Fluid Understanding
Wolf Rosenburg’s macro-economics lectures were hard grind for me. An unreal maze of input / output tables, national accounts and acronyms to which I paid perfunctory attention. So I failed to equip myself with the tools to understand global trade, which is a pity because I want now to understand the basics of oil and dairy trade. With this disclaimer as to any expertise, I will give the subject a go! The last year has been remarkably volatile in most commodity markets. Focusing on the two Big Fluids, these appear to be the events and numbers (E&OE):
| OIL | DAIRY | |
|---|---|---|
| NZ is | Net Importer | Exporter |
| Volume | 40 MMBLS (net) | 4200 MT |
| Price at Last Peak | USD 110 (14.6.14 Brent) | 1482 (4.2.14 GDT) |
| Price at Trough | USD 49 (15.1.15) | 739 (2.12.14) |
| Price 3.3.15 | USD 60 | 965 |
| Drop peak to trough | (55%) | (50%) |
| Bounce-back from trough | + 24% | + 30% |
If we make an improbable assumption that 3rd March prices and forex hold constant for a few months, the effect on New Zealand’s seasonally smoothed monthly cashflow compared with peak prices (early – mid 2014) might be approximately:
Oil: A saving of NZD190m per month.
Dairy: Reduced revenue of NZD575m per month.
Huge numbers in an economy of NZD20 billion GDP per month! On the face of it, a continuing disparity of this magnitude would be a major setback for the economy. But Governor Wheeler argues that the immediate benefit of lower fuel prices flows like a tax cut into consumers’ pockets and like a cost saving into business P&Ls, while “the effect on farmers’ spending in 2015 is likely to be much smaller than that (the reduced payout): farmers normally smooth spending through swings
in income” via dissaving.
His view of continued global volatility is clear: “Almost seven years after the onset of the Global Financial Crisis, central banks are increasingly operating in uncharted waters. Many continue to search intensively for mechanisms to help inflate their economies and return inflation expectations to their desired ranges. And they are doing so at a time when they, like financial markets, are unsure to what extent the weakness in commodity prices and particularly oil prices, reflects the possibility
of weaker global growth.
Market volatility, as reflected in exchange rate movements, interest rate spreads, and equity returns has increased in recent weeks, and one would have to expect the rise in volatility to be sustained through 2015”.
See http://www.rbnz.govt.nz/research_and_publications/speeches/2015/6012526.html
Maybe familiarity in markets and in the fundamental Supply and Demand Law provides me with the clearest pointer to understanding. A close friend in Beijing provides my closer. “Oil! Milk! There is no problem that price won’t fix!”