In their Farmshed Economics publication for December the bank’s economists looked back over the past 18 months of dairy prices and forward through 2015.
The best season ever looked like being followed by its mirror opposite, they said.
The root cause was large swings in dairy supply, such as New Zealand’s 10% production increase in 2013-14, with the initial catalyst being drought here and poor growing conditions in the northern hemisphere.
“As it turns out we have been here before, with a very similar dynamic playing out between the 2007-08 and 2009-10 seasons.
“If history repeats then 2014-15 is a case of what goes up must come down while 2015-16 is a case of in the end things even out.”
The ASB revision to $6/kg MS for next season followed the reality that low dairy auction prices had lingered longer than previously expected and they expected that to last into the beginning of next season.
“In particular, dairy auction prices have yet to find a clear bottom.
“Moreover, the starting point for the price recovery is lower than we had factored in.”
The main issues were healthy milk production here, in Australia and in the northern hemisphere, weak Chinese demand and weaker economies elsewhere, including the Middle East where low oil prices might cut dairy demand.
“But much of this weakness is temporary.
“At the same time oil price weakness is reducing incomes and dairy demand in oil-producing countries, it is also boosting disposable incomes in oil-importing countries.”
China is the second-largest energy importer so lower energy bills will eventually give weak consumer sentiment a boost.
China had also moved to stimulate the economy and so the ASB team saw Chinese growth and diary demand rising by mid 2015.
At that time milk production, in particular in NZ, should be slowing.
Slower production growth would give time for demand to catch up. And as demand and supply moved more into balance, dairy prices should recover.
ASB chief economist Nick Tuffley and rural economist Nathan Penny said once the excess of milk products cleared and demand returned in the emerging countries, the milk price was likely to return towards an average of $7/kg MS.
“With this long-run view in mind, we expect that dairy is down for now but by no means out,” they concluded.
- Read the ASB Farmshed Economics report
