China's Stock Market Rout Could Delay World Dairy Market Recovery

January 15, 2016 06:30 AM
China's Stock Market Rout Could Delay World Dairy Market Recovery

Optimism for the New Year has quickly dissipated, including hopes for a quick turnaround in world dairy prices. Not only has the economy in China—one of the world’s largest importers of dairy products—slowed further, but the U.S. consumer is now having to cope with its own declining equity markets.

“The widely anticipated recovery in dairy product prices later this year will largely depend on two factors: a slowdown in the growth of European milk production and a resurgence in Chinese demand for dairy products. There is no sign of the former, and hopes for the latter have suffered a serious blow,” says Sarina Sharp, agricultural economist with the Daily Dairy Report.

Chinese mainland equities plunged more than 13 percent during this year’s first week of trading in 2016, and trading was halted twice due to a new circuit breaker mechanism that went into effect this year. After a brief uptick last Friday, Chinese equities resumed their slide this week.

“The weakness in China’s stock market has pressured the country’s currency lower, and a falling yuan has further weighed on global stock prices,” says Sharp. “The yuan has dropped to its lowest level against the U.S. dollar since March 2011, which means Chinese consumers have less purchasing power to import goods priced in U.S. dollars.”

The People’s Bank of China has also been trying to guide the yuan lower, a strategy that some analysts see as an effort to boost Chinese exports to support weakening economic growth there. However, taking a longer-term view shows that since early last year, the yuan has actually gained ground against the euro and the New Zealand dollar as those currencies weakened, Sharp says.

“This suggests that China may be less inclined to import U.S. dairy products, but the declining yuan should not hamper China's appetite for dairy products from Europe and New Zealand,” she adds.

The steep declines in China’s stock market, however, could also force Chinese consumers to cut back on spending altogether, which could have a dampening effect on the world economy. Last week, the World Bank lowered its forecast for 2016 GDP growth in China, from 7 percent to 6.7 percent. In 2015, China’s GDP growth was 6.9 percent. The World Bank also lowered its forecast for the 2016 global economy, from an earlier forecast of 3.3 percent growth to a gain of 2.9 percent.

Since mid-2014, when Chinese dairy product imports dropped sharply, dairy exporters have been able to replace a large share of the volume lost to declining Chinese imports with sales to other parts of the world, but that, too, could be changing.

“Amid low oil prices and geopolitical turmoil growth in sales to places like the Middle East seems unlikely,” Sharp adds. “Furthermore, a slowdown in China’s economic growth would likely reverberate in other economies, which could dampen enthusiasm for dairy products around the world.”

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