Drought, coronavirus rattle dairy

Milk production could fall short of what the market is expecting. Photo: Stephen Jaquiery
Milk production could fall short of what the market is expecting. Photo: Stephen Jaquiery
Westpac has cut its farmgate milk price forecast from $7.40 to $7.20 and ASB has trimmed its forecast by 10c to $7.40, as economists keep watch on the effects of coronavirus and drought.

At this week’s GlobalDairyTrade auction the headline index was down 2.9% and most products fell. Key export product whole milk powder fell 2.6%.

The result was unsurprising given the continuing uncertainty surrounding the coronavirus outbreak, Westpac market strategist Imre Speizer said in a note.

The steps China had taken to contain the outbreak, such as limiting the population’s movement, had kept many factories closed.

This had meant less demand for their inputs, including milk powder.

On the supply side, persistently dry conditions in the North Island and eastern South Island could cause milk production to fall short of what the market was expecting.

ASB senior rural economist Nathan Penny said the impact of the coronavirus on dairy prices had been modest to date; in total over February, whole milk powder prices had fallen 8.6%, which did not make the top 30 of monthly auction falls.

Chinese buyers remained active, albeit cautious, and those signs remained consistent with the bank’s view that the coronavirus’ impact on dairy prices would prove modest and short-lived.

In its quarterly economic update, Westpac said China’s responses to the outbreak would affect New Zealand’s agricultural exports in varying ways.

As people stayed home to avoid the virus, eating out had plunged, and the greatest impact had been to demand for seafood, beef and lower-value cuts of sheepmeat.

While demand would eventually return as the virus was brought under control, lost export earnings would not be recovered later.

In other cases, the impact on prices could be short-lived. Chinese manufacturers had experienced longer than usual shutdowns this year due to the extension of the Lunar New Year holiday period and the lack of availability of workers.

As they reopened, they would need to catch up to demand and rebuild inventories, which would likely revive prices for staples such as milk powder. Other durable products such as logs and wool were also expected to get some support as manufacturing resumed in China. However, the adjustment process could be slow, particularly for the forestry sector where the over-supply of logs into the Chinese market that developed last year was still unresolved at the time the outbreak hit.

Increasingly dry conditions across the North Island would mean a shortfall in milk collections over the tail end of the season, which presented an upside risk to world dairy prices.

Sheep and beef farmers were likely to take a bigger hit as they would be trying to offload stock at a time when meat processors were booked up, and exports to China were constrained.

Westpac expected meat prices to fall further in the coming months.

Meanwhile, the Ministry for Primary Industries confirmed it had received four applications for consideration involving shipments of live cattle to China in March and April.

Animal health and welfare director Dr Chris Rodwell said MPI had received assurances that livestock unloading, quarantine and associated transport was not currently affected in China.

It would continue to monitor the situation closely.

‘‘All applications are considered on a case by case basis and approval will only be given if they meet our stringent requirements and provide additional assurances around arrival in China,’’ he said.

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