Dairy farmers are set for another profitable season but profit margins will shrink compared to last season, says Rabobank senior analyst Emma Higgins.
Export returns for all dairy commodity prices slid in May 2022, with WMP and butter prices leading the charge lower: the result of the continued fallour from Ukraine and Covid-19 events.
Importantly, all main commodities, except for WMP, are at higher prices compared to the beginning of the calendar year. RaboResearch expects dairy commodity prices to remain volatile over the coming months, with weak global milk supply settings supporting prices to remain at elevated levels. Slower supply growth supports a strong price floor.
New Zealand milk supplies for the penultimate month of the 2021/22 season were lower by almost 5.6% YOY. This is the ninth month in a row of weaker milk collections compared to last season, driven by average weather across much of the season. RaboResearch anticipates a farmgate milk price NZ$9.00/kgMS for the 2022/23 production season. Seismic global events continue to reverberate in markets, providing a challenging backdrop to milk price forecasts.
New Zealand beef export volumes dropped 3% below the five-year average in April 2022, as the entire supply chain faces delays from processors right through to retailers. Exports to China in April fell slightly by 3% YOY. We expect to see the impacts of the lockdowns in Shanghai reflected in the May and June export data for New Zealand. Although Shanghai is easing lockdown restrictions, other regions in China remain in lockdown. Beef is a popular protein and anecdotally we understand that consumers in Shanghai have been bulk buying beef and keeping it in their freezers. However, a worsening economic environment will likely force some consumers to reduce their beef consumption and substitute for cheaper pork and chicken options. NZ processors continue to play catch up on backlogs of cattle, but have been able to pass through healthy margins to farmers. RaboResearch anticipates that the farmgate beef price will remain elevated through the winter months, supported by a tight global supply situation.
The South Island lamb schedule moved higher in May 2022, hitting NZ$ 8.55/kg cwt at the end of the month. The uptick in pricing follows the usual seasonal trend of a rising schedule through winter. The national lamb kill at the end of April was 12.2% behind YOY, and the mutton kill across both islands was 12.5% behind YOY.
The mutton schedule was also lifted in May - the South Island mutton price was NZ$ 5.65/kg cwt at the end of May. The combined effect of New Zealand processing delays and increased ewe retention in Australia (flock rebuilding), means there are tight supplies of mutton available, supporting pricing. RaboResearch anticipates that farmgate lamb and mutton pricing will remain elevated through the winter months, but lockdowns in China, and rampant inflation in the EU region and US, are a risk.
The decline in offshore urea prices this month is reportedl due to weakening demand and discounted supplies continuing to flow from Russia. We could see softer global prices flow through to the NZ market by late July or early August. Despite this, we expect prices will remain volatile and will rise substantially if Russian gas is sanctioned. The decline in offshore potash prices has reportedly, like urea, been due to continued large flows out of Russia, moving primarily to Brazil. Prices have likely peaked with the loss of the Black Sea supply now priced in. Though phosphate prices may have peaked, the are expected to remain well above average in 2022. If China returns to the export market, price downside could occur in 2H 2022 However, recent news suggests that the Chinese government has reinforced export controls, with inspection periods for shipments increased to 75 days from 45 to 60 days. Chinese lockdowns and exportable surpluses will be key drivers for chemical price volatility in the coming 12 months. High inflationary pressures and associated increases in production costs are expected to keep prices high.
The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 0.5 percentage points to 2.0% in May. The NZ$ recovered recently to USc 0.65 from a mid-May low of USc 0.62. The RBNZ continued to be a front runner in interest rate hikes, raising interest rates for the fifth time in a row for May. The additional 50 basis points elevated the OCR to 2.0%, the highest since November 2016. Since the rate hike cycle started in October 2021, the RBNZ has added 1.75 percentage points to control inflation. We see the potential for further safehaven demand to boost the US$ in the month ahead.
This view stems from concerns over the pace of global growth.
We see the risk of another dip to the NZ$/US$ 0.63 area in the weeks ahead, with a moderate recovery back to USc 0.65 on a six-month view dependent on a broad-based softening in the value of the US$.