The Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) another 50 basis points to 2.5%. This was as expected and most commentators have mentioned that it was basically a copy and paste of the May Monetary Policy Statement. Pervasive inflation pressures mean that RBNZ need to keep the foot on the pedal for now.
We’ll get updated inflation figures next week, but expectations are that inflation pushed higher in Q2. RBNZ noted in its release this week that labour and resource scarcity are contributing to upward price pressure, which is being exacerbated by seasonal illness, a resurgence of covid and a net outflow of labour. There is medium-term downside risk to economic activity; however, RBNZ said it is comfortable that its projected OCR path remains broadly consistent with achieving its inflation and employment objectives, without causing unnecessary instability in output, interest rates and the exchange rate. Basically, it intends to keep lifting the OCR to combat inflation, and this objective currently outweighs any possible negative effects.
Price pressure is also not helped by the international front, with both the pandemic and the Russia-Ukraine conflict affecting global activity and causing continued supply disruptions.
Back to NZ, food prices increased 6.6% year-on-year (YoY) in June, with price rises across all categories in the food price index. Grocery food prices rose the most, up 7.6% YoY. Milk, potato crisps and yoghurt were the largest contributors to the subset. Cheese prices have also risen substantially YoY. Compared to May, food prices were up 1.2%. A 4.9% increase in fruit and vegetable prices was the largest contributor, though adjusted for seasonality, they were up only 0.7%, which is typical for winter.
Prices continuing to push higher is not great news for consumption. The domestic market is relatively small for NZ dairy, but the issues here are representative of the wider global situation. NZ is not the only place experiencing high inflation and likely falling economic activity.
US annual consumer price inflation came in at +9.1% yesterday, higher than market expectations. Core inflation was +5.9% (inflation excluding food and energy). These figures have reportedly fuelled speculation that the Federal Reserve will raise rates by a full percentage point next time it meets at the end of the month.
This is exactly what the Bank of Canada has done. Yesterday it raised its rate 100 basis points to 2.5%, its biggest increase in 24 years. Canadian inflation hit 7.7% in May, and the Bank of Canada expects it will average around 8% over the next few months.
Rising costs mean consumers are likely to spend less on dairy overall and opt for cheaper alternatives. The saving grace for the global dairy industry is that global milk supply is likely to continue to remain constrained, which is expected to feed into support for prices.
What happened last week in dairy?
WASDE July report outlines higher yields
The USDA has released their July World Agricultural Supply and Demand Estimates (WASDE) report, outlining an overall increase of 44 million bushels as harvest areas and yields increase globally.
Wheat supplies have been reduced 1.1m megatonnes (MT) with lower production out of the EU, Ukraine, and Argentina. Global exports have increased 0.9m MT with increased exports out of the US and Canada; however; world consumption has dropped 1.8m MT, bringing projected end stocks up 0.7m MT to 267.5m.
Corn on the other hand is projected to have far greater supplies and ending stocks with a forecast 45m bushels increase in the US based on larger area planted and harvested. Russia, the EU and Kenya have all reported declines; however, Paraguay has reported increased production. Paraguay is reporting significant increases in corn exports while Russia is opposite, with exports impacted by the ongoing conflict. Global corn ending stocks are expected to increase 2.5m MT to June.
Soybean production is reportedly down on production, exports and lower ending stocks with the US and Canada both projecting declines. Global projections are for a reduction of 3.7m MT to 643.1m oilseeds produced. Ending stocks have been reduced slightly to 99.6m mt, with lower ending stocks out of the US and Brazil; however, slightly offset by much greater stocks for Argentina. Reflecting on 21-22, China had notable declines on soybean and soybean crush imports.
Danone NZ gets FDA approval for infant formula exports to US
Danone NZ has been given the all clear to export infant formula to the US with the Food and Drug Administration (FDA) approving the company’s application.
After a series of hygiene complaints, the FDA closed the Michigan Abbott milk processing facility, recalling product and shutting off production from the facility which accounts for 16% of the US’ infant formula supply.
Less than two months after the facility was closed, severe flooding has closed the plant again, causing another delay on production, with production expected to be delayed by another three weeks.
Following the initial closure, the FDA invited a series of international dairy producers to export their infant formula into the US. An otherwise stringent vetting process has been simplified in order to secure product.
Danone NZ won approval to export to the US by the FDA last week, with a shipment of 550,000 cans, the equivalent of around 470MT of infant formula to be sent to the US from the NZ facility. Fonterra and A2 are anticipated to be approved in the next few weeks with both NZ companies having applied for approval.
News of approvals will be welcome to NZ as dairy exports fell 19% in May with the closure of Chinese ports. Furthermore, the value of infant formula will have a welcome impact on GDP with the May export value of infant formula sitting at NZ$15,527/t, 15.4% higher than the year prior. Long-term, this also offers NZ processors the opportunity to create future contracts as FDA approval is a barrier to entry.