Autumn springs hope and concern

Dairy commodity markets have laregly continued their positive trend over the month of February 2024.

Butter prices have continued to soar, lifting 12% over February 2024 and are 20% higher than at the beginning of the calendar year. SMP continues to recover, lifting 8% over February 2024, while gains for WMP slowed to 1% and cheddar prices stalled.

Milk supply growth from the global dairy exporting crowd continues to struggle. A return to meaningful production expansion from these regions will take some time.

Higher dairy commodity prices will translate into firmer farmgate milk prices in all regions; a welcome relief for farmers who struggled to achieve profitability in 2023.

At this stage, it's likely that it will take until the second half of this calendar year for volumes from the dairy exporting heavyweights to move back into positive territory.

Despite the struggling milk pool growth, sluggish demand remains the key influence on commodity prices, and therefore, farmgate forecast prices.

Beef 

Farmgate beef prices are tracking into 2024 in a pretty positive light.

A combination of good on-fam conditions reducing pressure to quit stock alongside steady demand means prices have held.

As summer met its mid-point through late December and into January, warm weather accompanied by rain in many regions kept pastures and crops in good shape longer than anticipated.

Recent weeks have seen a shift to drier conditions in some pockets, notably in the Upper SI and parts of the lower North. This said, the summer dry anticipated didn't eventuate in many regions and late February rain is kicking things along again in some spots.

Due to the overall good growing conditions to date, on-farm pressure to send cattle and also cull cows off farm has been less than the same time in 2023.

It is expected cull cows will be heading off farm over coming weeks, which may slightly reduce pricing for at least this cohort, as per normal seasonal trends.

In terms of NZ key beef export markets by value, the US was up 12% for January this year vs. last, and China down 19% by value for the same period.

Overall, New Zealand beef markets are looking positive to start 2024 and look to remain this way throughout the year with pricing at or above the 5-year average.

Sheepmeat

Pricing for SI lamb has held around the 600 cents/kg cwt to begin 2024 as we continue the subdued waiting game for an improvement in pricing.

Drivers continue to be the same; competing good Australian supply and slow Chinese demand.

A small silver lining throughout Quarter 1 of 2024 has been on-farm feed supplies, in terms of crop and pasture, in most sheepmeat producing regions.

The most notable move here is Southland, with an excellent, kind summer in terms of pasture growth.

With lamb prices lower than anyone would like, the need to quit stock has at least also been more subdued as producers opt to put extra weight on lambs to make up for a lower per kilogram price.

Looking at Australian sheep meat supply to start 2024, the elevated supply continues.

Weekly slaughter volumes increased 20% YoY and showed an 8% lift on January totals. Heading into February this was still 6% up YoY but March is expected to even out to March 2023 numbers.

China’s continuing soft demand due to a sluggish economy and reduced consumption saw the total value of exports drop from 41% to 31% YoY for the month.

Positively, we see an uptick towards both the US and UK however, a 9% lower value (1% higher volume) was realised in terms of total New Zealand exports for the month of January (compared to January 2023).

Meat processors are reporting optimism in terms of pricing lifts to global markets especially, UK, EU, and North America. The waiting game continues.

Interest and Exchange Rates

The RBNZ left the OCR unchanged in February and indicated that they are happy with the progress on controlling price growth.

In subsequent media interviews, Governor Adrian Orr indicated that it wasn’t a difficult decision to leave rates unchanged.

Our own house view is for inflationary pressures to continue easing as the economy operates well below capacity and restrictive interest rates pressure the unemployment rate higher.

As a result, we do expect that the RBNZ will be cutting rates this year to set the economy on a glide path towards 2% inflation next year without a deep and painful economic contraction.

The rate hikes already delivered have not fully flowed through to the economy because many borrowers are still enjoying comparatively-low fixed rates on their debt. As we move through the year, more of those borrowers will reset to higher rates, increasing the pressure on the economy, and the pressure on the RBNZ to cut rates pre-emptively to soften the blow.

Although we expect the RBNZ to begin cutting rates in the second half of the year, we also expect that the USA will be cutting earlier and faster. As a consequence, our forecast on the NZ$/ US$ exchange rate is for appreciation over the back half of the year up to 0.6400 on a 12-month view.