Global dairy prices halved last year because Chinese buyers have scaled back their activity after stockpiling in 2013.
Milk processors have pared back their expected payments to their farmer suppliers as a result.The Reserve Bank cited that weak outlook in its monetary policy statement (MPS) this morning as threatening to keep a lid on already low inflation, as it drove down the terms of trade more than previously forecast.
The Reserve Bank expected a more severe deterioration in the terms of trade to fall 8.4% in the March 2016 year, before rising just 0.1% the following year.
In its March forecast, the bank expected terms of trade to be 3% lower in 2016, before gaining 1.4% in 2017. Terms of trade measure the value of imports that can be purchased by a set amount of exports.
“Relative to last season’s record payout, farmers’ incomes in the 2014-15 season are expected to be around $7 billion lower, representing a fall of about 3% of nominal GDP,” the central bank said in the MPS.
“If the dairy payout is low in the 2015-16 season as well, farmers’ spending could fall sharply. Moreover, there is a risk that lower cashflows may limit the ability of farmers to smooth their expenditure.”
Reserve Bank Governor Graeme Wheeler last month flagged a weak dairy sector as one of three key risks to the nation’s financial stability, saying about a quarter of farmers were operating in negative cashflow this season and were relying on short-term loans to cover their working capital.
If prices didn’t recover, that would put stress on parts of the sector which in turn could taint banks’ loan books.
The Reserve Bank this morning said dairy production by other major exporters such as Europe and the United States remained high, which continued to undermine the recovery in process.
Prices were projected to slowly rise back to a more sustainable level in the next couple of years.
