Prices and weather collide

The underlying fundamentals to the global commodity market remain soft.

Through July, Oceania spot commodity prices fell across the board. The biggest falls were in cheese and butter as US dollar prices converge between the export regions.

Across the complex, most prices are below five year averages. The next phase of cycle is still reliant on more volume purchasing from Chinese buyers, averages.

The next phase of the cycle is still reliant on more volume purchasing from Chinese buyers. However, the supply outlook is still not strong and is now faced with negative weather impacts and tightening farm margins as feed costs rally. 

RaboResearch still expects New Zealand to post growth in milk supply over the course of the season, albeit at a modest rate below 1%.

Beef

Although production and export volumes remain similar to the 2021/22 season, increased competition from cheaper and higher volumes of Australian product into key markets is having a dampening effect on New Zealand prices.

The NI bull price dropped 4% and SI bull prices dropped 3% between the end of June and the end of July, taking the NI prices to almost the same as the five year average.

North Island store prices saw larger drops with R1 Friesian bulls dropping 8% to NZD 3.55/kg lwt but they remain 8% higher than at the same time last year. Beef production volumes are expected to start declining, helping to provide a floor for pricing over the next month.

The clear challenges to schedules remains increased competition from Australian product in the global markets.

Sheepmeat

Schedule prices for North and South Island lambs continued to fall through July down 7% from the start to the end of the month contrary to what would normally be happening at this time of year. High domestic volumes, strong global competition from Australia and soft consumer markets are all taking their toll on prices. The South Island lamb price was NZ$ 7.05/kg on 28 July getting close to the lowest price in the last five years for this time of year. The normal seasonal contraction in supply of lambs in August and September should provide some price support and possibly stop the fall in prices.

However, the weaker global markets, full supply chains, and strong competition are likely to mean prices remain soft over the coming months.

Farm Inputs

For the coming months, international fertiliser prices are poised to decrease or remain stable, but not without ups and downs along the track.

Despite production reductions since early 2023, supply is still greater than demand, putting pressure on prices, even now during the South American restocking period. Hopefully, Oceania will be able to piggyback on these lower prices later in the year.

Compared to a year ago, we have the energy crisis under control, but not solved, and soft commodities have come down from their record prices.

These developments have pulled fertiliser and agrochemical consumption down, levering the seesaw on the supply side.

Since January 2023, international prices for urea dropped by 15%, DAP is down 35%, potash decreased by 39%, and glyphosate fell massively by 45%.

Still, during the second half of July urea surged by 29% MOM, closely following natural gas prices in Europe, which rose 30% in the same period. It will not be a surprise to see a substantial percentage decrease in the near future after these elements fade away.

Interest and Exchange Rates

Future markets now suggest a 29% probability of a further 25bps hike in the OCR by November this year. This was driven by firmer than expected inflation in the second quarter of the year.

Figures released in July suggested that prices grew by 6% over the last 12 months, which was a touch faster than the 5.9% growth rate expected by the market.

Even more critically, non-tradeable inflation was 1.3% in the quarter versus expectations of just 1%, while tradeable inflation was actually one tick lower than expected at 0.08% QOQ.

The economy is still dealing with the after effects of natural disasters earlier in the year, but there are signs that we may now be through the worst of things.

Unemployment is expected to lift gradually from current record lows as firms begin to shed excess labour after years of finding it difficult to find workers.

We maintain our forecast that the RBNZ will keep rates on hold at 5.5% for the rest of the year.