Mark Lister: Dairy not only apple in the basket

Prices for apples and kiwifruit are up 11 per cent on two years ago. Photo / NZME.

Opinion

Bundle of other commodities strong enough to drive economic growth, despite sharp fall in dairy prices.

It's not all about dairy. We saw another poor result from the latest GlobalDairyTrade auction, with the headline index down 3.1 per cent and the important whole milk powder price down 5.1 per cent to US$2400 ($3072) a tonne.

Dairy prices have now halved since the beginning of the year, and Fonterra's current payout estimate of $5.30 per kg of milk solids is looking decidedly optimistic. I have no doubt we'll see this forecast reduced to something beginning with a four before the end of the year.

The dairy sector still has a very bright long-term future and we'll probably see a rebound in prices and the farmer payout in the next season. However, in the short term, this will certainly have an impact on our economic growth and, in particular, on those regional towns that rely on servicing the dairy industry.

The dairy sector seems to get all the attention these days, which isn't surprising as it's our biggest exporter. Milk powder, butter and cheese account for 28 per cent of our total merchandise exports and with exports generally representing 30 per cent of our economy, nobody can deny the importance of the industry.

However, while the 50 per cent fall in the GlobalDairyTrade price index this year has hogged the headlines, some of our other commodities have actually been holding up pretty well.

According to ANZ's commodity price index, meat and wool prices are up 19 per cent this year and 32 per cent over the past two years. Apple and kiwifruit prices are up 11 per cent compared with two years ago; log prices and seafood prices have risen 12 per cent.

Also, these price movements are all quoted in global terms so the general weakness we have seen in the New Zealand dollar over recent months would have added further to these gains.

None of these commodities compare with dairy in terms of their contribution to total merchandise exports, with meat a distant second at 11 per cent. Logs and wood represent 8 per cent, fish is 3 per cent and wool a little under 2 per cent.

However, put these four categories together and they add up to almost a quarter of the total, not far from the dominant dairy sector's 28 per cent.

Maybe this is one reason why we're still seeing reasonable economic growth across the country, despite the sharp falls in dairy prices. It could also explain why the dollar has held up better than dairy price movements suggest it should have.

While many parts of the country will feel the brunt of the inevitable belt-tightening that will follow a lower dairy payout, there will be others where a more diversified set of export commodities will see them perform reasonably well.

Regions like Hawkes Bay, Gisborne, Nelson and the Bay of Plenty are probably seeing some robust under-the-radar performances for a number of key commodities.

The dairy sector is, and always will be, a driver of economic growth and our future outlook.

But it's definitely not the only game in town.

Mark Lister is head of private wealth research at Craigs Investment Partners His disclosure statement is available on www craigsip com. This column is general in nature and should not be regarded as specific investment advice.