Dairy weighs on trade balance

Whole milk powder exports to China were down 66 per cent in April from the same time last year. Photo / Greg Bowker

Rising oil prices and tougher farming outlook expected to continue downward trend.

A slump in dairy exports weighed on the trade balance last month.

Exports at $4.2 billion were $240 million or 5.5 per cent lower than in April last year, a drop that could entirely be explained by a $237 million or 66 per cent drop in exports of whole milk powder to China.

That was despite a 3 per cent fall in the trade-weighted exchange rate over the year.

The annual trade deficit widened to $2.6 billion from $2.3 billion in the year ended March.

The annual trade balance has now deteriorated by about $4.4 billion since peaking at a $1.8 billion surplus in August last year.

"Looking ahead, the annual trade deficit is set to widen further in coming months as lower dairy sector revenues continue to flow through," said Deutsche Bank chief economist Darren Gibbs.

"This is likely to see the annual current account deficit widen from 3.3 per cent of GDP in 2014 to around 4 to 4.5 per cent of GDP over the course of 2015."

Overall dairy exports last month were $323 million or 27 per cent lower than in April last year despite a 1.2 per cent rise in volume terms.

For the year ended April, dairy exports were down $2.5 billion or 16.5 per cent compared with the year before. They still comprised 26 per cent of merchandise exports.

Infometrics economist Benje Paterson expects the weakness in export dairy prices to persist.

"Although Fonterra is widely tipped to announce an opening farm gate milk price forecast for the 2015/16 season above $5 per kilogram of milksolids, we are not as optimistic as most analysts and expect the final price for the 2015/16 season to be $4.80," Paterson said.

"Underpinning our view are low feed costs and Europe's recent relaxation of its regulatory environment, two factors which will continue to support an elevated level of milk supply in global markets."

April's exports of crude oil were worth $63 million or 43 per cent less than in April last year, which explains half of the $121 million decline in exports to Australia.

Imports of consumer goods at $933 million last month were up 6.1 per cent on April last year, not counting a 3 per cent rise to $369 million in imports of cars. Imports of plant and machinery (excluding transport) were up 3.6 per cent to $615 million.

ASB economist Nathan Penny expects a small downward trend in the trade balance over the next three to six months as the rebound in oil prices on top of strong underlying import growth leads to rising import values.

Penny said: "Later in the year, as dairy prices recover, the trade balance may stabilise somewhat."

Deficit widens

$4.2 billion of exports, down 5.5% on April last year.
$237 million drop in exports of whole milk powder to China.
$2.6 billion annual trade deficit in the year ended April.