Peaked oil

Over the past few weeks financial markets have been jittery and volatile. Concern about faltering economic growth in Europe and China has intensified, and last week there was even a bout of weaker data out of the United States. Markets are also coming around to the idea that global inflation will remain very subdued for a long while yet.

One consequence of this market volatility has been a sharp fall in global commodity prices. The fall in crude oil prices has been the most dramatic, down by almost 5% last week alone.

Lower global commodity prices have two important implications for New Zealand. First, as a food producer, New Zealand can expect to experience a noticeable downdraft in the price of the products it exports to the rest of the world – the 50%-odd fall in global dairy prices this year being just the leading edge. Actually last week’s fortnightly dairy auction registered a small increase in prices. However, broader global developments raise the spectre of this year’s farmgate milk payment being even lower than our current forecast of $4.80 per kg of milksolids. That forecast required a sharp increase in dairy auction prices from early 2015 onwards – for example, whole milk powder prices would have to rise from about $2,500/tonne at present to around $3,500/tonne by the end of the season. That is starting to look like quite a stretch in this environment of falling global commodity prices.

We do remain confident that faltering growth will spark a vigorous policy response in China and elsewhere (last week there was even chatter about the possibility of the US retaining its quantitative easing programme a little longer). However, it now looks as though any Chinese stimulus would translate into rising milk prices later in 2015 rather than earlier.