Westpac Urges Farmers to Prepare Now for El Niño Drought
Westpac NZ is calling on farmers and growers to start preparing now for the possibility of a dry summer, as likely El Niño conditions raise the risk of drought across parts of the country.
The weaker New Zealand dollar over the course of 2017 has also boosted farmgate returns. Recent dairy auction prices have led us to revise upward our payout forecast to $6.50/kgMS.
Yet despite the solid start to the year, we remain wary of the impact slower Chinese growth may have on demand for NZ’s commodity exports over the course of 2018.
Locally, weather remains challenging for farmers up and down the country.
On balance, we expect milk collections this season to be broadly on par with the 2016-17 season (although greater use of supplementary feed and poor pasture in some areas may have a bigger impact on fat content).
Fears of tighter international supplies, particularly for whole milk powder, helped dairy prices squeeze higher in the first few Global Dairy Trade auctions of 2018. Overall prices rose 5.9% in last week’s auction, including a 7.6% gain for whole milk powder.
Higher auction prices have led us to upgrade this season’s milk price forecast to $6.50/kg, slightly ahead of Fonterra’s estimate. But we continue to caution against extrapolating recent trends too far into 2018.
Our view remains that growth amongst NZ’s key trading partners is likely to slow this year, led by China. Chinese policymakers are poised to follow through with moves to rebalance their economy, reduce the risks generated by rapid credit expansion and put the economy on a more sustainable growth path.
And while the consumer sector isn’t the focus for Chinese policymakers, they are unlikely to escape a period of slower growth completely unscathed. With China such an important market for almost all NZ commodity exporters, this could see NZ’s prices soften as 2018 progresses.
• Anne Boniface is a senior economist with Westpac and this article appeared in the bank’s latest Agri Update.
