KEY POINTS:
Cheese, milk and butter are about to get cheaper again.
World prices for some of New Zealand's premier exports are tumbling, bringing bad news for farmers but relief for shoppers grumbling about the price of dairy products.
Fonterra yesterday reported a 10 per cent drop in the price
for whole milk powder.
The price - a benchmark for other dairy products - has fallen 34 per cent since July as the credit crunch and financial turmoil in the United States affect demand.
But while a drop in the price of cheese is good news for the shopper, it may be bad news for the wider economy, economists say.
Fonterra blamed the global financial crisis for the results of its latest internet auction yesterday, which returned an average price for whole milk powder of US$2917 a tonne - 11.8 per cent down on the previous sale a month ago.
The commercial director of Fonterra's GlobalTrade division, Guy Roper, said the price drop was expected and continued a decline from an unprecedented high last year.
Dairy prices had soared because of world economic growth, demand from emerging markets, reduced supply, drought in Australia and biofuel production.
Fonterra has always said it has to charge domestic consumers the same price it gets overseas.
The ANZ Commodity Price Index - also issued yesterday - dropped 4.9 per cent last month, its biggest monthly fall in 21 years.
Dairy products were down 7.9 per cent in the index.
ANZ economist Steve Edwards said dairy prices had dropped about 25 per cent from the peak, and could fall further.
Kaimai Cheese Company chairman Wyatt Creech said Fonterra should drop its prices for dairy products. But he suspected the company would try to ignore the falls if it could.
"It's like petrol, sometimes the prices don't fall as much as you would expect."
Mr Creech said the fall in price related to milk powder, not cheese, and while the two were related, international price falls in cheese were not as great. "It will mean a fall in the price of liquid milk; I expect the other dairy products will follow."
Mr Creech, a former deputy prime minister, said he expected the cost of Kaimai cheese to fall, reflecting market prices.
Westpac economist Doug Steel said although the price of dairy products was likely to fall in NZ, the international price slump was not good news for the country.
"I think that as a nation, when you've got 20 per cent of your exports, or even more, coming from dairy products, obviously falling prices are bad news for the country as a whole," he said.
Dairying contributed 27 per cent of New Zealand's export revenue in the year to May. Fonterra accounted for 25 per cent.
Mr Steel said dairy prices had been expected to drop, but the speed with which they had fallen was faster than expected.
"So prices in September are where we thought they might be in November.
"The new bit of info is obviously the credit crunch and slow-down in the US, which is seemingly spilling into Asia, and that demand is probably not as strong as we were thinking," Mr Steel said.
The ANZ Commodity Price Index for dairy products rose for 15 consecutive months, from 127.6 in August 2006 to a peak of 291.9 last November.
Expectations of a recession have led traders to predict demand for commodities will fall, which has prompted them to sell out.
Foods from dairy products to wheat and rice have had their biggest falls in five years.
Also contributing to the dairy slump is an increase in the supply of milk, especially from the United States.
Mr Steel said that despite the slump, prices were well above what they had been in previous years.
"It's still a very good platform for economic growth in New Zealand, still a good source of cash flow coming into the country, even if it isn't quite as much as it was last year."