Oil may be tanking further by the day, but there’s another commodity getting hammered in the second half of the year: Milk! And milk’s drop is just as dramatic as oil’s, considering how high it had been priced for most of the year.
Goldman Sachs warned that a milk glut was coming, and now it’s here. Moody’s said in a report (free registration required) that it’s keeping an eye on New Zealand’s banks because the ratings agency is worried about all their agriculture—dairy—exposure. The only industry with a bigger share of loans in the country is housing.
|Industry||Share of bank loans|
|Property and business||8|
|Finance and insurance||5|
Moody’s doesn’t think the fallout will be as bad as in 2009, the last time milk prices fell this quickly, because farmers didn’t take on too much debt trying to keep up with demand. But it does expect loan losses to creep up a bit. The agency blames a couple of things for the dip. For one, China’s GDP growth is slowing down.
Not only is China a huge market (paywall) for New Zealand’s dairy exports, but a tainted milk scandal had sent Chinese dairy imports and prices around the world soaring. Now that things are getting back to normal, Chinese dairy imports are falling, leading prices to drop.
That’s an especially bad problem to have in the wake of Russia’s ban on European and US agriculture imports. The Russia ban didn’t mean that much for US dairy farmers, but it did leave European dairy farmers holding the bag. Russia was a major export market for dairy products like cheese…
With Russia weaning itself off Western Europe, milk from Europe—along with that from New Zealand and other places—is contributing to the increasing supply available for the rest of the world.