However, there will be the ongoing challenges of both the high kiwi dollar and rising operational costs.
Expect to see some improvement in export conditions over 2013; with a lift in meat and dairy prices – as a result of recovery in demand from the US, Australia and China.
The best prospects for any kiwi dollar weakness will come from growing US economic strength. American economic fundamentals should begin to sharpen during 2013, in turn creating an environment that will drive down the Kiwi against the US dollar.
While there are other currencies the NZD has recently fallen against such as the Euro and Japanese Yen; the vast majority of New Zealand’s primary exports are traded in US dollars so this is the one to keep the closest eye on.
Recovering economic activity in China over 2013 is set to drive demand for dairy products, while the lingering effects of drought in the US and elsewhere continue to constrain agricultural supply. The United States drought last year impacted on roughly 62% of that country.
This brings back the horror memories of the dust bowl years during the great depression. The dust bowl, or the ‘Dirty Thirties’, was a period when severe dust storms that caused major ecological and agricultural damage to American and Canadian prairie lands in the 1930s.
Meanwhile, the recent drought has pushed US beef prices to record highs. With the American domestic market a large destination for US beef; therein lay some good news for New Zealand beef export prices.
There is also a glimmer of hope for lamb prices, with export volumes rising as the Chinese start the 2012/13 season on a strong note importing more than double the volume of kiwi sheep meat than a year before. China has recently overtaken the UK, on a volume basis, as a key export market for New Zealand sheep meat – with China importing 62,000 tonnes of NZ sheep meat between October 2011 and September 2012.
Although this does not directly impact already low prices, increasing demand in the Asian region will lead to long term price support for sheep meat.
Fonterra’s investment units will be ones to watch this year for all those interested in investing in the dairy sector. The units set off with a bang, late last year, when they were listed at $5.50 and have quickly shot up above $7 in early January.
Look out for links between the milk price movements and movements in the unit price. With the first GDT dairy auction of the year being up 2% and increasing dairy demand offshore; short term milk prices look to be well supported.
Unfortunately, operational costs aren’t set to go south anytime soon. This shows inefficiencies in the supply chain, as a high kiwi dollar – in theory – should bring prices down.
The industry is a getting an unwanted double whammy here, where in the fact returns are being suppressed by a high kiwi dollar and not being reflected in lower operational costs. New Zealand wheat producers are likely to see a good start to 2013, as US wheat inventories ended 2012-13 smaller than had been expected. These may not get the refill this year which investors had expected either, with winter wheat sowings coming in below forecasts not helped by the summer droughts.
So there is a lot in the pipeline across the rural sector for 2013, but the big themes will be the high-flying kiwi dollar and export markets.
The New Zealand economy is set to continue growing at a stable pace this year; so there is not much here that will drive the kiwi dollar down. So all eyes will on the US economy for any relief on the kiwi dollar and on our trading partners for any export growth.
• Francis Wolfgram is an Independent Financial Analyst with BA in Economics including 15 years’ experience in the financial markets working for some of the world’s largest financial institutions. This email address is being protected from spambots. You need JavaScript enabled to view it.
