07 Feb 2019
The sun is setting on a golden era for New Zealand’s food exports.
While the global supply of dairy and meat products is expected to remain constrained, new global risks are now impacting demand.
" The greatest current risk to international prices is the coronavirus outbreak in China.”
Meat prices eased already late last year as China took its foot off the purchasing accelerator. This coincided with a lift in the volume of livestock being processed in New Zealand, resulting in a sharp drop in schedule prices. This drop has been further accentuated by the spread of the coronavirus, which has to date claimed more than a thousand lives.
The virus outbreak could not have come at a worse time as it coincided with Chinese New Year – a period of celebration with families feasting together. Foods are often gifted as well, making this a massive consumption period for luxury goods, which includes New Zealand fruits, meats and dairy products.
The virus outbreak curtailed travel and discouraged public outings, including reducing restaurant dining. Even home deliveries of food have decreased due to the perceived risk of delivery staff spreading the disease.
Travel restrictions and an extension to the official Chinese New Year holiday period also mean containers of produce are piling up on wharves in China., Chilled storage space is now at a premium within China and also here in New Zealand.
The New Zealand dollar (NZD) firmed over November and December but a large portion has since retraced. Volatility can be expected. A slightly higher NZD has resulted in a small downward revision to ANZ Research’s milk price forecasts.
Financial resilience at the farm business level is now a core focus and in many cases this is being strengthened by a greater focus on debt repayments. A close watch on costs on the part of dairy farmers is helping to build profit margins but is hindering the arable sector as demand for supplementary feed has decreased.
The greatest current risk to international dairy prices is the coronavirus outbreak. China is by far the largest importer of dairy products, so any change in demand from China directly influences prices – particularly the price of whole milk powder.
Milk price futures for this season and next have bounced along over the past couple of months before easing sharply in recent weeks as the seriousness of the coronavirus outbreak became apparent.
Open positions in next season’s contract have started to build as farmers mitigate future revenue risks. Dairy commodity prices are generally expected to remain above the long-run average so long as global supply remains constrained but this will depend how global demand holds up in the coming months. Milk production growth rates are modest in all of the main dairy-exporting nations, meaning there is not an abundance of surplus dairy products to export.
Lamb prices have also dropped sharply in the past couple of months but are still at record levels for this time of the season. A lift in slaughter numbers, weaker prices in certain markets and a slightly stronger NZD are the main drivers of the reduction in farm-gate prices.
However, coronavirus is also causing major disruptions at Chinese ports. It is near impossible to get killing space for mutton and there is a backlog of lambs that isn’t likely to clear for another month.
Demand from China for virtually all imported products has ground to a halt as the country deals with the logistical challenges brought about by measures to stem the spread of the virus. Produce including lamb and mutton is backed up on ports in China. It is normal for some congestion to occur around the Chinese New Year holiday period but this year the congestion is much worse due to:
Containers are piling up on wharves and cold storage facilities within China are filling up fast, with much less meat being consumed than normal during the festive season and consumers electing to avoid public spaces.
As much lamb as possible is being diverted to alternative markets but since China has been the main market for mutton for a number of years, there are now limited alternative options available for this meat.
Susan Kilsby is NZ Agriculture Economist & Sharon Zollner is NZ Chief Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
07 Feb 2019
04 Feb 2020