There are still many unknowns around the Fonterra whey product contamination scare, but on the evidence of last Tuesday’s dairy auction it has not evolved into a serious negative for the wider economy. Meanwhile, the New Zealand labour market continues to gradually improve, but wage pressures have yet to emerge.
World dairy prices fell just 2.4% in last week’s GlobalDairyTrade auction, a modest decline in light of the contamination issue. Prices were still the sixth highest on record and over 70% higher than a year ago.
Indeed, the fall was not significantly different to what we were expecting before the contamination issue broke. We had penciled in a decline of around 20% over the remainder of 2013 as New Zealand dairy production recovered from the recent drought. In particular, we were expecting some payback from a 5.3% rise in the previous auction. So at this juncture, the contamination issue doesn’t seem to have had a major impact on Fonterra’s pricing power. Only time will tell what the longer-term consequences will be for trust in the Fonterra and New Zealand brands.
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