Dairy prices join commodity slump

Traders were concerned that demand for dairy would decline. Photo / Supplied

Dairy prices fell sharply in Fonterra's online auction yesterday as global commodities plummeted in the wake of the crisis in Japan.

The steepest price declines included wheat, corn, soybeans and palladium - a metal used in catalytic converters in cars.

Traders were concerned that demand would decline as Japan focused on containing the nuclear crisis and recovering from the disaster, with many selling commodities in favour of assets considered relatively safe.

LaSalle Futures Group analyst Matt Zeman said everything was "getting clobbered".

"I think investors are starting to get their arms around the economic and financial impact that this crisis is going to have," Zeman said.

The average price for a basket of products in Fonterra's bi-weekly auction fell 8.2 per cent, breaking the rise since the start of December which had seen prices hit the highest level since the auction was launched in 2008.

Fonterra globalDairyTrade manager Paul Grave said there was a lot of uncertainty in the world but demand was still strong.

"I think the market's going to be volatile, we've had a number of price increases and this is a market correction ... that is why we have globalDairyTrade to reveal some of these pricing changes," Grave said.

According to Statistics New Zealand, national exports of milk powder, butter and cheese totalled $8.8 billion in the year ended June 2010 - 21.7 per cent of all exports.

NZIER principal economist Shamubeel Eaqub said dairy prices were still high even after the drop and auctions could be quite volatile.

"I think part of it is related to Japan because we've seen commodity prices coming down across the board.

"It's affected things like oil, copper, equity markets so there is a pretty broad-base sell-off which is obviously having an impact but I couldn't possibly quantify that."

Eaqub had not seen any major reduction in demand in the global economy but there had been a series of shocks and negative news that was sapping confidence in financial and commodities markets.

Financial markets were looking to avoid risk.

"Because things are just so uncertain people don't want to take risk and that includes currency traders and commodities traders and equities investors," Eaqub said.

"Over the next little while we'll find out what happens and the biggest concern right now is the nuclear threat in Japan," he said. "Nobody knows how that's going to pan out."

A third of Japan's electricity came from nuclear power, which was important for the transport network and industrial production.

"How and when those things ramp back up we don't know," he said.

"Unfortunately right now we have a lot more questions than we have answers."

Japan recovered after the Kobe earthquake of 1995 and there had not been a major impact on global demand.

"What we tend to see is that other parts of the global economy and the supply chain tend to pick up the slack," Eaqub said.

"Optimistically I'm hopeful that that's what'll happen [this time]."

ANZ chief economist Cameron Bagrie said the drop in Fonterra's auction might be disconcerting but was less worrying when considering the price level, which was still high.

The average winning price in the auction was US$4443 ($6066) a tonne, compared with US$3080 a tonne at August 3.

"It's a bit of a reminder that commodity prices are still susceptible to turns in the global economic cycle and risk appetites," Bagrie said. "We've had a timely reminder of how quickly things can turn on that front with the events out of Japan."

The long-term outlook for soft commodity prices such as dairy still looked good.

"Let's not get too caught up within the ups and downs, generally the level of prices are still pretty high and that positive medium-term story is still going to be there behind the scenes.

"People are now starting to think about what is this going to do to the Japanese economy, what is it going to do to global consumer trends, what it's going to do to confidence," he said.

"At the moment nobody knows."