Some spring weather surprises

Weather risk was always lurking in the background, and some of the risk has started to materialise.

New Zealand milk production for August 2022 was down 4.9% year on year – the lowest volume for the month of August in five years. This means New Zealand milk production season-to-date is down 4.4% (4.2% on a milksolids basis). Milk production for the full season is now likely to end between 2% lower and 0% compared to last season – with the next month’s production a key watch.

An underwhelming flush looks likely for the second season in a row. In contrast, US milk production posted its strongest gain in 15 months in August, and EU milk supply is showing some positive signs. A largely absent Chinese buyer is still evident in global markets.

The August data showed a sixth consecutive year-on-year total volume decline. It is not surprising to see China’s import volumes trending lower. Rabobank has been forecasting lower imports in 2022, which will likely carry into early 2023. Buoyant local supply, ample inventories, and softness in consumer demand are feeding through into reduced import purchasing. A close eye will remain on the China dairy market for future price direction.

Beef

Beef demand and returns are continuing to chug along steadily, but the impact of inflation on consumer spending behaviour is something to watch over the next six months.

New Zealand beef exports in August remained strong, with export volumes lifting 13% year on year (YOY) and export earnings increasing 37% YOY for the month.

Demand from China, Japan and Korea is providing broad-based support for the farmgate schedule, as those markets soak up beef that would otherwise be destined for the US.

Exports to China for the month of August were strong, with 58% of New Zealand’s beef exports sent to China. Typically, around 40% of New Zealand total beef exports are exported to China in a year.

The low NZD is supporting beef returns, in addition to strong demand from China.

New Zealand beef exports to the US in August were back a significant 41% YOY.

Processing backlogs have been improving, but beef slaughter numbers remain lower compared to 2021.

Lamb

The new season has kicked off, but not with the spring boost everyone had all hoped. On-farm conditions across the country are challenging, with most regions very wet, impacting lamb growth rates.

In addition to slowed lamb growth, the industry is seeing slowing demand in New Zealand’s key markets. The national lamb kill tallies are catching up, but still have a way to go. The processing industry made significant inroads on the lagging national lamb kill through the winter months, with slaughter numbers catching up to be only 3.1% behind for the same period in 2021 (538,000 lambs) at the start of September.

The 2021 lamb crop was estimated to be 0.6% higher than the previous year by Beef+Lamb New Zealand, therefore a number of lambs are yet to come forward for processing. Lack of sunshine could boost the farmgate schedule.

Wet conditions across the country are hampering efforts to finish lambs, therefore we could see increased procurement pressure through October as processors try to keep chains full ahead of the new season lamb crop. Processors will also be extremely mindful of keeping shifts operating at capacity, to incentivise and retain valuable staff as the season kicks off. Exporters are reporting that they are starting to experience price resistance, evidenced by rapidly declining cut prices.

Fertiliser

Overseas prices in US dollars, for urea, increased 3% monthon- month (MOM) in September, while phosphate and potash both eased 12% MOM, respectively. In New Zealand dollar terms, urea prices declined 9% MOM, DAP declined 1% MOM, while potash super increased 5% MOM.

Rabobank continues to see substantial upside price risk for urea moving into Q4 2022 and Q1 2023. On 27 September, three simultaneous leaks spread in the Nord Stream I and II pipelines connecting Russia and Europe, and hope is largely lost for an increase in gas flows in the near future as a result.

Leaks of this scale are extremely rare, and the timing, distance and damage corresponds to sabotage, according to several EU energy and intelligence agencies.

In mid-September, Europe’s fertiliser industry association reported that 70% of fertiliser production was either slowed or shut down due to high natural gas prices. Given the latest reduction of natural gas supplies, we don’t expect a reversal in production volumes any time soon, and consequently any sustained reprieve in nitrogen pricing. The combination of potash exports still heading out of Russia and rumours of sizeable stocks in the Americas adds to our view of a downward trend in global potash prices continuing.

While stocks of phosphate are also reported high in the Americas, the dependency on natural gas for ammonia production means there is less price downside than for potash.

Agrichemical prices are expected to continue their downward trend moving into the end of 2022. While the drought continues in some regions of China, government- enforced electricity rationing for manufacturers has reportedly largely been resolved and production is expected to ramp up again with prices to ease at export terminals.