Economists are still sticking to a 2019/20 season forecast of around $7/kgMS despite the 3.8% drop in the Global Dairy Trade overall price index last week.
One of those is dairy: the bank has lifted its forecast farmgate milk price 25c to $$6.25/kgMS in the face of possible supply tightness.
Steel says world economic growth is likely to slow this year, but hopefully not slump as some are predicting.
“Uncertainty indicators are very high. If the world economy can hold together well enough, NZ’s product prices are expected to be flat-to-up this year on average, aided by pockets of supply side tightness.”
Plenty has been happening offshore that could influence NZ primary export prices: a material drop in oil prices then a bounce, global equity markets going wobbly, Chinese growth indicators easing, US-China trade tensions remaining and the Brexit deadline looming.
This all puts the markets on edge, Steel says.
“The world economy certainly looks to be at an interesting juncture and it is slowing. The open questions are how far and how fast? We expect further slowing in global growth through 2019 which will be a headwind for primary product prices. This shouldn’t really be a surprise after such a long period of expansion.
“But we do not back the view of some that a deep downturn is imminent.”
However, he says the BNZ will continue to monitor the risks of a US recession or significant global economic slowdown.
For now, demand for NZ’s primary products has been holding up well, underpinned by China, Steel says.
“This is highlighted by China’s market share rising for nearly all of NZ’s major primary export products over the past 12 months. This is despite a cooling in China’s macroeconomic indicators.
“It suggests that the positive structural forces of food demand in China have been outweighing cyclical economic softness. We expect more of the same in 2019, assuming further slowing in Chinese economic growth is orderly.”
However, he says one important aspect to watch when -- or if -- Brexit occurs is what happens to NZ’s 228,000+ tonne European sheepmeat quota.
“Despite all the trials and tribulations lurking offshore, it is important to recognise that not all is negative and uncertain on the international trading front. Indeed, the CPTTP has just come into force,” Steel explains.
“Officials estimate that this has the potential to ultimately deliver $222m per year in tariff savings for NZ once the deal is fully implemented over coming years. And the Government is looking to advance negotiations with the EU and RCEP group of countries, while also making progress in upgrading the existing trade deal with China.”
Meanwhile, there are some signs of tightening supply for some key sectors, he says.
“Dairy is an example. Stalled EU milk production and a rapid unwind in EU skim milk powder stocks, slowing US milk production growth and shrinking Australian milk supply bode well for some price improvement,” he explains.
“Global dairy prices have already shown some bounce despite a very strong NZ milk season to date. The 11% lift in auction prices over the past four auctions has been a touch more than we had previously forecast and also a bit earlier than anticipated. Solid demand and constrained supply appear to have been in play.”
Steel says sheepmeat supply also looks tight beyond this season’s peak.
“It is difficult to see a quick lift in NZ lamb supply in the year or two ahead given low breeding ewe numbers and a record lambing percentage this season.
“Meanwhile, dry conditions saw elevated sheep and lamb slaughter in Australia last year which will limit supply when flock rebuilding occurs.
“These supply-side factors should offer price support in the respective areas.”
Steel sees world prices for NZ’s major primary exports being flat-to-mildly-higher in 2019. The downside risk is ongoing disturbance in global financial markets or a sharper world economic slowdown than anticipated.
“Assuming an orderly economic slowing offshore, we see the combined positives of structurally improving food demand in China and supply tightness as enough to generate price improvement. There will also be initial benefits from the CPTPP trade pact filtering through this year.”