Friday, July 8, 2022

Dairy revival boosts trade surplus

Analysts at the financial services firm J.P. Morgan Australia – prodding the December figures that recorded New Zealand’s biggest monthly trade surplus in 18 months – gave credit to the dairy sector’s contribution. NZ’s traded sector had ended 2012 with a bang, it said. The monthly merchandise trade balance vaulted from a revised deficit of $590 million to a surplus of $486m, the strongest result since May 2011. While this was driven mostly by a plunge in imports, the export improvement still lent an underlying positive tone to the data, with the dairy category showing strength at the right time, it said. Analysts at The Headliner, a Christchurch-based investment newsletter, agreed the trade figures showed improving world dairy prices over the December quarter. Export prices generally were heading higher again and they expected this upturn to continue over 2013.   ASB economist Jane Turner noted dairy export volumes had improved for the second successive month, following three months of decline, to be up 14% on December 2011. But she had an eye on the weather and brought the dry conditions in the North Island into considerations. If these persisted, poor grass-growing conditions and high feed costs could limit this season’s production performance, she said.

Dairy prices had come under pressure over the past year but she felt they had stabilised and should start to lift over the coming year.

The first commodity price reports of 2013 should fortify her confidence. The ANZ's commodity price index rose 0.3% in world price terms to a 10-month high in January, its sixth consecutive monthly gain. But the confidence-sapping strength of the exchange rate took its toll and the lift in world prices was more than offset by the higher NZ dollar.

The largest upward contributions to the January rise in commodity prices came from a 1.5% increase in forestry prices and 0.4% rise in dairy prices, partially offset by lower prices for aluminium and meat.

Skim milk powder prices rose 2%, while butter and casein increased 1%. The price of whole milk powder was unchanged.Compared with 12 months earlier, however, dairy prices were 7.2% lower in January.

The currency took a further toll. On a trade-weighted basis the value of the NZ dollar strengthened 1.2% during January and it gained 0.7% against the United States dollar.
That resulted in the NZD Commodity Price Index falling 0.5% during the month and by 10% over 12 months. Dairy prices in NZ dollar terms were just 0.2% lower than in December but a hefty 11% lower than in January last year.

Tight range

The ANZ’s economists, looking at the bigger picture, said the NZD Commodity Price Index had remained in a relatively tight range over the previous five months. The NZD price of beef, dairy and aluminium hadn’t fluctuated much over that period.

For their latest quarterly forecasts, the ANZ’s economists have lifted their milk price forecast slightly to $5.60/kg milksolids (MS) for 2012-13. Their reasoning included Fonterra’s being fully hedged for currency movements. They expect a further contraction in global milk supplies before the seasonal increase in Northern Hemisphere production will lift prices during this March quarter. This sets a higher base heading into the following season, where they say a price in the low-to-mid $6/kg MS range looks achievable, assuming the NZ dollar is near its peak.

However, the weather is playing a part in what happens, too. By early February some rural areas were rapidly drying out and economists were taking the production-evaporating effect into account as they revised their gross domestic product (GDP) growth forecasts.

BNZ economist Doug Steel, in his Rural Wrap, expected milk production in the North Island to be less in February, March and April this year than in those months last year.
Dry paddocks were not the only factor.

“We have long had negatives factored in for this period compared to last year, because last autumn’s climate for grass growth was about as good as it could have possibly been,” Steel said.

In contrast, he expected South Island dairy production “to keep honking along”, showing strong growth, even compared with last season’s high levels.

Despite the challenging conditions in the North, and likely national late-season negative annual growth rates, the BNZ was tipping national production to be up about 2-3% on last year for the season as a whole.

“In the bigger picture this would be a very good performance, given that last season was a ripper (up 11% on the previous season),” Steel said.

Dairy farmers were feeling more confident about their prospects, according to the latest of Federated Farmers’ twice-yearly surveys.

True, a net 8% of dairy respondents expected profitability to worsen, the federation’s end-of-year survey found, but this was an improvement of 37 points on the 2012 mid-year survey. By contrast, a net 53% of sheep and beef farmers expected profitability to decline, down from a net 37% in July.

A net 12% of dairy farmers expected to lift spending, a positive shift from the net 1% who previously said they expected to cut back.

Commodity prices and the exchange rate were farmers' two largest concerns, in both cases to a greater extent than last July.

Some farmers want the Government to intervene in the exchange rate, although a greater number believe there is little the Government can do to directly control it, especially when it is being influenced mainly by global events.

Commenting on the latest data, federation president Bruce Wills said some improvement in confidence was apparent, compared with the start of the 2012/13 season, but this masked a split between dairy and the rest of pastoral agriculture.

