ASB rural report: Rural resilience set to be tested; weaker China outlook carries risk for some sectors including dairy, lamb and forestry

• Set to be another challenging 12-18 months for many farmers
• Commodity prices down another 6 percent over the past quarter
• Weaker outlook for the Chinese economy creating risk for some Kiwi rural sectors, particularly dairy, lamb and forestry
• 12-month NZD lows may offset some impact of lower commodity prices on farmgate returns

ASB has today published its second Rural Quarterly report, which warns the weak performance of the Chinese economy carries risk for many of New Zealand's rural sectors.

ASB Economist Nathaniel Keall says while the US economy has strengthened, China is battling high debt levels and weaker consumer confidence, which is likely to have flow-on effects for New Zealand.

"We are already seeing this play out with Whole Milk Powder (WMP), with China purchasing less than 40 percent of what's on offer at each auction, compared with a historical average in the 55-60 percent range. This is having an impact on the global dairy trade price indices, with WMP hitting a seven-year low during August. Prices have mounted a modest comeback over the past couple of auctions, and many farmers will be hoping the market is finding a floor."

Dairy

Prices are now 40 percent below the previous peak in early 2022 and down around 16 percent since the end of May.

"We expected to see dairy prices heading higher by this point. It's increasingly likely we will see a $6.60 per kgMS milk price low during this quarter, which is in the lower half of Fonterra's $6.25-$7.75 guidance range."

Beef and lamb

Lamb prices have undergone an unusual seasonal decline due to processers passing on the impact of weaker demand from offshore to the farmgate. This has resulted in an annual decline of around 10-15 percent for beef and 20-25 percent for lamb.

"We anticipated more upside for lamb than beef in our previous rural report - in fact, the opposite has proven true due to demand (not supply) differences driving pricing. Lamb is being hit harder by weaker demand, with consumers shifting to cheaper cuts amidst cost-of-living challenges."

Forestry

Forestry has dropped more than 30 percent below the previous USD price peak in 2021 (18 percent in NZD). Lower forestry prices have also been accompanied by lower export volumes as the sector battles headwinds like the impact of Cyclone Gabrielle.

With the Chinese construction sector decelerating even prior to last year's lockdown, softer demand has also had an acute impact on forestry prices given China usually purchases about 60 percent of New Zealand's exports.
But Keall notes there are some positives emerging on the horizon.

"12-month lows for the New Zealand Dollar (NZD) should continue to give farmgate revenue a minimal boost. Further falls in the NZD this season could offset some of the impact of lower commodity prices on farmgate returns.

"Commodity prices are usually cyclical: booms often sow the seeds for a supply response that triggers a subsequent downturn, and busts facilitate a tightening in supply that provides eventual support for prices.

"While this next quarter is likely to test the rural sector, it has seen challenging periods before. Many farmers have used high farmgate returns from previous years to pay down debt and ensure they're in good shape. Our agriculture sector has a long history of weathering storms and coming out the other side stronger. It's likely the sector will need to employ some of that same resilience and adaptability over the coming year."