Commodity price hikes don't always correlate with demand says Aaron Drew.
Hawke's Bay Today's newest columnist is New Zealand Institute of Economic Research economist Aaron Drew, who has moved to Hawke's Bay to also be chief investment officer with Hastings-based wealth manager Stewart Financial Group.
Mr Drew has previously managed modelling and research teams with the Reserve Bank of New Zealand and
was a consultant to the IMF and spent four years in France as an OECD economist. He spent seven years with the New Zealand Superannuation Fund, where he developed asset and investment strategies and was a member of its investment committee.
Fonterra expects to pay out $3.90 per kg/MS for the upcoming season. At these levels the majority of dairy farms in New Zealand will struggle to cover their operating costs, which DairyNZ estimates is around $5.25 for the average farm, let alone the cost of debt servicing.
The hope is that prices will recover to limit distress in the sector, and spill-over risks to the rest of the economy. The interest rate cut last week by the RBNZ to record lows illustrates they are concerned, and history also does not provide much comfort.
From a statistical perspective commodity prices are what economists call a "near random walk". The fundamental drivers of demand and supply conditions only weakly exert their impact on prices over a long-term horizon. Over shorter timeframes, which may run into several years, the best guess of tomorrow's price is the price observed today.
Present dairy price levels are unsustainable, and any meaningful cut back from our shores should raise world prices. Should is the operative word. Oil drilling activity on North American shale grounds has declined a massive 40 per cent since the peak in 2014, but despite these resources being the world's key marginal supply source oil prices remain below their break-even costs. Many other hard commodity prices remain in the doldrums.
