In our June forecast we welcomed rise of the dairy payout to $5.33 per kg of milk solids.  Surely the welcome now turns to elation with the announcement of $6.40 per kg of milk solids for the 2007/08 season.  Are we allowed to celebrate yet?  Questions that remain unanswered are: whether there is any more upward shift in the payout (as many commentators have predicted) and, what is the risk that the payout could fall as fast as it rose?  These questions form the backdrop for this section.

The news still remains not so positive for sheep and beef farmers, although there was a collective sigh of relief at the recent fall in the NZ$ exchange rate.

Dairy

As has been widely reported world commodity prices for dairy related products have seen massive increases over the past year.  This has flowed through to NZ$ commodity prices, with the recent fall in the NZ$ providing an added boost.  In the year August 2007, the ANZ world commodity index for dairy products increased by 120%, the corresponding NZ$ index grew by 92% over the same period.

Fonterra Chairman Henry van der Heyden noted in August that world butter and cheese prices have increased by more than 50% over the past few months and milk powder prices are holding at levels more than double historical long-term prices.  “I think we are somewhere near the top of the market without a doubt.  But we’re making an assumption that commodity prices will remain relatively firm for the rest of the season”. 

There have been a number of reasons for the recent high prices.  There has been constrained supply from the European Union (switch from powder to cheese), Australia (drought), Argentina (severe rain storms), and the US (expansion of ethanol production increasing the price of feed corn).

These increases have not flowed through to export data yet.  For the year to June 2007 export revenue was $6.4bn, a rise of 12.1% on the previous year, with volume was up 14%.  This implies unit prices were down 0.69%.  The reduction in recorded unit prices appears to have been influenced by Fonterra selling down stocks during the last export season.  We are not sure of the extent of the selldown, but are told it was to take advantage of the high prices. 

The complicating factor of stocks, makes forecasting the volume of product to be shipped in a given period even more difficult.  On average though, we are proposing a growth of export volumes of 4% for several years.

In August the forecasted payout for the 2007/08 season was raised to $6.40 per kg ms. (+44%).  The trading banks are more optimistic, with Westpac forecasting a payout of $7.20 (+61 % on the previous season!).  In this export industry we need to forecast the volume of product to be shipped and the set of export prices Statistics NZ will employ to value those exports (in the light of Fonterra’s hedging policies).  ANZ price trends show 7-9% monthly price rises from November 2006 to April 2007 in their indicator markets.  In the light of commodity price trends we are forecasting a rise in average unit prices for the new export season ending June 2008 of at least 20% (remembering that unit export prices are established without regard to forward exchange adjustments by Fonterra).  For the following year we assume another +5%, as the Statistics price series catches up, and thereafter a holding pattern.

As a closing note, it should be recognised that the current and on-going shake-up in the world financial markets may have a significant impact on world commodity prices.  There is a definite risk that a worsening of the credit crunch in coming months could see commodity prices fall as fast as they have risen.  The coming months should see the situation begin to unfold.  In its latest Monetary Policy Statement the Reserve Bank noted they assume that “prices will remain at current levels until about the middle of next year, before gradually declining.”  They also note that “the risks to this assumption are large and in both directions.”

Meat

While there has been the long-awaited seasonal lift in beef and lamb prices, the outlook still remains pretty bleak, at least in the short term.  Still, the situation could be much worse had the NZ$ not had its recent fall.  This welcome fall was certainly greeted with a collective sigh of relief from sheep and beef farmers.

On the domestic side the volume of sheep slaughtered has risen over recent months.  For the year to June 2007, there were 579,000 tonnes of sheep slaughtered, up 6.6% on the previous year.  The main reason for this has clearly been the drought on the east coast of the North Island as farmers clear stock.  There has not been the same pressure on beef slaughter rates with the level to June 2007, down 1.3% on year-earlier levels. 

World commodity prices have started to rise as global supply struggles to meet demand following drought conditions in other parts of the world.  World lamb prices have been the biggest beneficiary, but these increases have not yet flown through to farm-gate prices.

MAF in their latest outlook have reported that the farm-gate prices for lamb producers for the 2006/07 season were poor.  In inflation-adjusted terms they were the worst prices since 1996.  Static prices in New Zealand’s key European and US markets and the strong NZ$ have driven this result.

Rabobank has reported that beef schedule prices have increased 13% in the North Island and 6% in the South Island during August, but they still remain on average 25c/kg below year earlier.  MAF expects international prices for NZ beef to gradually fall in the year to June 2008, but beyond 2008 they are expected to rise. 

Lamb prices have also seen a lift recently, but again they remain 35-55c/kg below 2006 prices.  MAF expects international prices for NZ lamb to increase in the year to June 2008, although the impact on farm-gate prices depends on the position of the exchange rate.  Export volumes are expected to be lower contributing to a fall in the total export value.  The lower export volume is due to a combination of land lost to dairy conversions and the lower number of lambs born.  This, in turn, was influenced by the number of breeding ewes that were sold during drought conditions earlier in the year.

Statistics New Zealand’s quantity of meat export figures report volumes in the year to June 2007 were up 3.9% on the previous June year.  Export revenue for the June year was up 2.4% to $4.69bn.

Horticulture

Export prices of apples rose about 1.4% year ended June 2007 compared with year to June 2006.  MAF says that prices in 2007/08 in European and US markets will be similar to, or better than, prices last year.  Asian markets are positive as increased supply of the Pacific series of apple becomes available.  Per capita consumption of apples is static or declining in many countries, but increased supply is expected from China and South America.

MAF says that volumes exported in 2007/08 will be up slightly to 301,000 tonnes.  As at June 2007, fob returns were 3.4% higher than the previous year and volumes were up 2%.  Thus, prices were up 1.6% ($1,227 per tonne).  MAF forecast a dip in volumes in subsequent years as new varieties replace the old Braeburns and Royal Gala.

For the year ended June 2008 we forecast a 5% higher export volume at slightly higher prices (+2%) given the trends in ANZ commodity prices.  Following MAF there could be some improvement in prices as the new varieties replace the old.  Production and export volumes in the following years are likely to be at similar levels.

Zespri CEO says that prices in Europe, Asia and America in 2007 are likely to be maintained at good levels as markets were “hungry” for NZ kiwifruit.  NZ fruit commanded a premium over other suppliers.  Promotion is based on taste and consistency and is moving more to health and nutrition factors.  In Japan sales of gold were up 54% and green up 11% on the previous year.  In East Asia (Taiwan, Korea, and China) green was up 31% and gold 30%.  Gold was up 181% in Europe and green up 20%.  Zespri continued to follow a policy of taking supplies from other countries to maintain market share in the off-season.

The CEO warned that there was a limit to the amount of currency hedging that can be done.  A rising NZ$ was likely to take 60 cents to $1.20 off every tray of export fruit.  In a later statement he raised these estimates to 75 cents to $1.60, or $92m out of total income of $654m.

Exports rose to 326.4 thousand tonnes in 2006/07 (up 9.4%).  Unit export returns were up 1.4%, from $1,209 per tonne, to $1,227.

We are forecasting slightly higher export volumes for 2007/08 and later seasons.  Lower prices are assumed for the 2007 crop overall as the exchange rate bites.  If exchange rates trend down substantially, we pick it up in the following seasons.