Cat among the pigeons

The big news of last week was an 8.9% fall in the Global Dairy Trade auction price, after a 5% drop a fortnight previously. This is quite a different beast to the period of falling dairy prices we experienced back in March and April.

That earlier episode was the unsurprising consequence of improving milk production levels in New Zealand and elsewhere – froth coming out of the market, if you will. The latest round of falling milk prices was unanticipated, and is probably more to do with waning demand. The fallout is not limited to dairy alone – log export prices have also fallen sharply in recent months, although meat export prices are still rising.

The culprit here is a marked slowdown in consumer demand in China, exacerbated by a classic inventory cycle. Chinese wholesalers now have more than sufficient stocks on hand to meet relatively-soft demand, and the consequences are rolling up the supply chains for dairy products and logs.

The Chinese economy clearly decelerated in late-2013 and early-2014, following the earlier implementation of restrictive fiscal and monetary policies. China’s economic authorities are now loosening the reins, and the results are starting to show. June quarter Chinese GDP figures, released last week, showed signs of modest recovery in heavy industry and net exports. However, we suspect the consumer sector will be a laggard, and could remain weak for some time. The monthly Westpac-MNI China Consumer Sentiment survey fell sharply in June, and the Chinese housing market is still very soft. So while we are fairly confident that China’s rate of economic growth will accelerate over the course of 2014, a recovery in demand for New Zealand export products may take a bit longer.