Commodity exports remain reasonably firm, but . . . - Westpac

Analysts at Westpac explained that the prices for New Zealand’s key agricultural commodity exports remain reasonably firm, with robust global demand providing a supportive backdrop.

Key Quotes:

"Looking ahead, we expect key commodity prices to come under pressure, as growth in China slows, and global supply increases in some markets. Yet despite relatively buoyant prices, confidence in the rural sector is weak; with apparent nervousness about the impact of impending regulatory changes probably a key concern.

As we outlined in our last Fortnightly Agri Update, most of New Zealand’s key rural exports have started 2018 on the front foot. Dairy prices have improved noticeably since the start of the year – although this has partly been due to concerns that poor weather may curtail NZ production. Some of these concerns have eased following recent wet weather, and in last night’s GlobalDairyTrade auction prices stalled. The overall GDT index was down 0.5%, and Whole Milk Powder prices edged up a smidgeon (up 0.3% to US$3,246). Higher prices over the last couple of months have prompted us to lift our milk price forecast to $6.50 this season earlier this month. However, we still expect prices to moderate in 2018 as growth in China slows and global production increases (particularly in Europe).

Solid farm gate prices for most export commodities, however, have done little to bolster confidence in the rural sector. Confidence is lingering well below what we would expect given the current level of commodity prices (see chart). Undoubtedly, this reflects a number of developments. Weather conditions have been adverse in some regions with parts of the country suffering drought conditions in late 2017/early 2018, the dairy sector has watched with concern the spread of mycoplasma bovis, while the tighter labour market nationwide is also probably influencing the sector. But we suspect the plunge in confidence also has plenty to do with the change in government. The latest Federated Farmers confidence survey released earlier this month reported increased concerns about climate change and the ETS, while regulation and compliance costs were the top concern amongst survey respondents.

Changes signalled by the new Government that is likely to affect the rural sector include:

• commitment to a legally binding carbon emissions target
• no new taxpayer funding for irrigation
• support for less intensive land use (such as forestry)
• no new mines on conservation land, and
• tighter restrictions on foreign ownership of land.

The details around some of these policies are still to be confirmed, but evidently, farmers are fearful that ultimately they will increase their cost of doing business. This may mean farmers are reluctant to undertake significant investment on farm while uncertainty around how government policies will be implemented persists.

Weak confidence in the sector is also affecting the rural property market, most noticeably via soft sales volumes. To date, there has been little downward pressure on prices, with the combination of low-interest rates and relatively healthy farm gate prices meaning sellers aren’t being rushed into accepting lower prices. However, this combination won’t last forever. And the increasing focus on the environmental costs of farming is likely to see some land prices to come under pressure. In particular, the price of land used for dairying (which is likely to face the most significant cost increases as new environmental regulations are introduced) is expected to fall. In contrast, prices for less carbon-intensive uses of land such as horticulture and forestry could get a relative boost."