Rabobank cuts loan rate
Rabobank New Zealand will reduce the variable base rate on its rural loans by 0.5%, effective from 16 October 2024.
This would extend the run of generally profitable years for NZ agriculture into a fifth consecutive season. Agriculture, like air travel, can throw up nasty surprises. But NZ is, at the very least, giving itself the best chance to get through all this in good shape and adjusting to thrive in a new marketplace in the next decade.
Dairy
Commodity markets have started the new year off with a bang, with all dairy products lifting across the board. Rabobank forecast a farmgate milk price for the 2020/21 season of NZ$ 7.00/kgMS, landing squarely in the middle of Fonterra’s forecast range of NZ$ 6.70/kgMS and NZ$ 7.30/kgMS.
This is well above breakeven for most New Zealand dairy farmers and assumes Chinese import demand remains steady at current levels across the first half of 2021. We anticipate price settings for the 2021/22 season will remain favourable, providing firm footing for another season of a profitable milk price.
New Zealand dairy farmer fortunes for 2021 will rest on the continued strength of Chinese import demand. Rabobank estimates that Chinese milk production for 2021 will grow by 6% compared to 2020 slightly outpacing demand growth.
Beef
Rabobank expects farmgate prices to operate marginally below the
five year average throughout the majority of 2021 due to continuing foodservice restrictions, strong competition from South America, and a high NZ dollar.
However, the ongoing impact of African swine fever (ASF),
combined with robust demand for manufacturing beef and tight Australian supplies, should ensure pricing doesn’t slide significantly below 2020 pricing levels. Returns for higher value cuts predominately sold through foodservice channels will remain compromised for at least the first half of 2021.
The recent advent of the new highly infectious variant of Covid 19 has forced many countries to extend and/or strengthen lockdown measures, including restricting restaurant, bar, and café activity.
The silver lining is that sales through quick service restaurants offering takeaway and drive through services generally perform relatively well during and after lockdowns. This will help underpin solid demand, particularly from the US, for New Zealandmanufacturing beef.
China’s heathy demand for export beef will continue to provide market opportunities for New Zealand exporters but will also come with challenges.
Sheepmeat
Rabobank expects farmgate prices to drop from the record levels experienced over the last two seasons, due to some key market challenges, but anticipates prices to hold slightly above the long-term (five-year) average, with several factors still providing some optimism for 2021.
Reduced foodservice activity, combined with weak economic conditions in key markets, particularly the EU and US, will continue to impact demand for higher-value lamb cuts, pushing average export returns below 2019/20 levels.
At this stage, foodservice sales are anticipated to improve towards the end of 2021 as Covid-19-vaccines and containment measures take effect.
This could lead to a lift in overall export returns in the second half of the year, creating opportunities for farmers selling lambs later in the season. Robust retail sales and strong
Chinese demand will provide a healthy pricing floor, supporting solid export returns in 2021.
Horticulture
2021 looks set to be characterised by labour shortages, more investment into permanent crops and production, and rising demand for quality produce, alongside changes to land use and regulation.
In 2020, New Zealand’s horticulture sector rose to the challenges of Covid-19, and, in response to strong demand for many of our key exports, the sector shipped record volumes last year (see chart).
Moving into 2021, China’s economy is showing signs of recovery, which is important for New Zealand exporters. But a recovery on the consuming side of the economy is required to see demand at least hold or continue to rise, not only in 2021 but further out, as New Zealand’s supply continues to rise. Collaborative efforts across government and the industry to address the labour supply imbalance will be critical to support future growth of the sector.
Exchange rate
We expect the New Zealand dollar to largely hold the gains it made through late 2020, bringing the highest average NZ$/US$ exchange for six years in 2021.
At 9% above 2020 levels, this will act as a significant deflationary force to commodity prices in local currency terms in 2021.The NZ$/US$ has been benefiting from the improvement in risk appetite among investors.
The prospects for global economic growth and commodity prices (positive for the NZ$) and reducing the prospect of investors scrambling for safe haven assets in 2021 (which typically buoys the US$ against other currencies). We are forecasting for an average NZ$/US$ of USc 71.5 for the calendar year.
