Wednesday, July 6, 2022

Westpac predicts boost for returns

Dairy farmers, followed by beef producers, should see higher prices as a flow-on effect from the soaring world grain prices caused by droughts, says Westpac Bank senior economist Felix Delbruck.

Drought has hit major grain-producing regions in the United States and Eastern Europe which has pushed up prices for Northern Hemisphere cattle farmers.

Reduced milk production has already resulted and higher beef prices should follow after the initial surge in slaughter of drought-affected cattle, he said.

“We expect food prices to rise further over late 2012 and into 2013 and eventually to be reflected in an improvement in New Zealand’s terms of trade,” Delbruck wrote in the latest Westpac Agribiz newsletter.

However, that would also support the NZ dollar, continuing to squeeze import-competing firms and exporters.

“And while we continue to believe that demand growth for our key food exports will outstrip supply over the next few years, translating to higher food prices on average, volatility around this higher average level will continue.”

World dairy prices have already moved upwards in response to the US drought, with milk powder and butter approaching $4000/tonne and cheese $5000/tonne.

“However, as is often the case, the dollar has followed dairy prices higher, tempering some of the gains. In the 2013-14 season and beyond, prospects are firmer.

“With a recovery in global growth and ongoing income growth in emerging markets, particularly China, we expect increased demand to underpin prices.”

US dairy cow numbers peaked at around 9.26 million earlier this year and are down, falling towards what the USDA predicts will be 9.1m next year.

Milk production was up as high as 5% (% annual change on three-month rolling average) during this year but is forecast by the USDA to dip to minus 3% next year.

Both the EU and US have fallen into negative year-on-year milk production during July and August.

While the drought may force US cattle producers to cull animal numbers, the national herd is already the smallest in the past 60 years the impact on prices may be small.

“From 2013 onwards, we expect beef demand to improve in tandem with an improving world economy.

“The hangover from the small herd size and high feed costs will make it difficult for US farmers to rebuild herds and keep up with this improving demand.

“This may mean opportunities for NZ beef farmers to fill the breach and benefit from higher prices.”

Westpac also suggests that high world grain prices will inspire farmers in non-drought regions to respond with increased seed sowing.

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