With the dairy industry accounting for approximately 25% of NZ’s export market, a reduction of dairy prices by 46% from last year will definitely slow growth over the next year. Lower prices will also mean a deterioration in the terms of trade and a bigger current account deficit.
The BNZ have identified 3 factors that have influenced the global dairy market:
1. Ongoing very strong growth in global milk supply – lagged response to previous high prices, favourable weather, and low grain prices. Low grain prices mean that feed for farmers is cheaper and relative to milk prices makes it worthwhile to produce even more milk;
2. Disruption caused by the Russian trade ban on dairy products from the EU, US among others;
3. Question marks around Chinese demand amid reports of high inventory levels.
The graph below suggests that there will be $5.5bn less revenue coming into the economy – 2.3% GDP.