Virus jitters stabilise at global dairy auction
Global dairy prices eased rather than tumbled overnight, as investors took comfort that central banks were moving to soften the blow of coronavirus.
Fonterra’s global dairy auction fell overall by 1.2 per cent to US$3112. Prices for key export product whole milk powder fell a mild 0.5 per cent to US$2952 a kilogram of milk solids – much better than the 3 per cent fall ASB economists were expecting.
Skim milk fell 3.2 per cent, while butter rose 1 per cent.
ASB rural economist Nathan Penny said the coronavirusinspired turmoil on world markets was the biggest issue for New Zealand dairy exports, more so than the current drought, but the auction indicated that those fears were stabilising.
‘‘Global policy-makers are starting to throw the kitchen sink at the outbreak,’’ he said.
‘‘The other thing from dairy’s point of view, is the spread of [the virus] ... Iran, Italy and South Korea are not really big dairy markets so for us, looking at China and the sense that things are slowing or starting to normalise, that’s probably the bigger story for dairy.’’
Financial markets started to improve on Tuesday after investors sensed that central banks would move to cushion the economic impact of Covid-19, which emerged from China but is now spreading to the West.
However, the ANZ Commodity Price Index fell 2.1 per cent last month, with more to come, agricultural economist Susan Kilsby said.
‘‘The impact on export prices of the recent coronavirus outbreak in China is only partially captured in this month’s data. We expect further downward pressure on commodity prices in March,’’ she said.
Cheese prices had offset lower milk powder prices last month and the data did not yet reflect the recent fall in global dairy trade prices, which were back 9 per cent since early last month.
‘‘Dairy exports remain robust but are not immune to the supply chain challenges all industries currently face,’’ Kilsby said.
Yesterday morning the US Federal Reserve lowered its benchmark rate by 50 basis points, to a range of 1 per cent to 1.25 per cent, and on Tuesday Australia’s Reserve Bank (RBA) slashed interest rates from 0.75 per cent to a fresh record low of 0.5 per cent.
ASB now believes New Zealand will follow suit with a 25 basis point cut in both March and May, taking the official cash rate to 0.5 per cent.
Forestry and meat export prices have also been affected by the coronavirus, creating backlogs and logistics issues in China, one of dairy’s key markets.
However, Penny said dairy was well-placed to weather the storm, which was possibly why the reaction at auction had been so mild.
‘‘It is more of a staple like infant formula, babies need their bottles, and we heard from Fonterra last week that their product was getting through [in China], albeit with some delays.’’
Like the dairy auction, sharemarkets have also showed nascent signs of recovery. The NZX fell more than 1 per cent a day for five out of six days before turning upward on Tuesday after a rally on Wall St.
However, the economic ripples of the virus still appears to have some way to go, with summer spending figures in New Zealand reflecting the downturn in Chinese tourists here because of coronavirus travel restrictions.
‘‘Global policy-makers are starting to throw the kitchen sink at the outbreak.’’
Nathan Penny ASB rural economist