FXStreet (Bali) - According to ANZ, the strong rebound in dairy prices (yet again), challenges the need for further immediate OCR cuts by the RBNZ as low dairy prices was a huge driver behind the start of the easing cycle.
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The move higher in dairy prices continued overnight with another solid rise of 9.9% for GDT-TWI. Milk powders led the way again with WMP up 12.9% and SMP 13.4%. The gains are creating further impetus for milk price forecasts to move back toward $5.00/kg ms.
Moves were broadly consistent what had been flagged by NZX futures. Anecdotally there seems to be increasing cross-over between the futures and physical markets making the former a better predictor of upcoming auction outcomes.
Where to from here? The price jockeying on the futures market for WMP prior to the announcement of this week’s GDT volumes signals that the powder market remains hyper-sensitive to New Zealand supply conditions and GDT offer volumes. Fonterra’s latest update indicating year-to-date production is tracking 8-10% behind the same period last year.
The slow start means peak milk supply is unlikely to be as strong as previous years, which will weigh on annual production. Nevertheless, early season comparisons can often be misleading.
Market expectations are for a 5-10% decline in annual milk supply, and we are currently at the lower end of this range. Ultimately, the weather will have a greater say this season, given lower use of supplementary feed and an industry focus on pasture as the lowest cost feed source. Lower cow numbers in milk this season will also have an impact. The increase in cull cow numbers over the last 12 months is expected to have reduced the number of cows in milk by 2.2% in 2015/16 and led to the first contraction in the dairy herd for 10 years.
There continues to be concerns about the possible impact of El Nino this summer too. At this stage it is a risk. It has to be remembered under a ‘typical’ El Nino pattern this would affect around 40% of New Zealand’s milk supply - a large proportion of which is irrigated in the Canterbury region. Therefore, the effects could be quite localised and might not have an outsized impact on national supply.
All up, the slow start and limited GDT offerings are expected to continue to be price supportive for now, especially while it’s the Europeans seasonal lull for milk supply and seasonal high period for Chinese milk imports.
From a monetary policy point of view we have the RBNZ in temporary “pause and reflect” mode for the time being before a further OCR cut is delivered next March.
We view rebounding dairy prices as challenging the need for further immediate OCR cuts given that low dairy prices were a huge reason behind the RBNZ cutting rates in June, July and September.
Irrespective of the timing of OCR moves, two points are still relevant. First, we see rates remaining low for an extended period. Second, the risk profile for the OCR is skewed beyond simply one further cut. That reflects the global scene, with the IMF cutting its global growth forecasts and saying the risks remain to the downside
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