Plunging dairy prices may squeeze New Zealand farm incomes and curb spending, adding to signs that economic growth will slow, economists said.
Whole milk powder prices slumped 11.5 percent in an overnight auction to $2,725 a metric ton, a two-year low, GlobalDairyTrade said. That extended the decline to 46 percent from a peak in February. A separate report showed New Zealand employment growth slowed more than economists forecast in the second quarter.
Prices for dairy, New Zealand’s biggest export, are falling amid rising global production and waning demand from China, which built up inventories earlier in the year. New Zealand’s Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, last week cut its forecast payment to milk suppliers to NZ$6 a kilogram of milksolids from an initial estimate of NZ$7, and down from NZ$8.40 last season.
“This is starting to enter the danger zone for many,” Con Williams, economist at ANZ Bank New Zealand Ltd. in Wellington, said in an e-mailed note. “This will have wider flow on effects to the rest of New Zealand and especially many rural regions.”
New Zealand’s dollar dropped to a nine-week low of 84.52 U.S. cents after the auction results. It fell further after the jobs report, buying 84.35 cents at 3:10 p.m. in Wellington.
Exports make up 30 percent of New Zealand gross domestic product, with dairy accounting for almost a third of that.
The dairy auction result “reinforces that growth will slow in 2015,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “The income story for dairy farmers has changed, construction growth won’t be quite as strong and you do have the impact of higher interest rates and a still-strong exchange rate.”
ASB forecast on July 29 that growth will slow to less than 3 percent in 2015 from 3.7 percent this year assuming a Fonterra milk payment of NZ$6.20 for this season, he said. The bank today cut its forecast for the payment to NZ$5.80.
Fonterra reviews the payment as the season progresses depending on price and currency trends.
Farmers should review their cash flow, Federated Farmers Vice-Chairman Andrew Hoggard said in a statement. Still, the number of buyers in the dairy auction was the most since April, which is a sign prices may be close to stabilizing, he said.
Williams estimated the overnight auction result was the equivalent of a NZ$4.90 per kilogram payment to farmers, who should be budgeting for Fonterra to pay as little as NZ$5.50 a kilogram this season. Budgets and discretionary spending need to be trimmed, he said.
The plunge in dairy prices was seized on by the main opposition Labour Party as New Zealand prepares to hold a general election on Sept. 20.
“New Zealand is too reliant on one industry,” Labour leader David Cunliffe said in a statement. “Riding the wave of commodity prices is not a long-term solution to grow jobs and incomes.”
Employment increased 0.4 percent, or by 10,000 jobs, in the second quarter from the first, when it grew 0.9 percent, Statistics New Zealand said today. The median forecast in a Bloomberg News survey of 11 economists was for a 0.7 percent gain. The jobless rate fell to 5.6 percent, the lowest since the first quarter of 2009, as the number of people participating in the labor force declined.