Wednesday, February 21, 2024

European power crisis looms

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There are two issues that we can see arising from the potential energy crisis looming in the EU.
Westpac senior agri economist Nathan Penny predicts total New Zealand production will be 0.5% down on the 2022 season.
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By Alexandria Winning-Browne, NZX dairy analyst

Last week Russia announced that they are restricting the supply of natural gas via the Nord Stream 1 gas pipeline. The pipeline runs under the Baltic sea, from the coast of Russia to the north-eastern coast of Germany. The pipeline usually delivers 170 million cubic meters of natural gas a day, but the current restriction is currently at 20m cubic meters a day. Politically this restriction is creating tension in Europe, with western leaders and commentators suggesting that Russia is using their gas supplies as a political weapon. 

Following the announcement, gas prices leaped 35%, but in further perspective, gas prices in Europe are pegged at 450% higher than the same time last year. Phenomenal. This energy supply issue in Europe is creating serious issues for both the EU, and the rest of the world. The global gas price is interconnected, and this lack of supply has dragged the global price higher.

So, how does this impact dairy?

There are two issues that we can see arising from the potential energy crisis looming in the EU: one is the increased risk of recession in Europe due to a lack of economic output, due to a lack of energy to produce/ process products. There are already reports of steelworks being shuttered while energy prices are high, and sugar factories processing stock earlier than normal to avoid the impacts of a lack of supply as the weather cools off. Recession in EU will shock the global economy, and hit consumers affordability, and potentially their consumption of dairy; thus downward pressure on dairy prices.

However, there is also the NZ dairy price supportive angle on this crisis; if dairy processors in the EU can’t access energy or the cost of energy is inhibitive, then energy intense processing will be under threat. So, this could see the dairy processing landscape change significantly over the coming EU winter months, and see NZ milk powder prices supported due to a lack of supply out of the EU.

We watch this developing crisis closely to determine the impact to the global dairy market.

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