Rabobank flags rising global dairy prices, warns of downside risks ahead
While global dairy commodity prices continue to climb in most key exporting countries, the second half of the year is expected to bring increased downside risks.
Oceania origin commodity prices were mostly flat in the quarter, excluding a correction in the butterfat markets. Further upside cannot be ruled out, but the peak is near.
An expected softening of Chinese import demand should be enough to trigger a price correction in the dairy complex that is likely to occur in the later stages of 2021.
The European flush has largely been lacklustre. However, US milk production remains in high gear, and Australia has positive milk production flows for the season to date.
The settings remain in place for healthy profit margins for New Zealand's dairy farmers again in 2021/22 with Fonterra's opening mid-point farmgate milk price forecast of NZ$8.00/kgMS.
Other companies are largely in line with a similar forecast price, ensuring strong cashflows over the winter period.
Beef
RaboResearch expects farmgate prices to lift over June, with the reduced competition from Australis and a hot US market will help to lift the pricing floor.
However, the stronger currency and increased production are limiting the impact of these external pressures.
Farmgate price movements moved north over May 2021. As at the end of May, the North Island bull price was NZ$5.25/kg cwt, with the South Island bull price sitting fractionally lower at NZ$4.70/kg cwt. Higher prices are being driven by the imported beef price mixed with some local procurement pressure.
Sheepmeat
We expect the continued demand from key markets as we move closer to winter months here in New Zealand, helping to see prices lift through June 2021.
Farmgate prices have seen a jump over May, in line with seasonally tightening of product availability.
As of the end of May 2021, prices in the North Island averaged NZ$7.70/kg cwt, while South Island lamb averaged NZ$7.45/kg cwt, both lifting 12% compared to the same week last year.
Demand for sheepmeat from key markets continues to remain robust. New Zealand shipments of lamb to China were 16% higher in April 2021 compared to the year prior, which was impacted by the early stages of Covid 19.
Export volumes for April 2021 were 28% higher when compared to the three year average export volumes to China, highlighting the strength in the Chinese market. New Zealand shipments of lamb to the US were similarly strong for April, with exports +41% higher on 2019 volumes.
Climate
NIWA is forecasting above-average temperatures for most of the South Island across the winter months. The North Island is equally likely to receive above-average or near-average temperatures over the coming three months.
Rainfall levels are anticipated by NIWA to be near-normal for the top of the North Island, and the north and east coast of the South Island. The east of the North Island is likely to receive either near normal or above-normal rainfall. The west of both Islands are likely to receive below-normal or near-normal rainfall levels through the winter period 2021.
NIWA is forecasting near-normal or below-normal soil moisture levels in both the north and east of the North Island, as well as most of the South Island. The rest of country is forecast to have near-normal soil moisture levels through to August 2021.
Exchange rate
The NZ$ rose almost 1 cent against the US dollar in May and was trading at USc 72.5 on June 2.
While the US Federal Reserve believes that the current inflation evident in its market is transitory and warrants no action, the Reserve Bank of NZ is pushing the other way.
Encouraged by falling unemployment and rising commodity prices, in late May the RBNZ flagged that their first hike is likely to be in 2H 2022.
All being well, they hope to be well into a normalising cycle by the end of next year, and to have hiked six times by the end of 2024. Rabobank expects that the divergence of expectations for rates in the two countries will see the NZ$ hit US74 within six months.
