Coronavirus: Futures pricing points to a big hit for NZ dairy industry

Futures market pricing suggests wholemilk powder - New Zealand's biggest export - is in for a big shock this week in response to the coronavirus outbreak in China.

The March wholemilk powder futures contract traded on the NZX has fallen to US$3020 a tonne, down 9.7 per cent from US$3345/tonne just over a week ago on January 24.

"We have had a reasonably big decline in wholemilk powder futures over the last week and half, which has really been in direct response to the possible demand shock that we may see from China in the coming weeks and months," said Nigel Brunel, director of institutional commodities at OM Financial.

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The outbreak has thrown financial markets here and around the world into sharp reverse after a very strong year for most in 2019.

In oil, West Texas Crude and Brent crude prices have fallen 18 per cent and 15 per cent respectively.

The New Zealand sharemarket took its lead from weakness in overseas markets, dropping 2.1 per cent this morning as concerns about the impact of coronavirus in China on world economic growth started to weigh more heavily on investor sentiment.

On Friday, the Dow Jones index in the United States fell more than 600 points, or 2.1 per cent - the biggest decline since last October.

OM Financial's Brunel expected prices to fall "a decent amount" at this week's GDT (Global Dairy Trade) auction. "It's hard to know exactly by how much," he said.

"The view is that it could be ongoing, because even if you get a resolution to coronavirus and the infections stop, it's probably going to be a few weeks or months before confidence returns and people start buying icecreams, milkshakes and milk powder," he said.

Results of this week's GDT auction are due early tomorrow.

"We are looking at a pretty weak GDT auction, I would suspect," Brunel said.

"It's pretty bearish and there is concern as to what the impact is likely to be on New Zealand dairy exports," he said.

Wholemilk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, have been firming since the middle of 2019, aside from a short pullback in December.

New Zealand's biggest exporter, Fonterra, said last week that the outbreak had not affected its business, but that it was closely monitoring the situation in China.

The outbreak came at a time when the environment was looking favourable for dairy, with constrained production here and overseas acting to support prices.

Also running in exporters' favour has been a weak New Zealand dollar, which traded yesterday at US64.61c - down from US66c when news of the deadly virus first emerged.

The co-op's forecast for the current season is for $7 to $7.60/kg, with a mid point of $7.30/kg - comfortably ahead of DairyNZ's estimate of break-even of $5.95/kg.

The outbreak of coronavirus in China and the onset of very dry conditions throughout much of New Zealand has suddenly changed what was shaping up to be a positive outlook for the primary sector.

New Zealand meat prices are already feeling the pinch.

Sheepmeat and beef prices have fallen as a result of the outbreak after a record-breaking run throughout most of 2019.

The coronavirus outbreak has already disrupted the export market for meat and logs and both sectors have already been affected by the outbreak.

Last week, Alliance Group said beef and sheepmeat prices had turned lower as a result of the outbreak.

Meanwhile, New Zealand's second biggest log exporting port - Eastland Port - has been brought to a standstill, as orders from China dry up.