ANDREA FOX. Tumbling prices at the petrol pump have a sting in the tail for farmers, with predictions that oil-producing countries’ appetite for dairy products and lamb will shrink along with their economies.
Economists say with some oil-producing countries – in particular the Middle East region – being important markets for New Zealand dairy exports, the oil price fall will dampen chances of a commodity dairy price recovery in the first half of the year, suggested by the recent three-strike run of improved average prices on Fonterra’s Global Dairy Trade auctions.
The oil price collapse could also offset any economic comfort for commodity exporters from the weakening of the New Zealand dollar against the US dollar, in which this country mostly trades overseas.
In the sheepmeat export sector, the oil price plunge is also said to be contributing to a fall in the lamb schedule since early December.
The country’s biggest meat processor Silver Fern Farms said while it had flagged a softening sheepmeat schedule back in October, the fall had been more than anticipated.
Chief executive Dean Hamilton said the oil price fall was a contributor, along with reduced demand from China and the weakness in the Euro, which was affecting the New Zealand dollar farmgate price.
The Middle East was a large market for lamb and the plunge in oil prices had created «some fragility» in its economies, Hamilton said.
«Lamb being at the higher price end of protein, we are seeing more caution in terms of what people are buying.»
ANZ rural economist Con Williams said the potential impact of the oil price collapse on export returns was concerning.
Oil-producing Russia would not be buying a lot of dairy product, even if its ban on European dairy imports came off in August, he said.
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«A 50 per cent drop in their currency versus the US dollar will make it very difficult for them to be a buyer of any soft commodity product probably.»
Williams said reports of the shrinking purchasing power of oil- producing countries were already coming through.
«A lot of the oil-producing countries have been key buyers in the last four to five years or longer. Of the top 20 [dairy product] importers a number are big oil exporters or dependent on oil revenue and the [lower] oil price looks like staying around for a while.
«We think the purchasing power and dairy demand from those markets will be alright in the medium term, but we don’t think they will be willing to pay top dollar or high prices. Hence we have shaved down our expectations as to how much milk powder prices might recover over the next 12 to 18 months.»
Williams is picking a «modest» recovery in milk powder prices in the next few months, with an improvement in the second half of this year.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said demand for dairy products from oil- producing countries with low disposable incomes such as Venezuela, Iran and Iraq would likely be crunched in the coming year.
The oil price fall was part of a wider global easing in demand for commodities, which had included dairy, copper and iron ore, Eaqub said.
«The global commodity market is very finely balanced between supply and demand.
«So we are still walking an incredibly difficult tightrope between global milk supply and demand.
«The balance of risk in my mind still hangs with a relatively low price for the next year or so.»
Eaqub is not confident the Kiwi dollar will continue to weaken.
«What we are seeing in Europe, Japan and Canada is a competitive devaluation of their currencies, and quite often New Zealand [the dollar] ends up appreciating as a result, or staying at a much higher level than it normally would given where other fundamentals like commodity prices are.
«Our forecast is only for a gradual depreciation of the New Zealand dollar, mainly because a huge amount of money is being printed [globally] and easy monetary policy is being pursued almost everywhere else in the world but unlikely to be so in New Zealand.»
Silver Fern Farms’ Hamilton said another driver of the sheepmeat schedule softening was lower demand from China.
China had been processing more domestic sheepmeat than ever before, including capital stock.
«That has stalled some of the domestic supply chain and reduced their demand for imports.»
He understood the increased domestic kill had been a result of health issues in China’s sheep flocks.
While a fall in the sheepmeat schedule had been anticipated, the oil price slump, the China domestic processing situation and the extent of the Euro currency softening had not been «broadly anticipated».
«The combination of those things has seen the declining price being passed onto farmers.» Also not fully anticipated had been the fall in returns for «steak and cuts» beef exports, he said.
It had been expected that October’s record-high prices for beef destined for the US grinding market would weaken, but the continuing high Australian beef kill had impacted on these other beef products.
«It seems to have carried on for 18 months. Everyone expected it to stop but it seems to be insatiable. As a result there’s been a lot of supply in the market, more than anticipated.»
Beef + Lamb economics service executive director Rob Davison said dry conditions in New Zealand were also driving down schedule prices, along with the weaker Euro which in turn was affecting currency market thinking about US interest rate and dollar movement.
The end of Australia’s high beef kill because of drought could come quite quickly with rain, he said.
All these effects on prices were expected to be shorter term and the outlook for meat returns next year was still positive, Davison said.
Hamilton said beef returns to farmers may not be as robust as predicted but were still 20 per cent up on what was paid this time last year, helped by the weaker Kiwi dollar against the US greenback.
«Beef prices are still very high, but not as high as thought. The bigger headline is on the lamb side. Prices are not where was thought, they are bow back to where they were this time last year.
Hamilton said in SFF’s view, beef prices would continue to be strong «at least for this current season».
«Those supply factors don’t change overnight but we feel as confident as you can be about beef,» he said.
«With sheep meat, what started off as a strong season has moved to be a pretty moderate season but hopefully those (price depressing) factors won’t recur next year.»
Hamilton said there were bright spots for lamb exports.
The UK, a traditional big market for New Zealand chilled lamb at Christmas and Easter was showing continued good demand.
In the US, where New Zealand had a small market, sales were «having a good year».
«So there are some bright spots, but on balance it’s not enough to lift prices at this time of the year versus last year.»
-NZ Farmer
http://www.stuff.co.nz/business/farming/agribusiness/65411646/dairy-lamb-skid-on-oil-slick