Profitable season, with lower margins
Dairy farmers are set for another profitable season but profit margins will shrink compared to last season, says Rabobank senior analyst Emma Higgins.
The bank's senior agricultural analyst Emma Higgins says there are more risks now than last season and these are building - especially in China. Higgins says a critical factor is when the hard lockdowns in Shanghai might lift.
The Ministry of Foreign Affairs says it could be mid to late June before any sense of normality returns to the city, which is a major port that many of NZ's exports go through.
Higgins says the lockdowns are a key watching point and there are still conversations going on around the risk of secondary sanctions being applied to China should they enter into the geopolitical tussle between the USA and Russia.
"If that were to happen, there is a risk that our major market could evaporate overnight, which would have dire consequences for NZ," she explains. "We are not there yet, but the risks are building and that is only one market, let alone things like rampant inflation and other recessionary risks as well."
On top of the Covid lockdowns in Shanghai, Higgins says the Chinese economy is slowing and economists the world over are slashing forecasts for global growth. She says other factors at play include the phenomenal growth of the Chinese domestic dairy industry.
In the last two years, milk production in China has grown by 15% and a staggering 8% in the first quarter of this year. Higgins says the expansion of the Chinese dairy herd has been a target for its government and that has implications for NZ.
"The consumption data in China is quite bumpy but we don't think consumption has grown at quite the same rate as production yet,” she adds. “At the same time, their imports have been incredibly strong. We think that the China market is well stocked and [we] expect to see some weakness appearing across the course of this year in terms of their import demand.”
Higgins says in the first quarter of this year, NZ shipments to China actually slowed down by 20% year-on-year for quarter one. Her view is that China is “well stocked” with dairy products and there are other factors which have contributed such as the broken supply chains.
Costs Increasing
Emma Higgins says grain, oil and livestock feed prices are all being affected by the Ukraine war.
She says producers in the northern hemisphere are going to face higher cost of milk production across the course of this year and into next year. Meanwhile, Higgins adds that NZ dairy farmers are also being caught up in higher input costs. She says that while prices for dairy prices could be good, the margins for the 2022/23 season will be lower.
Higgins believes NZ dairy farmers are also being challenged by the weather gods, new regulations and the geopolitical chaos, which is causing rising input costs.
