The chances of an interest cut in NZ next week have soared after global dairy prices fell to six year lows on Wednesday night, the Kiwi dollar also dropped to new six year lows and Fonterra, the world’s biggest dairy group, chopped 500 jobs in NZ, and elsewhere.
The RBNZ meets a week yesterday and is now expected to cut its cash rate 0.25% to 3% after the surprise 0.25% cut in June.
But Westpac economists yesterday tipped a possible 0.50% cut because of the seriousness of the problems emerging in NZ in dairying and the weak inflation reading.
The cut will be despite the continuing property boom in Auckland.
All are connected – there was the poor global dairy auction (where prices for milk products fell 10.7%). In fact it was the 9th global auction in a row that dairy prices have fallen and the average price is now at an all time low.
And the March quarter consumer inflation data yesterday in NZ was lower (a fall of 0.3%) than expected, giving the Reserve Bank of NZ room to cut next week.
That news prompted a sell off in the Kiwi dollar, aided by falls in other commodity currencies, such as the Aussie, and comments by Fed chair, Janet Yellen that the US central bank remains on track to lift interest rates later this year.
The 10.7% fall at the latest GlobalDairyTrade (GDT) auction on Wednesday was the largest drop since April of this year, and saw the price index fall to its lowest point since the GDT was first established in 2008. The GDT price index is calculated from the total quantity sold in a trading event across all products, contract periods and sellers.
The average sale price at the latest GDT auction was just $US2082 ($NZ3156) a tonne, but much of the product sold below this price.
Prices for cheddar and whole milk powder fell 13.9% and 13.1% respectively. Skim milk powder fell 10.1% and anhydrous milk fat fell 10.6%. The previous auction saw a fall of 5.9% in the global average. NZ economists say the falls are steeper than both Fonterra and the Kiwi government and Reserve Bank have been factoring into their forecasts.
Earlier this year, when prices were 20% higher, economists were saying the weakening global price would cut NZ national income by around $NZ5 billion in 2015-16. That figure is now much larger as the latest fall has seen economists push out forecasts for a recovery in prices.
In fact there are some estimates it could be as high as $NZ13 billion, which if accurate, could see the Kiwi economy slow to a halt or even dip into a recession in the next year.
Weak Chinese and other Asian demand, rising production in Europe and the US and the impact of Russian sanctions (on NZ milk) have combined to undermine global demand and this year.
The tumbling dairy price though is pushing the Kiwi dollar lower – it fell 1.86% on Wednesday and was weak again yesterday. That will help offset some, but not all of the fall in dairy prices, as the Fonterra job cuts confirm
The Kiwi dollar traded around 65.57 US cents yesterday its lowest level since late July, 2009. Not helping the currency yesterday was the 0.3% fall in consumer inflation in the March quarter (the cPIT was up just 0.3% in the year to march), raising the spectre of deflation.
Falling dairy prices are starting to translate into falling retail prices for milk, with bigger falls tipped for later in the year in NZ shops.The falling dollar should help arrest any chance of deflation taking hold in NZ, but there is definitely disinflation spreading through parts of the economy.
Fonterra’s news though brought home the dramatic impact the falling dairy prices are having in NZ.
Fonterra CEO, Theo Spierings said yesterday the job cuts would deliver savings of about $NZ55-60 million ($A49-53 million) a year.
Those being retrenched will leave from September onwards. Fonterra employs 16,000 people in New Zealand and other countries..
The jobs are understood to be from Fonterra’s central procurement, finance, information services, human resources, strategy and legal teams.
Staff have also been told that on August 5 the company will begin consultation on new structures in other divisions including sales, marketing, research and development, communications, health and safety, and food quality. NZ media reports say this suggests there could be more job losses later in the year.
The Fonterra board meets on August 7 and will consider the price of dairy products paid to the 10,500 owner farmers.
NZ analysts say it will be cut, and the dividend paid on the units in the listed Shareholders Fund looks like being cut as well.
The emerging problems in the NZ economy are not what our big four banks want to see – all are also majors in the NZ economy and economists forecast rising debt problems among dairy farmers and suppliers from the slump in prices, and then there’s the property boom in Auckland which could be popped by a income shock from the slide in dairy prices and incomes.
