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.
October commodity prices were generally firmer. Oceania FOB powder prices rallied more than 10% for the month on the back of less favourable milk production signals in New Zealand.
Butter prices also firmed through the month, but cheese prices fell again in October as a weak US wholesale market dragged prices lower.
Grey clouds continue to build over the production outlook in New Zealand. For the key month of September, milk production was 0.4% below the same month last year on a volume basis (but higher on a milksolids basis).
This means that the volume of production for the season-to-date is trailing the previous season by 1%. Challenging seasonal conditions in the North Island have been the culprit. The outlook for milk supply offshore softens.
US milk producton has been in decline for the past few months, with a smaller herd driving the slowdown. Across Europe, milk supply growth remains sluggish.
In key export regions in Europe, farmgate prices are showing signs of stabilisation.
Beef
North Island bull price rose a small but steady 2% over the four weeks to 27 October to NZ$6.15/kg.
This rise in prices has been stronger than average for this time of year. Prices, after being close to average back in September, are now 5% higher than the five-year average.
The continued rise in New Zealand prices may reflect the seasonally lower volumes of cows and bulls in the system and the desire of processors to attract numbers with the anticipation of the US prices remaining strong.
Total beef slaughter volumes for the full 2022/23 production season (ending 30 September) were largely similar to the prior period. Beef export volumes for September were lower by 5% YOY.
Volumes to China declined by close to 30%, and value dropped by a significant 46% compared to September 2022. However, shipments to the US jumped by 35% to 8,884 tonnes.
Sheepmeat
There was not much good news over the month of October for lamb prices.
The slight lift in farmgate prices exhibited over September and into October had disappeared by the end of last month, with the SI lamb price dropping back down below NZ$ 7/kg on 27 October 2023. Farmgate prices are nwo 25% lower than this time last year and almost 20% below the five-year average when comparing the same week's prices received.
Lamb prices continue to hover at levels similar to 2020 - some of the lowest farmgate prices received over the last 10 years. Provisional export slaughter data for the 2022/23 season shows lamb slaughter (17.7m) was steady versus 2021/22 volumes.
Sheepmeat export data reflects the challenging market conditions in China. Export receipts received were lower by 17% over the same period, driven by the weaker value of shipments to China and the US - down 11% and 15%, respectively, compared to last September.
Farm Inputs
The farm inputs price structure in Q4 2023 will have a heavy impact on farmers' budgets next season.
This is due to retailers' procurement time frame, which can be several months long for some products.
On the fertiliser side, we expect price stability with a small bearish potential for major overseas exporters, assuming the Israel-Hamas war does not disrupt supply chains or boost crude oil prices. For the next five months, we forecast international urea prices to be down 11% in US dollar terms compared to the period between November 2022 and March 2023, with DAP prices down 26% and potash down 41%.
This is a very encouraging outlook for farmers. However, currency and energy costs will adversely impact farmers' input budgets.
Meanwhile, the diesel terminal gate price is another headwind that will make operations more costly.
Interest and Exchange Rates
Third quarter inflation for New Zealand was lower than expected at 5% YOY.
That compares to a consensus forecast of 5.9% and the RBNZ's forecast of 6% made in the August Monetary Policy Statement. So, after we had confirmation last month that New Zealand was doing better than many thought on economic growth, we now know that it is also doing better than we thought on fighting inflation.
We've been saying for some time that we believe the OCR has peaked at 5.5%, but the futures market had been gradually pricing in more hikes.
The lower inflation figures saw the New Zealand dollar come in for some punishment during October.
The currency fell as low as 0.55 74 after opening the month at 0.6004.
The sharp falls in the New Zealand dollar and the continued high rates of net inward migration are providing support to the economy, even as individual consumers remain under pressure and New Zealand's trade performance gradually recovers from its very weak position.
