For global commodity markets, the start to 2017 has been resoundingly positive, with expectations of rising inflation contributing to an upward price shift. However, we may soon see a number of cracks appearing - with potentially critical consequences for our domestic economy.
While a lower New Zealand dollar will provide a significant boost to our export sector, the benefits of a lower kiwi are unlikely to offset the economic "drag" we will no doubt see should dairy prices continue to drop.
The "headline" dairy auction at the beginning of this month resulted in a 6.3 per cent reduction in average prices, and a significant fall in both whole milk powder (down 12.4 per cent) and skim milk powder (15.5 per cent). So, while demand is up relative to this time last year, it would appear that an increase in inventories has put a stop to any momentum that had previously been built.
Although the outcome of one auction doesn't indicate a trend, support for commodity prices will be monitored very closely by the Reserve Bank, as the dairy industry attempts to reduce debt following the trying time that dairy farmers have experienced of late.
This shift in milk prices is not an isolated incident within commodity markets, with oil once again trading below US$50 per barrel. Data from Opec suggests this is due to Saudi Arabia reducing its production costs by a third, coupled with growing US inventories - further highlighting an inability for commodity markets to effectively manage supply side responses.