Reserve Bank research into local volatility in commodity prices indicates dairy prices will stay at their current levels in the short- to medium-term barring some major shift in Europe or the United States.

Bank staff members Amber Wadsworth and Adam Richardson investigated the interplay between idiosyncratic movements in New Zealand export prices and the global trend across all commodity prices.

They found the bulk of price volatility tracked the global trend and the divergence between commodity prices and their own estimates of the global trend could be used to forecast individual commodity prices, especially dairy.

“We conclude that if dairy prices are above the level implied by the global trend then they will tend to fall until they reach the level implied by the global trend and vice versa,” Wadsworth and Richardson said.

They embarked on their analysis in search of a framework to help distinguish between global trends and localised movements, which could help shed light on the implications for the NZ economy of movements in export commodity prices and might weigh on the terms of trade and overall economic incomes, making it useful when assessing the inflation outlook and setting monetary policy.

In its latest monetary policy statement, the bank said it expected whole milk powder prices to remain stable over its forecast projection, with prices near the bank’s medium-term assumption of US$3000 a tonne.

Whole milk powder sold at an average US$2852 a tonne at the last Global Dairy Trade auction.

They said the general trend for dairy prices followed global factors though there were periods when idiosyncratic events took hold.

“The result for our forecasting exercise indicates that going forward we could expect dairy prices to remain at current levels in the short- to medium-term unless significant events in the dairy industry occur, for example, developments in farm support policies in the European Union and US.”

Similarly, meat prices tended to follow broader commodity trends though there were some large divergences during the global financial crisis.

They noted current strength in meat prices was greater than global factors indicated because lamb prices were buoyed by restricted supply and increased Chinese demand after the approval of chilled lamb imports and beef prices were bolstered by Brazilian beef exports facing bans after a series of corruption scandals.

Source: https://agrihq.co.nz/topic/markets-and-data/prices-and-trends/rbnz-predicts-static-dairy-prices