ dollar forecasts, we have also lowered our milk price forecast for this season back to $4.70/kg milk solids. It looks like a better milk price will have to wait until next season after all,” In financial markets, the Reserve Bank (RBNZ) delivered a flat interest rate outlook as expected. But the big recent news is record highs for the NZ dollar (NZD) against the Euro and Australian dollar (AUD) in March. Moreover, continued NZD strength and AUD softness makes parity against the AUD a possibility this year.

“The NZ economy continues to outperform its Australian cousin. The RBNZ here is on hold, while the Australian equivalent has cut its interest rates and is likely to move again. All up, this puts parity against the Australian dollar very much on this year’s radar,” says Mr Penny.

This quarter’s special edition of Farmshed Economics report looks at how the global dairy market competition is beginning to heat up, driven by the US.

“While the slump in the global dairy market persists, with lower dairy prices hitting local farmers hard, the United States is currently experiencing a dairy renaissance with dairy farm margins the best they have been since 2008 and US dairy demand improving,” says Mr Penny.

With US dairy farms becoming more profitable, production has lifted, though curiously this has not led to an increase in exports.

“A lift in production has not translated into export growth, and this isn’t necessarily a bad signal because of the relative luxury the US has to cherry pick its export opportunities,” says Mr Penny.

“Unlike NZ, the US has a massive domestic market, so if global prices are relatively weak, focus can return inwards”

“Overall, we consider that the US is the competitor we need to keep the closest eye on, given its ability to selectively pick export opportunities. However for now, NZ remains the dominant dairy exporter, with changes in home-grown supply still dictating global shifts in export supply, particularly for whole milk powder.”

ENDS

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