By Allan Barber
The recent fall in Fonterra’s GlobalDairyTrade on line auction for the fifth time in six months means global dairy prices have fallen by 9% since last May and by 24% over the season when adjusted for the value of the New Zealand dollar.
The dollar has only just come off historical highs against both the UK pound and the euro, so the combined effect on our dairy, beef and lamb exports has been disappointing to say the least.
But the outlook in the medium term is still good, provided our exports are not derailed by one or more of the dire forecasts of Greek debt default, general lack of buoyancy in UK and Europe, and the lower growth forecast in China.
On the positive side, Greece has so far managed to secure terms that enable it to avoid default (the big question is whether it can deliver the harsh remedies demanded of it); the UK appears to be making a sluggish recovery; The USA is looking better and China’s growth is still expected to be at least 7% without a burst housing bubble.
From the commodity perspective dairy prices are expected to remain under pressure until mid 2012 at least with higher production in the USA and Europe, but world demand for milk powder is, in Fonterra CEO Theo Spiering’s word, robust; lamb prices may come under more pressure because lamb has become an increasingly niche, luxury food item, and as in New Zealand fewer consumers can afford it; but conversely manufacturing beef prices in the USA are at their highest level ever, having risen from more than 180 US cents per pound before Christmas to 220c/lb today.
The US cattle herd is at its lowest since the 1950s which means the amount of beef coming on the market will need even more supplementing by New Zealand and Australian lean beef used in the American grinding beef or hamburger market.
In addition this market will respond to the improvement in the American economy, as well as the better weather and summer sporting occasions which are so important to consumption.
USA exporters are also sending more grainfed beef to Asia which will have an impact on this country’s sales to Japan, Korea and Taiwan, but it may open up more demand from the USA for our grass fed prime beef.
Beef processors have used the strength of the New Zealand dollar exchange rate to bring livestock prices down which should mean they can make a good margin on their bulls and cull cows when the slaughter rate gets closer to capacity. Therefore farmers can’t look forward to any increase in short term procurement prices with these likely to come under pressure until after the peak has passed in June.
It’s also possible that AFFCO’s industrial problems will mean it doesn’t have the capacity to handle its share of the peak, ensuring even a shortage of processing capacity when the cull cows finally start to move in the next few weeks. Dairy farmers won’t be particularly worried by the 15 cent drop in forecast payout, unless this is the first of further drops, and at $6.75-6.85 the payout is well above previous years’ lows. However it is worth remembering that less than three years ago the forecast payout was $4.50.
Looking further out, it is difficult to see any increase in our commodity prices which have been at record highs in international terms until coming off those peaks in the last few months. But global demand for protein and New Zealand’s reputation for food produced in a healthy environment give justification for confidence that these won’t come under serious price pressure any time soon.
Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at firstname.lastname@example.org or through his blog at http://allan.barber.wordpress.com.