Supply chain mayhem!

Export returns for Oceania butter and cheese prices remained at or near record levels but softer powder prices crept through as price resistance started to appear. WMP prices slid over April with main buyer China impacted by lockdowns and additional products offered on the Global Dairy Platform. The first GDT auction for May showed a clear weaker price trend emerging, centred on a cloudy demand picture amidst reverberations from the pandemic and the Ukraine invasion. The milk supply situation in export regions continues to underwhelm, supporting the case for farmgate prices to remain elevated compared to the five-year average. New Zealand March milk supplies were lower by almost 2% YOY, turning the run of weaker milk supply growth into an eight-month streak. With farmers well into establishing new season's budgets, processor opening forecasts for the season beginning 1 June 2022 are eagerly anticipated. The weak supply fundamentals support another profitable farmgate milk price.

Beef

Global beef pricing remains strong amidst mounting economic and supply chain pressure in key markets. New Zealand's total beef export earnings hit a new record in March 2022, totalling NZ$ 470m, up 27% YOY due to high prices and despite export volumes down 11% YOY due to supply chain challenges.

Significant disruptions are impacting supply chains - from processing and shipping to cold storage and food delivery. New Zealand's March exports to China were down 10% YOY, despite strong local demand and pricing. Around a third of China's populations is now impacted by lockdowns. We expect that the volume of beef exported from New Zealand to China will reduce in the coming months as supply chain disruptions and backlogs in China limit import volumes. However, export values are anticipated to remain strong as consumer demand for beef is still high. But if lockdowns are prolonged then consumer confidence could reduce, negatively impacting beef pricing.

Sheepmeat

New Zealand sheepmeat export volumes for March were 25% behind the three-year average for the month. Processing delays and supply chain challenges are limiting export volumes. As of 2 April, the national lamb kill for the seaon was 14.2% behind YOY (1.67m lambs). Export volumes to the EU-27 countries and UK remain subdued. However, exports to the US in March were 47% higher YOY. Strong demand from the US for Easter lamb is an encouraging sign in the lead up to 'grilling season' that the growth in US demand for New Zealand lamb through 2021 is likely to continue. However, with inflation reaching 8.5% in the US in March, consumer willingness to pay could be tested.

RaboResearch anticipates that farmgate lamb and mutton pricing will hold steady in May, supported by US demand. Lockdowns in China are expected to impact export volumes in May.

Fertiliser

The ongoing war in Ukraine and sanctions on Belarus and Russia continue to be the main drivers of volatility in fertiliser markets. Global prices for potash and phosphate, in AU$ equivalent terms, rose 10.2% and 10.1%, respectively, during April. Overseas urea prices declined 25% MOM, but the decline is expected to be temporary. The continued flow of fertiliser exports from Russian ports to 'friendly' countries and a smaller than expected Indian IPL tender have moved global urea prices down from their March high. We do not expect a sustained, or further, decline in urea prices unless hostilities cease in Ukraine, something that is considered unlikely in coming months. High energy prices are likely to keep urea prices trading in the elevated ranges over the course of the year. Meanwhile, agrochemical prices have likely peaked but are expected to remain elevated through 2022.

Exchange Rate

For now, we maintain our outlook for the NZ$ to trade at 0.70 on a three-month view. The Reserve Bank of New Zealand (RBNZ) decided to accelerate the pace of monetary tightening and increased interest rates by 50 basis points to 1.5% in April. As such, the RBNZ hopes to mute the risk of rising inflation expectations. The RBNZ monetary policy committee notes that they remain committed to preventing high inflation from becoming entrenched. In short: expect more interest rate hikes. The combination of these growth constraints, higher prices, and higher interest rates dampens the economic outlook for the second half of the year. Slower Chinese growth is a headwind for NZ’s economic outlook, in view of the strong trade links between the two countries. A weaker outlook for China, and (by implication) for world growth, also supports the view that the safe haven US$ could be stronger for longer. Our current forecast suggests scope for a move back towards USc 70 by the end of this year.