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.
This brings final tallies for 2021/22 to a drop of 4.1% YOY. Commodity prices improved over June 2022.
RaboResearch expects dairy commodity prices to remain volatile over the coming months, with weak global milk supply drivers supporting prices to remain at elevated levels.
Higher corn and soybean prices and weather disruptions in certain regions have put a handbrake on milk supply growth.
Overall inflation pressures on energy, fuel, and wages are also impacting profitability across the Big-7, despite higher milk prices. We expect the milk supply to grow again from second half of 2022.
Beef
Export volumes in May were consistent with volumes exported in May 2021.
There were some changes in buying demand in May though - exports to China lifted (+27% YOY) while exports to the US continued to drop (-30% YOY). Beef export volumes lifted in May after dropping in April due to shipping difficulties and port access in Shanghai.
The current liquidation of the US cow herd is positive for demand for New Zealand lean trimmings over the next few years. Once the US herd stabilises in numbers, there will be a shortage of available 90CL as cows and heifers are retained to build numbers once climatic and economic factors improve. This is likely to provide demand and price support for NZ 95CL.
The North Island bull price lifted to NZD 6.05/kg cwt in the last week of June, which is NZc 0.59/kg cwt higher than the five-year average for the same week.
RaboResearch expects the farmgate beef price to remain elevated through the spring months, supported by a tight global supply situation.
Sheepmeat
Schedule pricing continues to heat up as processors seek stock. After months of backlogs, processors are actively searching for stock.
The South Island lamb price climbed to NZD 8.96/kg cwt in the last week of May. The impacts of lockdowns in China are evident in the May export data. Export volumes to China were down 11% on the previous month, and down 27% compared to May 2021.
Although lockdowns eased in Shanghai at the start of June, China's zero-Covid policy means we can expect lockdowns to be a regular occurrence for the remainder of the year.
The May sheepmeat export data includes some bright spots - exports to the UK lifted 16% in May compared with May 2021.
May exports also increased to some of our smaller markets: Saudi Arabia (+54% YOY) and Malaysia (+97% YOY). The weaker NZD/USD has supported strong returns for exporters.
Fertiliser
Global fertiliser prices edged higher in June but are still 41% (urea) and 3% (MOP) lower than H1 2022 highs in USD terms.
Despite a substantial decline, urea prices remain more than 100% above their 2019/20 five-year average, and N fertilisers have already seen a lift from June lows and might soon face more upward price support.
This would likely be driven by energy prices and a seasonal uptick in demand as Northern Hemisphere regions start to stock up toward the end of their summer.
Phosphorous prices are also off highs but more falls could be expected if China resumes its full export capacity.
Exchange Rate
A 50 basis point cash rate hike - to 2.5% - is expected in July by the RBNZ.
The NZD has been volatile and fell again to USc 0.62 after, but we expect a move toward USc 0.68 within 12 months.
All eyes remain on the RBNZ meeting on July 13 and the likely cash rate hike of 50 basis points, to 2.5%, which will likely be followed by another two hikes of 50 basis point each in 2022.
These would already bring the cash rate into the 3.5% to 4% range many analysts expected for 2023.
