Strong demand drives positivity

Global commodity markets broadly softened throughout March before showing some signs of optimism  by the end of April. In US dollar terms, commodities were higher at the end of April versus the previous month (except whole milk powder).

Year on year, commodity prices are now down between 28% and 36% since April 2022. The underlying forecasts for the 2023/24 season are around the corner.

With farmers well into establishing their new season budgets, processor opening forecasts for the season beginning 1 June 2023 are eagerly anticipated.

Global supply and demand fundamentals are weaker than this time last year. With elevated macro risk at this time of the pricing cycle, it's likely that there will be a wide opening range.

Beef

Import demand from both China and the US pushed higher in March. New Zealand's total beef export volumes in March were only 2,400 tonnes shy of the record volumes of March 2021.

Total export volumes were 19% higher compared to February 2023 volumes and 9% higher on a year on year basis.

China was the main destination, taking 52% of our exports, while the US took 42%. Export volumes to China lifted 24% YOY.

China has continued to import high volumes of beef through Q1, despite very high domestic inventory levels.

Given the current inventory levels, recovering foodservice sector, and weaker local beef prices, RaboResearch anticipates China's total beef imports could soften over the next few months.

However, the underlying trend of consumers decreasing pork consumption and increasing beef consumption is expected to support New Zealand beef exports in the medium term.

Sheepmeat

The store lamb market has been buoyed by plenty of grass across both islands this autumn.

Although schedule prices are softer compared to the highs of 2022, pricing is still well above five-year averages - the sting in the tail is production costs.

March export data brought welcome news, with sheepmeat exports surpassing March 2022 volumes.

Export volumes increased 30% compared to February 2023, and 12% YOY.

The average export value climbed NZc28 from February values, to NZ$ 9.05/kg FOB.

While the lift in export earnings is trending in the right direction, the average export value for March was still NZ$ 1.94 behind YOY.

The lift in export earnings was predominantly underpinned by growing demand from China, with exports lifting 31% MOM and 51% YOY.

The ongoing recovery of the Chinese economy will be pivotal to bolstering farmgate prices in New Zealand. RaboResearch anticipates that lamb and mutton schedules will continue to track upward through autumn, as the foodservice sector recovers in China.

Fertiliser

Oil production cuts, a possible increase in China's fertiliser export quota, and a rebound in US demand are sending nitrogen in its own direction.

Phosphate and potash markets have been sustaining similar fundamentals in recent weeks: Despite a reduction in mining and processing, the global available supply exceeds demand.

The story is very different for urea. The US market flipped as 'weak market activity' turned into 'corn planting ahead of schedule,' with greater buying and inputs shipments anticipated.

This pushed the market up 40% MOM for New Orleans barges, for example.

Another factor that could occur in the coming weeks and months in the non-official increase in China's fertiliser export quota scheme after spring applications.

This would mean Chinese providers could increase their exports, which, combined with a temporary price increase, would put Chinese urea at competitive levels, thus increasing global supply.

There are many moving pieces and factors that still need to play out before a new price level for farm inputs is set. The landing track is rough and full of potholes.

Exchange Rate

First quarter CPI inflation surprised to the downside in April. That was very welcome news for New Zealand households and the RBNZ, as the pressure to keep raising interest rates seems to be lifting somewhat.

The battle hasn't been won yet though. Despite the weaker than expected CPI read, food prices for the month of March increased by almost double the expected level.

This will be partially due to the effects of Cyclone Gabrielle, but food price inflation is likely to be a persistent feature for a while yet.

Of particular interest in the CPI figures was news that inflation is now being generated overwhelmingly by domestic influences.

Unfortunately, this means that further falls in inflation will need to be driven on the domestic side, because helpful influences from improvements in the external environment may be close to exhausted.

The New Zealand dollar was under pressure in April as the strength generated by the RBNZ's surprised 50bp rate hike proved to be short lived.

The softer inflation figures, home sales volumes, and the poor trade data were all negative influences for the Kiwi over the course of the month.