Thursday, April 25, 2024

Resilience to the fore for ag sector: ASB

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Next 18 months set to be “another challenging period for farmers”, bank says.
ASB economist Nathaniel Keall expects the NZD to lose further ground over 2023, hitting a trough of around 58 cents before recovering.
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The looming slowdown in the global economy and its implications for commodity prices will test rural resilience over the coming 18 months, according to the ASB rural quarterly report.  

“It looks like the next 18 months will be another challenging period for farmers, but fortunately many have used high farmgate returns of recent years to pay down debt and ensure they’re in resilient shape,” ASB economist Nathaniel Keall said.

“What’s more, the New Zealand agri sector has a long history of weathering storms and coming out the other side stronger – from the UK’s entry into the EU in 1973 to the removal of subsidies in the 1980s.

“It’s likely the sector will need to employ some of the same resilience and adaptability over the next couple of years too.”

After peaking 12 months ago, agri commodity prices have eased substantially over the past year with underlying USD prices down more than 20% since then.

A softer Kiwi has partially offset the fall, with NZD prices down only about 15%.

But Keall said while some supply constraints are easing, global growth is set to slow with economists sceptical China’s reopening will drive commodity prices higher.

Growth of a predicted 5-6% would still be far below what China has averaged over the past decade.

China also only accounts for a quarter to a third of NZ goods exports and growth is slowing in most other major economies.

The consensus forecast for growth among NZ’s trading partners sees growth remaining at 3% or below over 2023 and 2024.

“In our view the risks to that estimate are towards the downside.”

For meat, Keall said cooling demand is increasingly weighing on global protein prices. Having spent the 2021-22 season hovering at record highs courtesy of strong demand and tight supply, beef prices are now down 5-10% over 2022-23 while lamb prices are as much as 15% down over the same period.

“We expect lamb and beef prices to make only modest gains over the latter half of 2022-23 and 2023-24 seasons as, with global growth slowing, global protein demand is unlikely to surge.

“Returning food-service demand from China will help support prices and we expect demand for beef and lamb to remain north of historical levels.

“With growth declining in the US, EU and UK, export growth for beef and lamb will be Asia-driven over the remainder of the season and next,” Keall said.

“We expect the China recovery to be consumption-driven, which is positive for food exporters.

“To that end we’ll be keeping an eye on China’s efforts to contain the spread of African swine fever with sources reporting an increase in infections over early 2023.”

It will be a case of “prepare for landing” for dairy, with price forecasts for the 2023-2024 varying wildly as crunch time approaches.

“While some forecasters are touting $10 per kgMS, Fonterra’s opening midpoint sits at $8. We’re more conservative in our expectations and expect a price at the $7.25 mark.

“Fundamentally our view rests on expectations that dairy consumption will slow this year in line with the global economy.”

While China is the bright spot for dairy exporters, the recent GDT auction results suggest it might be slow off the mark with demand for dairy imports set to pick up only gradually.

While by far the dominant buyer for NZ’s dairy exports, China still only accounted for about half of NZ’s milk powder exports in past years and just under a quarter of overall global milk powder imports.

Chinese whole milk powder (WMP) production is up 25-30% on this point in the past three seasons while consumption has trended to its lowest levels since early 2020.

“China may take advantage of the current lull in prices to further rebuild inventories, but it’s unlikely to compete hard for prices while the domestic environment looks as it does.”

Meantime currency is pretty much a “flightless bird” still looking subdued but stable, Keall said.

“It’s been an unusual commodity cycle when typically the NZD has a strong relationship with commodity prices with the Kiwi rising when agricultural commodities lift and vice versa.

“What’s unusual about the past year or so is the breakdown in that relationship. The NZD didn’t rise as high as we would have expected when agricultural prices were at their peaks and it has subsequently fallen more than we’d have expected given the more modest easing in commodity prices.

“We’re sceptical that the NZD and commodity prices will continue to decouple with a decelerating global economy carrying clear risks for both.

“Broadly speaking we expect the NZD to lose further ground over 2023, hitting a trough around 58 cents in quarter three before recovering,” Keall said. 

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