Bet you’d like it: New Zealand, the Saudi Arabia of milk, is enjoying a resurgence in popularity among the global herd of investors. With the prospect of a Fed rate hike now looming on the horizon, investors are once again rushing into risky markets they had abandoned for fear of being exposed to weaker Chinese demand. The low U.S. rates have little to do with the amount of Chinese imports or the amount of food or drink its citizens have, but they make investors much more willing to risk cheap dollars in search of money. higher yields in the most remote corners of the world.
The New Zealand dollar, the Kiwi, has climbed 7.5% over the past month. This sparked a rebound in stock prices, which have climbed 3.7% in the past two weeks, with milk-exporting giant Fonterra (ticker:
) gains 2.6%.
The milk market remains a bit sour. Like oil, the world is in the midst of a glut of milk. According to Rabobank, production continues to increase even though large importers are working with massive stocks of powdered milk. Prices are down 7% from a year ago and 50% below their February 2014 high, according to HSBC. Prices have fallen the most in New Zealand, where Rabobank says milk prices are still below the cost of production.
But after falling in August to their lowest level in a decade, prices are rebounding – auction prices for dairy products have jumped 63% since August, according to Bloomberg. As demand in China holds up despite the slowing economy and turbulent stock prices, Rabobank predicts that the milk glut will evaporate by the middle of next year as producers reduce their excess production. This could help stop a dramatic drop in New Zealand exports which saw them fall 18.3% year-on-year in the second quarter.
Another wild card is El Nino. In August, Nomura strategists warned that the periodic weather regime was shaping up to be the most severe since 1950. It could hurt agricultural production and push up food prices, including milk prices. Rabobank warns El Nino could wipe out pastures from Argentina to Australia. And because milk prices are still historically low, farmers are unlikely to compensate for the loss of grass by purchasing animal feed. While that would be bad for most of Asia, it would be great for New Zealand, the world’s largest exporter of dairy products.
New Zealand dairy farmers are also set to benefit from the recently concluded Trans-Pacific Partnership, the comprehensive trade deal between the United States and 11 other Pacific Rim countries. If ratified, New Zealand dairy cows would have access to five new markets, according to Moody’s: Canada, Japan, Mexico, Peru and the United States.
BUT FORGET THE MILK: the outlook for cow juice may not be the main reason to be optimistic about Kiwi. HSBC economist Paul Bloxham notes that even as milk prices fall, tourist arrivals are at record highs, led by a near-tripling over the past five years in the number of Chinese visitors keen to see something rare in China: the sky. Indeed, tourism is poised to overtake dairy this year as New Zealand’s main source of exports. A weaker Kiwi only helped.
Chinese visitors buy more than a lung full of fresh air. While no reliable statistics exist, it’s an open secret in New Zealand that Chinese buyers are helping fuel a real estate boom. Auckland home prices have jumped 24% in the past year, according to Bloxham. This supports a boom in housing construction.
The housing boom is also making it harder for the central bank to cut rates. Economists expect the Reserve Bank of New Zealand to cut interest rates this year – to 2.5% from 2.75% – to spur growth and revive inflation, which the data released today, fell to 0.4% in the third quarter, well below the RBNZ target. between 1% and 3%. Yet markets are still betting the central bank won’t cut, fueling a rally in New Zealand government bonds.
Bloxham believes the RBNZ will cut again this year, which, along with the rise in tourism, should dampen the economy while demand for its major staples remains weak. He expects GDP growth to improve next year to 2.6% from 2.3% this year. While the overall New Zealand market does not look cheap, and the Kiwi remains vulnerable to capital outflows if new fears of a Fed rate hike reappear. But with the cost of currency hedging relatively low compared to many Asian currencies, perhaps now is the time to look for some bargains in the New Zealand stock market before a rate cut gives a new boost. momentum for actions.
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