Saturday, December 2, 2023

BNZ: Tough 12-18 months ahead for dairy

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In 2022, BNZ forecast a recession for the second half of this year based on the Reserve Bank’s efforts to control inflation.
BNZ Markets head of research Stephen Toplis expects the dairy payout to come under pressure in the short term.
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There are plenty of reasons for dairy farmers to have an optimistic long-term outlook, but things will not get easier over the short to medium term, a leading sector researcher says.

But nor should they get dramatically harder, BNZ Markets head of research Stephen Toplis told agricultural industry leaders at an open day held by dairy farming company Southern Pastures in South Waikato.

In May last year, BNZ forecast a recession for the second half of this year based on the Reserve Bank’s efforts to control inflation, and that thinking has not changed.

“We were always going to have a recession. The question is, how high do interest rates have to go to get us there?” he said.

The impact of those rate increases have not flowed fully through the economy and he predicted household mortgages to hit 6.5%.

In the rural sector, a disproportionate number of farmers have floating rates. According to new data from the Reserve Bank, the dairy sector is currently paying $1.20/kg milksolids in interest rates. 

“What’s even more distressing is that in 2021 that number was 50 cents,” Toplis said.

Global and domestic factors are putting the milk payout under pressure in the short term.

“We would be surprised that on the basis of current information … we are going to see a dairy payout – not in the season ahead but the season ahead of that – any bigger than the one you’re going to get in the next 12 months.”

The bigger issue for farmers is not the payout, but the dollar value of their cost structure, he said.

Those costs will ease, eventually putting farmers in a much better position. 

“But at the moment in the next 12-18 months, there’s no way of avoiding it being a really difficult time to operate. It’s just a given.”

The global economy is slowing, which will impact New Zealand because 90% of what occurs in NZ from an economic perspective is driven by the rest of the world.

As much as people blame the Reserve Bank and the government for inflationary pressure, these are global issues and NZ’s rates have peaked at lower levels compared to other countries, he said.

“Every developed country in the world has been raising interest rates. We’re no different in that regard.”

As a result, global demand is going to be at its weakest over the next six to nine months.

“As a consequence of that, commodity prices have come under some pressure and that will continue to be the case.”

However, it is looking more buoyant over the medium term, he said.

China’s lockdown took the heart out of its economy, but it is now back as a genuine force. Chinese  demand is starting to stabilise global commodity prices.

China as a nation has the single biggest impact on NZ products and it is good news that China is turning that corner.

However, he said, NZ exporters have to start thinking about China as a developed economy rather than a developing economy.

Its per annum growth rate is now sitting around 3-4% after averaging 14% 20 years ago. This is now the expectation because the more developed a country is, the less it grows, he said.

“While we can rely on China in totality, we can’t rely on China to keep growing in the manner that it has done over the last few decades.”

Looking further out, Toplis said NZ will be a beneficiary of climate change. This is because the rest of the world will be worse affected. Once the impacts of it become more widespread, NZ will have no issues attracting migrants as the country is seen as an oasis.

“In 10 years, our biggest problem is going to be keeping them out.”

It will also cement NZ’s importance as a food producer in the global economy, because of the likelihood of decreases in supply, he said – though it still requires flexibility to meet consumers’ preferences.

“We are very, very well positioned.”

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