Rural resilience is set to be tested with a weaker China outlook carrying risk for several primary industry sectors, particularly dairy, lamb and forestry, according to the latest ASB rural quarterly report.
It warns the weak performance of the Chinese economy is set to be another challenging 12-18 months for many farmers, though there are some positives emerging on the horizon.
ASB economist Nathaniel Keall said while the United States economy has strengthened, China is battling high debt levels and weaker consumer confidence, and this is likely to have flow-on effects for New Zealand.
“We are already seeing this play out with whole milk powder [WMP], with China purchasing less than 40% of what’s on offer at each auction, compared with a historical average in the 55-60% range.
“This is having an impact on the global dairy trade price indices, with WMP hitting a seven-year low during August.
“Prices have mounted a modest comeback over the past couple of auctions and many farmers will be hoping the market is finding a floor,” Keall said.
On the dairy front prices are now 40% below the previous peak in early 2022 and down about 16% since the end of May.
“We expected to see dairy prices heading higher by this point.
“It’s increasingly likely we will see a $6.60 per kgMS milk price low during this quarter, which is in the lower half of Fonterra’s $6.25-$7.75 guidance range.”
Lamb prices have undergone an unusual seasonal decline due to processers passing on the impact of weaker demand from offshore to the farmgate, and this has resulted in an annual decline of about 10-15% for beef and 20-25% for lamb.
“We anticipated more upside for lamb than beef in our previous rural report, in fact, the opposite has proven true due to demand, not supply, differences driving pricing.”
Lamb is being hit harder by weaker demand as consumers shift to cheaper cuts amid cost-of-living challenges.
Forestry has dropped more than 30% below the previous USD price peak in 2021 (18% in NZD).
Lower forestry prices have also been accompanied by lower export volumes as the sector battles headwinds like the impact of Cyclone Gabrielle.
With the Chinese construction sector decelerating even before last year’s lockdown, Keall said softer demand has also had an acute impact on forestry prices given China usually purchases about 60% of NZ’s exports.
There are some positives emerging on the horizon.
“Twelve-month lows for the New Zealand dollar should continue to give farmgate revenue a minimal boost. Further falls in the NZD this season could offset some of the impact of lower commodity prices on farmgate returns,” Keall said.
“Commodity prices are usually cyclical; booms often sow the seeds for a supply response that triggers a subsequent downturn and busts facilitate a tightening in supply that provides eventual support for prices.”
While this next quarter is likely to test the rural sector, it has seen challenging periods before.
Many farmers have used high farmgate returns from previous years to pay down debt and ensure they’re in good shape.
“Our agriculture sector has a long history of weathering storms and coming out the other side stronger.
“It’s likely the sector will need to employ some of that same resilience and adaptability over the coming year.”
In Focus this week: Trade relations with post-covid China
Bryan talks with Meat Industry Association chief executive Sirma Karapeeva, who has just returned from leading a technical delegation to China. She says post-covid China is different to the one she visited prior to the pandemic, but while the economy is subdued there are opportunities for NZ exporters.