Rains set up autumn

The latest milk production data releases in the United States and New Zealand have been below Rabobank expectations set in December 2021. New Zealand milk production was down 6.1%.

YOY in January 2022, while US milk flows also took a hit of 1.6% YOY in January 2022. The market will be watching closely New Zealand milk supply over the shoulder of the season in a tight global market. In late February, Fonterra lifted its farmgate milk price forecast range for the 2021/22 season to NZ$ 9.30/kgMS to $9.90/kgMS. Thi is now a record milk price forecast for New Zealand farmers.

Beef

A contracting US cattle inventory is supporting global beef prices. On 1 January, total US cattle numbers had decreased 2% in 2021 to 91.9m head. Continued drought conditions and mounting input costs of feed and fertiliser are expected by RaboResearch to drive a further contraction of total cattle numbers in 2022. Despite the increase in US 90CL cow supply, demand for New Zealand lean exports has remained elevated, with export earnings to the US up +10% YOY in December 2021. The farmgate North Island bull price was NZ$ 5.90/kg cwt in the last week of February, which is NZc 0.18c above the five-year average price. However, processing delays and backlogs of stock are making it challenging for farmers to capitalise on current prices. The national beef kill was back -3.1% as of 29 January (week 17 of the 2022 season). RaboResearch anticipates that the North Island farmgate bull price will remain elevated in early autumn above the five-year prices average, supported by strong global demand. However, the schedule is likely to face increased downward pressure from processing delays associated with Covid-19.

Sheepmeat

The record sheepmeat prices have continued into early 2022. The South Island lamb schedule was NZ$ 8.25/kg cwt in the last week of February - $1.88/kg cwt ahead of the five-year average price for the same week. Strong consumer demand and lower global sheepmeat availability continues to underpin strong export earnings. Sheepmeat export earnings were up +17% YOY in December 2021, despite volumes being back -10% YOY for December (compared to very high exports in December 2020). Demand from China and the US remains steady.However, shipping logistics continue to present difficulties getting product to the US and the UK. Recent widespread rain alleviated pressure on lamb backlogs. The national lamb kill for the 2022 season was -7% behind YOY at 22 January (week 16) due to processing delays and a challenging season climatically. RaboResearch anticipates the South Island lamb price will remain elevated above the five-year average through early autumn. Covid-related processing challenges could put downward pressure on the schedule through autumn.

Farm Inputs

Russia's invasion of Ukraine has put a major dent in the likelihood of local urea prices significantly declining ahead of the autumn and spring application period. We now expect global urea prices will increase again to levels just below the November peak for the next couple of months, before tapering once again by mid-year. Fertiliser markets are likely to be impacted by the crisis in three ways:

1. Export capacity: Russia itself is a major exporter of fertilisers, especially of ammonium nitrate. Although we are yet to see any official sanctions on fertilisers, the impact of other sanctions, such as the removal of Russian Banks from the SWIFT payments system, is highly likely to reduce the ability of importers to purchase products.

2. Port Access: Many ports across the Black Sea region are now closed. Shipping lines are also avoiding Baltic ports due to the high war insurance premiums and the risk ships may get stuck in the region.

3. Gas Supply: The Nord Stream 2 pipeline has been halted and EU gas prices again have escalated. Russia typically supplies about one third of the EU's natural gas. Given natural gas is the main feedstock for urea, high natural gas prices may elevate urea prices once again.

Exchange Rates

The NZ$ at USc 0.67 is close to early February values. Although we forecast a rise towards NZ$/US$ 0.71 on a three-month view, this could be thrown out of kilter if geopolitical news worsens and the safe-haven US$ finds additional support. With escalation in Ukraine, the NZ$ could suffer from safe-haven US$ finding more support. RBNZ forecasts the CPI to peak at 6.6% YOY in Q1, before softening towards the end of the year at 4.1% YOY. So far, the NZ$ has risen rather in response to the tone of the RBNZ policy meeting in late February. The NZ central bank has been marked out as one of the most hawkish - supportive of the raising of interest rates to fight inflation.