Friday, March 29, 2024

China churn set to unsettle dairy – NZX

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Analyst warns not to expect improvement in the short term.
Economic problems in China are a threat to New Zealand dairy, says NZX’s dairy insights manager.
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A dairy analyst is warning the dairy sector not to expect market activity to strengthen in China as it transitions out of its strict covid lockdown policies and returns to normal.

Speaking at a breakfast event at Fieldays on dairy risk management, NZX dairy insights manager Stu Davison said he does not see a lot of short-term positivity in China at the moment. 

Once China gets rid of its covid policy, it has lots of economic problems to deal with, as well as covid infections and the political unrest that has been seen in the country, he said.

Davison said he is concerned about how China is going to re-establish its economy.

“This is a threat to New Zealand dairy, it’s going to soften our prices. It’s not like it’s going to disappear forever and we know that the FTA [free trade agreement] kicks in in 2024, and a zero-tariff policy on all imports, which is going to be really handy, but we need their economy. 

“Their economy drives our economy at the moment.”

Davison said he is also concerned about the macro-economic factors affecting global demand for consumers.

“The way I simplify that one is how deep are consumers’ pockets likely to be in the next couple of years?”

Interest rates are impacting all consumers globally and “as a consumer, how important is dairy to me as a weekly or a daily product? That determines where our demand will fall off to.”

Unlike the 2008 Global Financial Crisis , when Chinese consumers stopped buying, this time around dairy is more entrenched in their diet, which could cushion any fall.

“It’s not all doom and gloom but it could definitely have an impact.”

In the past six months growth in milk solid equivalent trade in China fell 28% compared to the same period last year. 

Davison described it as a trade hole in China, with 125,000t less dairy product imported into the country.

“That’s a massive volume of dairy missing from trade flows and that’s why we’re seeing this softening of price.”

That could put the milk price under pressure, he said.

The milk price futures market is a good measure of how volatile the market is at present, with contracts trading at $8.90. This is where the market is seeing milk price futures for the current season. 

“The volatility we have seen in the nearest contract in the last several months has been quite substantial. We have seen $10.67 traded on the nearest contract and we’re as low as $8.80 now.

“The volatility on the world market is seen in that future where people are exchanging risk for what they see.”

He said NZX has forecast a mid-range milk price of $8.80/kg MS and expects Fonterra’s forecast to change when it gives is quarterly update to its forecast this month.

“I’m usually a pretty optimistic person, but right now, it’s looking poor,” he said.

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