ASB Rural Quarterly report: Dairy rebounds, forestry looking up as meat prices lag, but overall a more positive outlook for the sector

• Central banks keeping interest rates high, markets hopeful the global economy will avoid a sustained recession
• Decent rebound for dairy prices, with global prices up about 20% since their lowest point
• Forestry prices turning slowly, expected to bolster construction activity and domestic demand
• Meat prices down due to flagging demand from cost-of-living pressures
• Lamb prices hit hard by increase in Aussie supply to global markets
  

ASB's latest Rural Quarterly report out today contains a more positive outlook for the sector compared with previous quarters, as prices for key commodities have rebounded and forecasts have been nudged upwards.

ASB Economist Nathaniel Keall says the more bullish growth outlook has a lot to do with changing expectations around what monetary policy will do.

"Markets have become more bullish that rates won't need to move as high, and the global economy might manage the fabled ‘soft landing.' Traditionally ‘safe' assets like government bonds and the US dollar are out of favour, and ‘risk' assets like equities and commodities, are back in vogue."

Dairy prices have managed a decent rebound of about 22% since their lowest point earlier in the season, but are still around 30% below the peaks they enjoyed the previous year.

"The main feature of recent auctions has been the enduring absence of Chinese purchases. Over the past three months, the world's largest dairy importer has purchased less than 40% of the Whole Milk Powder (WMP) on offer at each auction, versus a historical average of 55-60%.

"We've twice revised our 2023/24 milk price forecast since our last report. The recent uptick has also pushed our forecast for the 2025 season higher, to a fairly robust $8.30 per kgMS."

While a weaker global economy curbed commodity prices in general in 2023, meat consumption looks to have been harder hit than some other staple commodities. 

"Accounting for adverse currency movement given the higher NZD, the average producer is earning a little over 9% less than they were at this point in the previous season - and as much as 21% below what they could hope to be paid at this stage in the 2022 season.

"Lower demand has crashed into stronger meat supply in many parts of the world. Oversupply has been an acute issue in the Australasian lamb market, explaining the sustained weakness in lamb prices. 

"Australian lamb production rose a whopping 13% to record highs in calendar year 2023, releasing a glut of supply onto global meat markets and placing downward pressure on wholesale prices.

The downturn in forestry prices came earlier - and hit harder - than the softening in other commodities, particularly given the concentration of the sector in China. 

"With Chinese economic activity projected to slow in 2024 (albeit not as much as previously expected), and the Chinese property market not looking particularly flash, we are expecting modest support from the export market. 

"However, we are anticipating a slightly more supportive environment domestically. With OCR cuts likely in the second half of the year, we expect house prices to gain ground over the course of the year somewhere in the region of 7-8%. That's a much slower upswing than during the last house price cycle, but should bolster construction activity and ultimately domestic demand for New Zealand forestry products to some degree."

ASB General Manager Rural Banking Aidan Gent says the bank's farmers and growers have shown great resilience, and ASB is committed to backing food and fibre.

"The combination of fluctuating commodity prices, on-farm inflation, Official Cash Rate rises and some extreme weather events have tested the resilience of our farmers and growers. The food and fibre sector, as always, has shown great resilience. We have been proud to both continue to support our existing customers through these challenging times, as well as welcome new customers to ASB. 

"We are excited about the future of food and fibre in New Zealand and are committed to providing support to the sector to enable it to continue to be productive and profitable. There are always challenges, but we believe from challenge comes opportunity and we are backing the sector all the way."