Global trade war 'bad news for NZ'
A global trade war beckons, which is bad news for a small open economy like New Zealand, warns Mark Smith ASB senior economist.
In his latest commodities report, Penny says that prices in the three sectors look similarly healthy.
“In fact, there is a better than fair chance that all three sectors surpass the $6/kg mark simultaneously at some stage this year, known as the Magical Triple 6.”
Dairy is already there; ASB milk price forecasts are sitting at $6.00/kgMS this season and $6.75/kgMS next season.
Over recent months, lamb and beef have rapidly closed in on the $6/kg price mark as well.
Penny says firstly, beef prices have drifted higher since February (up 7.9% over this period). General tightness in Australian and NZ (including a lower dairy cow cull) supply have contributed to this lift, while more recently the Brazilian beef scandal has given prices a further boost.
Meanwhile, lamb prices have been on a tear over the same period, lifting 13.7%. Indeed, this price surge goes against the grain of the normal seasonal pattern, where prices fall.
He says the main impetus for this lift has been very low local slaughter and thus tight supply this year.
“At this juncture, we expect both meat sectors to at least touch the $6/kg mark over 2017. In particular, recent trends and continued tight supply support this view.”
However can these prices last? Penny is optimistic that both beef and lamb prices can remain high next season, if not above $6/kg mark.
“In particular, we are seeing signs that demand is likely to underpin already tight supply. For example, the announcement this month of Chinese approval for chilled beef and lamb exports should lift average prices into this market.
“Similarly, the earlier lifting of Iranian trade sanctions and eventual re-commencement of lamb exports is likely to give lamb demand and export prices a further boost. Notably, Iran accounted for nearly 60% of NZ’s lamb exports during the 1970s.
“All up, the outlook for all three sectors is positive, and the fact that all three are strong at the same time is a rare occurrence. However, we retain some caution, noting that higher prices will induce a supply response. In particular, we expect lamb supply is likely to rebound in the spring and improved demand may not be able to offset the extra supply; this is likely to see prices moderate.”
