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Meat export volumes were at a record high for the six months to March, led by increased demand for beef from the USA. Meat export volumes to China also increased, while volumes to other main export markets fell.
The increase in demand for beef by the Americans was predominantly for processing beef, which is normally used in ground beef products, such as hamburger patties. Boneless cuts also featured strongly in exports to the US, though did fall slightly.
This taste for Kiwi beef is supported by recently released US retail data which showed surprisingly, that grocery store sales were overtaken by restaurant and bar spending for the first time ever as the younger Generation Y cohort looks set to overtake baby boomers soon in their penchant for dining out.
As well as this higher demand, increased supply also contributed to the record export volumes. The bumper cattle processing season was helped along by extra cattle numbers as the recent declines in dairy payout and drought conditions saw higher numbers of culls. The medium term at least looks bright for beef exporters, particularly if US economic indicators continue to improve this year, especially with strong demand but tight supplies, and the relative value of our dollar against the US$.
Meanwhile, sheep meat export volumes fell in the first six months of the 2014/15 season, driven mainly by decreased demand for lamb and mutton from China as their domestic supply volumes increased. Export volumes to the UK also fell as domestic production in the UK increased, coupled with a weaker UK retail sector. The weaker Euro also influenced the weaker demand from our European markets, while lower oil prices led to dampened demand from the Middle East.
However, despite the lower export volumes, this was offset by a rise in the value of lamb exports over this period with higher average values across most of our export regions.
The kiwifruit industry is seeing a strong recovery this season with volumes building towards levels last seen before the Psa vine killing disease in 2010.
The recovery has been heralded by the introduction of a new disease-resistant variety of gold kiwifruit called Gold3. At the same time, the more common green variety also saw a lift in productivity, further bolstering supply volumes.
The industry has seen a resurgence in global demand as well, particularly from the premium market in Japan, while China has seen strong growth as well and is targeted to become our top kiwifruit export market by 2018.
More growth is anticipated further afield in Asia, with the recently signed free trade agreement with South Korea which will see the current tariff of 45% on New Zealand kiwifruit phased out within the next five years. Furthermore, Taiwanese market prospects are also looking favourable with last year’s signing of the Agreement on New Zealand and Taiwan Economic Co-operation (ANZTEC).
Prices have also been recovering, as a shortage of supply from competitors such as Chile, increased demand in the face of previous supply shortages following the Psa outbreak, and the recognition of the quality of our kiwifruit exports contribute to boosted returns for the industry.
Prices for gold kiwifruit are currently at a premium of around $9.30 a tray, but are expected to return to around $6 a tray once supply has built back up to pre Psa levels, while the green variety prices are expected to remain fairly consistent at around $5.30 a tray over the season. A tray contains approximately 3.6 kg of fruit.
The possibility of parity with the Australian dollar is still on the cards despite the Kiwi dollar falling from its parity party inducing high in April. The Reserve Bank of Australia’s recent announcement cutting interest rates to 2% may lead to a depreciation of the Australian dollar against a basket of currencies, which the RBA felt to be both likely and necessary given the recent decline in commodity prices, particularly within the mining sector. The cut is hoped to also act as a stimulus in business investment outside the mining sector particularly in the face of lower Chinese demand. The cut now widens New Zealand’s interest rate advantage to 1.5%.
The RBNZ’s decisions to hold the OCR at 3.5%, and the relative strength of the Kiwi dollar against the US dollar in recent weeks are additional factors which would put upward pressure on the Kiwi/Australian exchange rate, which could increase the likelihood of parity.
Regardless, even if parity was reached, it would not necessarily translate into price parity.
This is because of time lags in real terms due to forward pricing arrangements; that is, items sourced from Australia tend to have been purchased several months in advance at set prices and exchange rate, with the corresponding price tags attached to commodities at the same time. The result is that prices may fall for certain commodities such as clothing and cars, but these would not flow through until the end of the year.
Another reason why parity may not result in lower prices in the short term is that many trades are undertaken in a third currency. This makes direct comparisons of whether prices will actually move ‘lower’ harder to confirm, unless the parity has been sustained for some time. For example, in the case of clothing stock imported from Australia, these are in turn likely sourced from Asia where currencies are tied to the US dollar.
In addition, the disparity in the size of our relative markets means Australia has greater purchasing power. So the benefits of parity may take some time before translating into lower prices for consumers here. This is very much dependent not only on parity being reached, but also on the length of the period over which parity is maintained.
The more immediate impact however will be on holiday makers heading across the ditch, who will benefit from the stronger Kiwi dollar.
Dairy farms face a long hard road this year in the face of falling international dairy prices as global supply increases.
Fonterra’s recently announced season payout of $4.50kg, down from $4.70kg, will mean that this season will see dairy farmers minimising or halting discretionary spending. The lower payout will mean a lean season for dairy farmers cash-flow wise, and would be exacerbated should low dairy prices continue into the 2015/2016 season.
Agricultural debt is 21.8% higher than five years ago and around 5% up on a year ago. RBNZ figures for 2014 showed that farm debt stood at $52 billion, with dairy farmers holding about $32 billion or nearly two-thirds of that debt. However, much of that debt was concentrated amongst a small proportion of dairy farmers; approximately half the dairy farm debt was held by only 10% of dairy farmers.
Heavily indebted farms will be increasingly sensitive to lower prices, particularly in the face of illiquid farm sales. This outlook is not helped by the unfavourable climactic conditions experienced in the South this past year.
However, the total floor area of farm building consents has been picking up over the last two years. There has not been a relative increase in credit to dairy farmers, which suggests that a fairly significant amount of farm development took place through retained earnings from previous high season payouts. rather than through increased use of debt. Current season indicators point to a likely stagnation of such development this year, and should dairy prices fall further, more dairy farmers may look to rely on debt to see through the next season.
While every effort is made to ensure that the information, opinions and forecasts included in this publication are accurate and reliable, BERL and all contributors do not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on or the use of information, forecasts or opinions it contains.
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