Confidence

Rising global dairy prices and upward revisions in payout forecasts had helped the dairy sector regain some confidence, but this came off the deep pessimism recorded at the start of the season. And things were hardly buoyant now, Wills said.

The strong Kiwi dollar was acting like a sea anchor on all export returns, he said. Dairy farmers nevertheless expected to increase production and spending, with only a small drop in those expecting to reduce debt.

In contrast, confidence in the sheep, beef and grain sectors continued to sink.

Meat and fibre farmers have seen prices reverse, while the high dollar erodes what they ultimately get paid.

One finding puzzled Wills. Despite high unemployment figures, farmers are struggling to find skilled and motivated staff.

“So is there a mismatch between where people live as opposed to where the jobs are?,” he asked.

Those jobs were not low-skilled or low-paid, Wills said, and he should know, because he has been reviewing farm remuneration survey results from federation members.

The more positive outlook of dairy farmers, compared with other farms sectors, has been reflected in ASB rural lending growth. It said lending to the rural sector had outpaced that of its major rivals in the third and fourth quarters of 2012, helped by increasing numbers of dairy conversions.

Mark Heer, ASB's general manager of rural banking, said the dairy sector was the key driver of lending growth. There had been more dairy conversions in the past 12 months, which hadn’t returned the sector to pre-global financial crisis levels but had led to a rebound, with significantly more interest in dairy conversions.

This had followed a period of about 12 months where there were almost no dairy conversions.

While the pace of conversions quickens, farm debt is mounting. Reserve Bank figures show rural debt amounted to $49.8 billion at the end of December but it was the annual growth of 5.1% (compared with 2.5% growth in business credit and 0.4% growth in total household claims) that wary bank officials were monitoring.

In December 2011, agriculture sector credit had been 0.6% smaller than a year earlier. The shrinkage continued until March, when it grew by 1.6% (compared with March 2011) to $47.8b.

The pace of growth has quickened every month since then.

The latest figures give no breakdown for dairying. But another set of Reserve Bank data shows dairying (with credit of $30.5b) accounted for 64% of total agricultural credit from registered banks in June last year.

In its Financial Stability Report last November the Reserve Bank warned that the dairy sector seemed more vulnerable to a sharp decline in the payout than at the peak in dairy prices in 2007/08.

“Aggregate debt is higher now than it was in 2007/2008 and a slightly greater proportion of this debt is now held by the most indebted portion of farmers,” the bank said.
“Declining farmland prices have eroded the equity buffers of indebted farmers, implying that banks would consider foreclosing on a larger proportion of farms if the payout fell sharply and was expected to remain weak.”

Just over the road from the Reserve Bank, Treasury analysts were examining the effects of the strong NZ dollar on the economy generally. Among them, the currency’s hardening had contributed to lower-than-expected inflation in the December quarter, helped by falls in commodity export prices over much of the year and subdued domestic demand. But the influence of those factors, particularly the latter two, is expected to fade this year.

Consistent

On the matter of NZ’s trade prospects, the Treasury said the outlook remained consistent with its trading partner growth forecast in mid-December of 3.4% for 2013. For the economy generally, growth through the middle of 2012 had been weaker than the Treasury and most other forecasters had been expecting. However, the short-term outlook remained favourable.

Recent developments underpinning this optimism included reports of continued gains in year-on-year milk production. These pointed to a resumption of growth in the agriculture industry in the December quarter, following a fall of 2.1% in the September-quarter GDP figures.

One business that was expanding, in South Canterbury at least, was the live export of dairy cattle.

A shipment of 7200 heifers left Timaru for China in January. It was reported to be worth about $13m to the economy.

Stock agent Peter Walsh, whose firm was involved in brokering the deal, said sheep farmers increasingly were turning to dairy farming and breeding dairy cattle for export.
Animal welfare group SAFE was critical of the shipment, arguing the 17-day trip would be stressful for the animals and rough weather could lead to injuries.

But Timaru Chamber of Commerce chief executive Tony Howey said breeding dairy cattle for sale was increasing because it provided another revenue stream for farmers, and the business supported grain producers, trucking companies and the town's port.

At much the same time, the Xinhua news agency was reporting Chinese demand for imported NZ cows increased dramatically last year. It was citing Statistics NZ data showing that in the 12 months to November 2012, New Zealand shipped 43,517 live cattle worth $112m.

China bought 38,232 of them at a value of more than $100m.

This was a significant increase on the previous November year, when 25,000 animals worth $63m were exported to China.

Hence China has become NZ’s biggest dairy cow export market, taking 88% of live exports, although Fonterra is among the buyers as it expands its operations there.

Beyond that, of course, the weather might have a big say in how things pan out.

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