Some pockets of price improvements

BNZ senior economist Doug Steel says the good news is that there have been some green shoots appearing on the price side of things.

“It has not been uniform nor universal, but some product prices have lifted,” he says.

He adds that the official terms of trade figures are released with a long lag, so the recent bounce in some product prices haven’t shown up in the official figures yet.

“This includes dairy prices. Global Dairy Trade (GDT) auction prices in early April were up nearly 28% from their August lows. Such moves will show up in the official stats much later this year.”

The GDT gains look supportive of a 2023-24 milk price in the vicinity of Fonterra’s current forecast midpoint of $7.80/kgMS.

While that would be down on the previous season’s $8.22, it is significantly better than some forecasts during the season that had dipped well below $7.

Adding in dividends and this season looks like coming in above Dairy NZ’s latest estimate for the national average breakeven price for milk of $7.75/kgMS, notes Steel.

Beef prices have also shown some improvement offshore over recent months, offering support to domestic farmgate prices.

“None of this means that product price levels can be described as strong overall, but there’s at least some that have lifted above prior lows. But others haven’t,” he says.

“In contrast to the above, lamb prices remain very weak. Yes, there has been some price improvement, for some lamb products, in some markets. But the overall balance between international supply and demand for lamb remains challenging for pricing overall. Today’s NZ farmgate lamb price is about 15% below its five-year average. That is in nominal terms and before higher costs enter the profitability equation.”

Low lamb prices and higher costs were key components of Beef + Lamb New Zealand’s (BLNZ) recent mid-season update that indicated the prospect of a sharp drop in farm profits in the sector, with many seen making cash losses. For the 2023/24 season, the BLNZ update forecast farm profit to be down 54% on the prior season and down by 67% on two seasons.

Steel says kiwifruit and apple prices are expected to be back a bit this year but follows from more positivity surrounding production, including further recovery from last year’s severe weather hit.

“The well documented significant increase in kiwifruit volumes this season will translate into much higher export volumes during the selling season over coming months. While kiwifruit pricing per tray is expected to be generally lower than the prior season (which was elevated on low volume), Zespri forecasts show higher expected per-hectare Orchard Gate Returns for the major categories compared to the prior season.

“The pockets of primary product price improvement have been supported by global economic growth expectations getting revised incrementally higher over recent months. The direction of travel is helpful, however with growth expectations remaining below average caution remains around the primary product price outlook.

“We have been of the view that NZ primary product prices would see some moderate gains, on average, over the coming year. This remains our base case. But we are quick to point out that we are still only talking about higher prices, not high prices. We suspect annual comparisons will look better this year as much a result of last year’s low base as any measure of genuine strength.”

Meanwhile, Steel warns that there remain any number of risks to monitor, including of the geopolitical variety.

“These can change any price trajectory abruptly,” he says.