Trade balance with the US a saving grace
New Zealand is so far escaping the unpredictable vagaries of President Donald Trump's trade policies by the skin of its teeth.
Average prices for Oceania SMP saw a small uptick, reflecting weaker milk production growth in Europe and steady demand from the main buying regions of China and Southeast Asia. WMP continued to drift lower over August 2021.
Rabobank's view is that Chinese buyer confidence (particularly to procure stock further out across the year) is under pressure. This pressures is brought about by the need to clear expensive inventory and is increasingly impacted by strong local milk production in combination the resurgence of Covid-19 in parts of China.
The strength of the peak will play an important role in price direction in the coming months. July 2021 milk production jumped 6.6% YOY following high milk price forecasts and supportive weather. Rabobank forecasts flat milk production for the full 2021/22 season.
Beef
Argentine beef export restrictions to China are not directly impacting New Zealand export volumes but are supporting farmgate pricing.
Total New Zealand beef exports for the month of July 2021 were slightly back on June volumes (-5%), indicating that New Zealand beef isn't filling the deficit in China caused by Argentina's restrictions on beef exports. The Argentine export restrictions are, however, providing a firm pricing floor for New Zealand farmgate pricing. This set a new record for the month of August 2021. The North Island bull price continues to track well above (+12%) the five-year average and pricing range. Rabobank expects the strong demand and pricing to continue through to at least October.
Sheepmeat
Record farmgate prices across both islands for August!
Prices not only signify schedule records for the month of August, they set new records for the highest schedule prices since RaboResearch began recording this data in 2010. These record prices are being supported by demand from the US and local procurement pressure.
July exports were 10% back on 2020 volumes for the same month. Lower export volumes for July are a reflection of the higher number of sheep killed early in the season due to drought. The season-to-date mutton kill is 8.7% ahead of the 2020 season.
In addition, lower lamb crop volumes for 2020 have flowed through to a reduced lamb kill of 3.9% for the season to date. Beef + Lamb NZ is forecasting a slight increase in lambing percentages across the country for 2021, with ewes in OK body condition after a challenging autumn and summer. Market fundamentals are holding firm, and Rabobank anticipates farmgate pricing to hold over the coming months.
Fertiliser
Rabobank expects that high global fertiliser prices will be here to stay until at least the new year, primarily supported by the ongoing strength of commodity prices.
With phosphate prices so high, we expect some farmers will lighten application rates. Initially, we think this could lead to global prices easing by as much as 10% to 15% during the third quarter in the course of northern hemisphere procurement. We expect that this will be short lived though and that, given the time taken for shipping and local procurement, local farmers are unlikely to see any benefit flow through by way of lower prices.
We continue to watch the the situation regarding Chinese fertiliser exports very closely.
To recap, the Chinese government is providing guidance to local fertiliser producers to focus on domestic markets rather than exports. If we see this, it is likely to put further pressure on global prices, which will flow through to local NZ farmers.
Exchange rate
The NZ$ plummeted 2.8% in three days, to a nine-month low, in mid-August.
This followed the snap three-day nationwide Covid lockdown announcement and was in the context of a stronger US$.
Despite remaining in lockdown for the rest of the month, the NZ$ rebounded to be steady with the end of July rate. In the context of the lockdown and uncertainty, it is not surprising that expectations that the RBNZ would lift interest rates this month were not met.
The market is, however, still positioned for two 25bp interest rate hikes in the coming six months, in line with the RBNZ's continuing concerns regarding inflation. In line with this, we have pulled back our NZ$ forecast only marginally.
We now expect to see a 69USc NZ dollar over the coming month, 70USc on a three month view and then strengthening to 72USc on a 9 month view.
