RBNZ’s 2015 Dairy Forecasts Come Unstuck as China Stays Away

New Zealand’s central bank started 2015 with a forecast that milk prices would rise about 40 percent this year. So far, they’re down 18 percent.

The overly optimistic outlook, revealed in documents released to Bloomberg following an official information request, indicate how quickly the country’s economic prospects have turned and support the central bank’s rapid-fire interest rate cuts in June and July.

The Reserve Bank assumed whole milk powder prices would rise to $2,600 a ton over the first half of 2015 and increase to $3,300 by the start of 2016, according to a Feb. 11 report from the bank’s economics department released Aug. 19. But as Chinese buyers stay out of the market, the average powder price at the GlobalDairyTrade auction fell to a low of $1,590 a ton on Aug. 4 from $3,272 in mid-February.

Governor Graeme Wheeler responded to the impact of falling dairy prices on economic growth and near-zero inflation by cutting interest rates in June and July. Economists expect further reductions as Fonterra Cooperative Group Ltd. dropped its forecast payment to New Zealand farmers to the lowest in at least 10 years, hurting farm incomes and spending.

In their February report, central bank officials said: “the drivers of milk powder prices and how they are likely to evolve are a key uncertainty in the bank’s economic forecasts.” They cited the decline in Chinese demand and the effect of oversupply.

Chinese Inventory

At that time, analysts suggested the Chinese inventory adjustment would have largely taken place by the middle of 2015 “although there is considerable uncertainty surrounding this,” the RBNZ report said. Global supply was likely to slow and Fonterra was forecasting a drop in New Zealand production, it said.

Milk powder prices rebounded to $1,856 this week after Fonterra cut back the volume it offered. New Zealand is the largest dairy exporter globally.

Wheeler cut the official cash rate a quarter point to 3.25 percent on June 11, citing weak inflation and a “more pronounced” fall in export commodity prices. He cut the rate to 3 percent on July 23.

The RBNZ’s most recent forecasts from June are for economic growth of 3.1 percent this year. Nick Tuffley, chief economist at ASB Bank in Auckland, now says growth could be half that pace, and expects Wheeler to lower the benchmark to 2.5 percent by the end of the year.

Wheeler Says N.Z. Economy Not Weak Enough for Big Rate Cuts Fonterra Cuts Milk Payout Forecast as Global Prices Slump China Spurns New Zealand Milk Powder and 12,000 Farmers See Red RBNZ Forecast to Fully Reverse 2014 Tightening on Dairy Fall

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