Dairy price correction a confidence boost – BusinessNZ

Anchor milk powder packets are seen at a shop in Colombo (Reuters)
Anchor milk powder packets are seen at a shop in Colombo (Reuters)

The uptick in dairy prices at the latest auction should put some confidence back into the economy that should never have been lacking anyway, says BusinessNZ chief executive Phil O'Reilly.

Prices at the latest GlobalDairyTrade rose an average of 14.8 percent, with the all-important whole milk category rising by more than 19 percent, ending a five-month run of 10 consecutive falls.

"It's been a long time coming, but I guess we've got to remain cautious," says Federated Farmers spokesman Andrew Hoggard.

"The current prices for whole milk powder and other key dairy commodities are still at record lows."

Fonterra pulled off the move by releasing less product into the market, bringing supply closer to demand. Mr O'Reilly says it should be the beginning of a correction in dairy prices, which have been pushed lower by an increasing supply.

"The marginal players, those who got in when the price was too high… are less likely to be there next season," he said on the Paul Henry programme this morning.

Fonterra's forecast payout this season is $3.85 per kilogram of milk solids, well down on last year and below an amount that would ensure farmers break even.

"Dairy prices are massively important and I really feel for the dairy farmers, and Fonterra's going through some tough times right now, but the economy's a much bigger, broader thing than that," says Mr O'Reilly.

Farmers' recent woes shouldn't be taken as a barometer for the economy as a whole, he says, which is "doing a lot better than many other economies around the world".

"The reality is it's slowing down, but it's still pretty healthy. Our own performance and manufacturing index numbers just out in the last week or so suggest manufacturing's still growing – has been growing now for 34 consecutive months, nearly three years. The service sector is growing even stronger than that, construction's going along quite well, even parts of agriculture are going along quite well – if you're a kiwifruit orchardist in Tauranga, you're feeling reasonably good right now. 

"It's quite important we don't talk ourselves into a recession, we don't talk ourselves into a panic. Things are still reasonably healthy in the economy, and likely to remain so."

He says calls to further diversify the economy, particularly from Labour, have already been heard, with tourism "as big as dairy" and currently benefitting from recent falls in the kiwi dollar.

China's recent moves into producing its own dairy shouldn't threaten Kiwi exporters either, says Mr O'Reilly.

"That's actually pretty good news for us, because it suggests they see that need for protein for their population as well.

"It goes to the point that New Zealand needs to do what New Zealand does best – which is work in the niche of high-value branded products to wealthier consumers around the world."

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