China sneezes, dairy markets catch a cold

The performance of the Chinese economy is starting to impact of world dairy markets, according to Nathan Penny, Rural Economist with ASB bank in New Zealand.

He says the Chinese economy is in a ‘sticky patch’ at the moment with Chinese GDP growth ending 2015 at its lowest pace in 25 years.

In addition, he says the Chinese sharemarket was at one stage this month 15% lower than it ended 2015.

“And with China the largest dairy importer, dairy markets soon reflect any Chinese weakness,” he said.

The two Global Dairy Trade auctions this year have seen prices fall circa 5%.

However, Penny says he is still positive on dairy’s long-term prospects. “We expect the current Chinese concerns will eventually settle.

“Moreover, Chinese growth will continue transitioning away from industrial sectors to services over coming years.

“Such a move should support higher household spending, including on food,” he says.

Global Dairy Trade

This week overall dairy prices were down a touch at the Global Dairy Trade for the second consecutive fall. WMP fared a little better, dipping 0.5%. SMP prices fell 3.2%, while butter and casein posted the largest falls of 5.9% and 7.8%, respectively.

Penny says there is no doubt Chinese economy concerns are spilling over into dairy markets, keeping prices subdued.

“The January dairy price falls follow a similar episode in July 2015.

“Although, the recent falls are more modest, especially when compared to other commodity markets such as oil; (oil prices have fallen over 20% this year).

Penny said that he believes that tightening dairy supply and exports have buffered the fall so far.

“Thus, if Chinese growth concerns recede, we expect dairy price strength to soon return.

“However, the farm-gate benefits of any dairy price recovery is likely to now accrue to next season.

“Our view remains that dairy prices will move higher over 2016. New Zealand dairy production and exports are tightening. But with Chinese concerns likely to persist at least in the short term, the price recovery is likely to prove stop-start,” he said.

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