A difficult year is looming for farmers, with new-season lamb prices likely to open $2/kg below last year – coming after Fonterra twice this month lowered its farmgate milk price. Analysts warn there is little likelihood of improvement as farmers also juggle high inflation and interest rates. ASB economist Nathaniel Keall said lower product prices will wipe $3 billion off dairy farm incomes compared to last year, and up to $1.5bn off sheep and beef.
Meanwhile, farm debt has risen $1bn since January, according to Reserve Bank of NZ figures. A key reason is the stalled post-COVID recovery in China, which last year bought 32% of NZ’s dairy and 43% of its red meat exports, but other markets are also struggling from low consumer confidence and weak economic activity.
A Ministry for Foreign Affairs and Trade report warns China’s economic growth has slowed, its property market is struggling, local government debt has reached a record US$S9.2 trillion ($15.4 trillion) and youth unemployment is at 21.3%.Fonterra twice this month lowered its forecast farmgate milk price, from a mid-point of $8kg/MS to $6.75kg/MS, as the Global Dairy Trade index slumped to a five-year-low.
RaboResearch senior agricultural analyst Emma Higgins said China is rebalancing excess domestic dairy supply and inventory and the challenge for NZ will be managing new-season milk flows in an era of weak demand. She said there is some positive news with tightening northern hemisphere supplies. United States milk production in June was flat after 11 months of year-on-year growth, while annual European Union milk flows are just 0.2% higher due to hot weather.
AgriHQ senior analyst Mel Croad is forecasting November lamb prices to average $6.85/kg in the North Island and $6.80/kg on the South Island, compared to $8.74/kg on both islands in the same month last year. Croad said the forecasts reflect export conditions, which are universally weak but especially in China, and record volumes of Australian lamb swamping world markets.
Australian lamb prices have subsequently collapsed, its Eastern States Trade Lamb Indicator last week falling to AU$4.60/kg compared to AU$7.60 a year ago. Given these conditions, the average July export values for NZ lamb fell to $10.96/kg, about $1/kg lower than in June and $1.50/kg less than a year earlier.
For the past five years mutton prices have averaged $5.65/kg at this time of the season but are currently between $3.10 and $3.15/kg. Given the state of China’s economy, Croad is not confident prices will improve.
Beef prices are currently below the five-year average by 10c-50c/kg but its versatility and ability to shift to other markets will temper price shifts.
BNZ senior economist Doug Steel said with the GDT 20% below last year, the outlook for dairy is weak and unless markets improve he fears this season’s final payout could be in the low-$6/kgMS range.
He is also pessimistic about sheepmeat prices given weak demand from China and Europe and the impact of Australian production, adding it could become even more desperate if forecast El Niño weather brings unseasonal dry conditions to Australia and NZ.
The NZ-United Kingdom free trade agreement has provided new access for beef, but the Australian free trade agreement allows tariff-free access for Australian lamb, providing extra competition.
Steel said tempering the gloom is the fact that farmers have repaid debt so have strong balance sheets, the NZ dollar is below US60c and likely to stay there for some time, and global meat and dairy production will fall as producers respond to the same conditions.
ASB’s Keall said bank forecasts for the coming dairy season are conservative at $6.60kg/MS, below Fonterra’s latest forecast $6.75kg/MS.
He can’t see interest rates easing for at least a year.
“It is going to be a pretty tough one for a lot of people,” he said of the coming year.
ANZ agriculture economist Susan Kilsby said while interest rates appear to be close to the top of the cycle, the bank has factored in at least one more rate rise of 25 basis points.
“We are still a long way off interest rates coming down. We are at least a couple of years off that.”
Most farmers have reset their loans and shifted to floating or short-term fixed plans.
Westpac senior agri-economist Nathan Penny doubts farmers will have much of a reprieve this season, although the bank is forecasting farm inflation to fall from 17% last year to low single digit figures by the end of this year.
