HSBC Global Research: Global dairy price surge boost incomes

HSBC Global Research

New Zealand Digest: Global dairy price surge to boost incomes

- Dairy prices have surged, pushed higher by falling global production and solid demand from emerging markets
- A recovery in global production could see some easing in prices from very high levels, but rising emerging economy demand, particularly from China, should limit declines
New Zealand is the single largest exporter of dairy products to China and dairy accounts for 27% of its exports, so local incomes are set to get a boost from rising dairy prices

Milking the moment

Dairy prices have surged in recent months to a level more than 50% above where they were a year ago. A slowdown in global production, reflecting poor weather conditions in a number of countries, including the recent drought in New Zealand, was a key factor in this run-up in prices. At the same time, emerging market demand has remained robust, with particularly strong growth in Chinese imports of dairy products over the past year, reflecting the ongoing rise in middle class incomes and shifting diets.

Production conditions are beginning to improve among key global exporters and this may see dairy prices ease from their current very high levels in the near term. However, while some moderation is expected, prices are expected to hold up relative to levels seen in the early part of last decade – as rising incomes and a growing middle class in emerging markets drives increasing demand for dairy products.

While New Zealand’s economic growth was held back in the first half of this year by a fall in rural production associated with drought, higher dairy prices continued to support growth in incomes. A brief contamination scare in early August was resolved quickly, so it had no noticeable effect on dairy trade. An improvement in pastoral conditions in recent months is also set to see dairy production bounce back strongly in the second half. Coupled with the run-up in prices, farm incomes are set to rise significantly.

The improved rural outlook should help support a pick-up in growth in New Zealand over H2 2013. An improved outlook should also see farm investment and credit growth rise, although the eventual boost depends on how New Zealand’s farmers opt to spend this increase in revenue. While it is unlikely that New Zealand will see the same rapid rates of rural credit growth seen in the lead-up to the global recession, positive conditions in the dairy market should support some rise in rural sector borrowing in coming quarters.

ENDS

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