Dairy doldrums keep Reserve Bank nervous

Dairy doldrums keep Reserve Bank nervous

By Paul McBeth

June 11 (BusinessDesk) - A slow recovery in global milk prices that's weighing on the local dairy sector is making the Reserve Bank nervous, with the prospect of another sub-standard season threatening New Zealand's national income.

Global dairy prices halved last year as Chinese buyers scaled back their activity after stockpiling in 2013, and milk processors have pared back their expected payments to their farmer suppliers as a result. The Reserve Bank today cited that weak outlook in today's monetary policy statement as threatening to keep a lid on already low inflation, as it drove down the terms of trade more than previously forecast.

The Reserve Bank expects a more severe deterioration in the terms of trade, to fall 8.4 percent in the March 2016 year, before rising just 0.1 percent the following year. In its March forecast, the bank expected terms of trade to be 3 percent lower in 2016, before gaining 1.4 percent in 2017. Terms of trade measure the value of imports that can be purchased by a set amount of exports.

"Relative to last season's record payout, farmers' incomes in the 2014/15 season are expected to be around $7 billion lower, representing a fall of about 3 percent of nominal GDP (gross domestic product)," the bank said in the MPS. "If the dairy payout is low in the 2015/16 season as well, farmers' spending could fall sharply. Moreover, there is a risk that lower cash flows may limit the ability of farmers to smooth their expenditure."

Governor Graeme Wheeler last month flagged a weak dairy sector as one of three key risks to the nation's financial stability, saying about a quarter of farmers were operating in negative cash flow this season and were relying on short-term loans to cover their working capital. If prices didn't recover, that would put stress on parts of the sector, which in turn could taint banks' loan books.

The Reserve Bank today said dairy production by other major exporters such as Europe and the US remained high, which continued to undermine the recovery in process. Prices are projected to slowly rise back to a more sustainable level in the next couple of years.

(BusinessDesk)

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