Drought’s mixed effects on sectors
Prolonged dry weather will have mixed effects on commodity prices, says ASB senior rural economist Nathan Penny.
In the bank’s Commodities Weekly report, Penny says the bank expects NZ commodity prices to come off the record highs achieved in 2019.
“Recall that over October and November, the ASB Commodity Price Index set record highs in NZD terms, with meat, fruit, forestry and seafood prices all setting record highs on a component basis,” says Penny.
Nonetheless, the bank expects commodity prices to remain at healthy levels on a historical basis.
“Indeed, key (fundamental) drivers including growing global incomes and food demand, global food supply constraints and the ongoing impact of African Swine Flu are likely to remain in play and supportive of prices over 2020,” Penny says.
On African Swine Flu specifically, the report says 2019 coincided with the peak impact on protein prices, including on NZ meat export prices.
However, the sheer magnitude of the rebuild in the global pork herd means that meat prices are likely to remain relatively high over 2020, if not beyond then, as the global pork herd slowly rebuilds. Penny says it’s a similar story with regards to the NZ dollar.
“We expect the NZ dollar to trade at levels that will be historically supportive for commodity prices in NZD terms. However, the risks are that the NZD/USD remains above its 2019 average of US69c.
“The level of commodity prices are consistent with NZD/USD trading closer to US70c over the course of the year, providing slightly less support overall for producer incomes in NZD terms.”
Meanwhile, the bank anticipates global dairy prices (in US dollarterms), will rise over 2020 on the back of tight global supply.
“We expect zero growth in NZ production over the 2019/20 season. US and EU supply growth is low, while Australian production is likely to continues to fall rapidly. We anticipate underlying global dairy demand is likely to remain healthy and supportive of global dairy prices.”
