Fran O'Sullivan and Alexander Speirs: Focus needs to be on dairy

Fonterra is the China's largest dairy producer.

Spare us all the inane hoopla about dollar parity with Australia, going on a shopping spree in Sydney or snapping up a holiday house in Queensland.

The Australian cross rate is attractive for New Zealanders -- those with plenty of spare cash to spend. But for NZ businesses invested into Australia -- including many agribusinesses -- the high kiwi dollar just pokes a hole in the level of dividends repatriated back to local shareholders and owners.

What's more important in the agribusiness sector are the big trends. Top of the list is the end of the Chinese White Gold Rush which sent prices for NZ commodities (milk powder) into stratospheric levels.

This is having a major impact on returns for NZ's main export -- dairy. It will also flow through to the economy in the medium term.

So far, there is little sign out of the Government that any policy response is planned.

But lowered returns will inevitably impact on NZ's trading balance with the rest of the world, farmers' ability to manage farm debt (luckily many of NZ's farmers have healthy balance sheets) in the likelihood that the current trough for dairy commodity prices takes a longer time to recover than NZ's key dairy and banking analysts have previously forecast, and ultimately the amount of spend in rural communities.

All this will ultimately flow through to impact on tax revenues at some stage.

One analyst sent us through some metrics that ought to give cause for concern. The price index on the main GlobalDairyTrade platform is now roughly half what it was in 2013 and back to the same level that it was in 2005.

On top of that, in February NZ's exports to China were down more than 18 per cent on the same month last year. Imports are level pegging.

We all know that Australia's current misfortunes are having an impact -- but the Australians are still buying our goods.

However, the major Chinese demand boost that has sustained the NZ economy since the Global Financial Crisis is evaporating when it comes to dairy returns.

As the country's largest dairy producer, Fonterra continues to talk up future prospects -- as it must -- to ensure confidence in the cooperative from its suppliers.

But the dairy futures curve has for a while been appearing to foreshadow a more negative outlook.

The last dairy auction on April 1 confirmed that, illustrating that the rising auction prices which had been occurring since the start of 2014 had disappeared. As Sean Keane from Credit Suisse emphasises, "the data dashboard that the GDT auction served up was one of the least pleasing that the NZ dairy sector has seen in some time. Every one of the seven products that were offered yesterday fell in price, with the arithmetic average decline coming in at 11.4 per cent.

"Broader financial market participants tend to follow the Whole Milk Powder (WMP) auction price more closely than the headline index number, and this is entirely appropriate. The WMP Index is the most important price element in terms of its relevance to the payout that farmers receive each year, and the significant impact that payout has on the broader NZ economy.

"The WMP news was not positive, however, with the index price falling by a larger than expected 13 per cent. Prices being paid for WMP are now almost $750 lower than they were in February, and they are heading in the opposite direction to where most official forecasts assume they will be ... "

These results ought to give Government policymakers and the Reserve Bank food for thought.

Whether they will use these signals to work with our dairy companies to shore up markets and drive high-quality products further up the value chain and command premiums is a different matter.

But the price trends combined with the tendency for online selling to be used to drive prices down -- as with the Akurala infant formula launched by Synlait and New Hope in China last week -- suggest the industry has some quick work to do to stay ahead of the game.