Dairy product price rise a ‘double-edged sword’

‘We think farmers are well placed to manage through this difficult season.’

THE lift in dairy prices is good news for farmers and the economy but the reasons for the rise are not all positive, economists say.

Dairy prices were up 9.4 per cent at Fonterra’s GlobalDairyTrade auction yesterday, boosted by a big increase in the price of whole milk powder.

The average winning price was US$3042 (NZ$4138) per tonne, up from US$2513 in December but still down about 40 per cent in US dollar terms since February.

ASB rural economist Nathan Penny

Prices have now increased at four consecutive fortnightly auctions.

The

New

Zealand

dollar jumped more than 2 cents against the US dollar after hitting a fouryear low on Tuesday night.

The kiwi dropped to US71.76c, its lowest mark since March 2011, shortly after the Reserve Bank of Australia cut its interest rate on Tuesday to a record low 2.25 per cent. New Zealand’s official cash rate is 3.5 per cent.

Yesterday morning, however, the kiwi rallied on the back of the strong dairy prices, rising US2.5c to a day’s high of US74.32c at about 7.30am, and ending the day at US74.18c.

But ASB rural economist Nathan Penny described the rise in dairy product prices as a ‘‘doubleedged sword’’, because it is partly due to a fall in production.

‘‘While this result has given upward momentum to dairy markets, New Zealand farmers still have to deal with dry conditions and potential falls in production,’’ he said.

‘‘By and large, however, we think farmers are well placed to manage through this difficult season, and the prospect of a firmer 2015/16 milk price should lift their confidence medium term.’’

BNZ economist Doug Steel said the big price gains were a positive sign and likely to see many lifting their 2015 views for dairy prices.

‘‘But we are also conscious of some challenges this year, including the ongoing impact of the Russian ban and the strife it is causing in Europe, question marks around Chinese supply/ demand, lower international grain prices and the removal of European Union production quotas.’’

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