Agnbusmess June 2019 - - NewZeaIand RaboResearch Food Agribusiness 30 May 2019 Rabo ban Commodity Outlook Regulation Dairy Beef Sheepmeat Achieving proposed methane targets under the Zero Carbon Bill by 2050 will be a challenge for the New Zealand livestock sector and will require changes to future farming practices. Rabobank expects NZ milk production to grow no more than 2% for the current 2018/19 season. Rabobank expects tightening domestic supplies to put upward pressure on farmgate prices over the coming months, as production begins to wind down from its the seasonal peak. Rabobank expects farmgate prices to continue to strengthen out to the end of the 2018/19 season (September). Wine Imports of French sparkling wine grow, along with those from South America and Europe. Rabobank expects this to continue across 2019. Horticulture The strong start to kiwifruit and apple export years is expected to continue into 2019, but is tempered by a watch on China’s economic performance. Fertiliser Our bearish view on global fertiliser markets is unchanged month-on-month, primarily based on expectations of continuing low global demand. FX Oil We lower our expectations further and now look for the NZ dollar to hit Usc 63 by May 2020. We expect Brent to hit USD 75/bbl in the weeks ahead, on rising seasonal demand and geopolitical tensions. Climate Soil moisture anomaly (mm), 26 May 2019 Wetter than normal (mm) 60 40 20 NIWA notes above-average temperatures are forecast for the east coast of both Islands and the top of the North Island through to July 2019. All other New Zealand regions are forecast to experience above-average to average temperatures from May 2019 to July 2019. 10 Rainfall totals from May to July are equally likely to be normal or below-normal for all the North Island and the east of the South Island. The north of the South Island is likely to receive near-normal rainfall levels, while the west of the South Island is equally likely to receive normal or above-normal rainfall levels over the same period. 0 -10 -20 -30 -50 Drier than normal Source: NIWA, Rabobank 2019 NIWA is forecasting an equal chance of near-normal or above-normal soil moisture levels for the West Coast of the South Island through to July. The top of the North Island is likely to have below-normal soil moisture, while an equal chance of near-normal or below-normal soil moisture levels is forecast for the remainder of the country from May to July. What to watch • Wetter for the west, warmer in the east. Higher-than-normal air pressure for the West Coast and the top of the North Island, combined with below-normal air pressure in the lower South Island, will result in more westerly winds than usual. NIWA notes that the mix of warmer sea temperatures in the Tasman Sea – in addition to more frequent westerly winds – could result in “several spells of unseasonable warmth” for the east coasts of New Zealand through to July. Frequent fronts for the west coasts of New Zealand are also possible over this period. Bill Sets Ambitious Methane Targets Achieving proposed methane targets under the government’s recently announced Zero Carbon Bill by 2050 will be a challenge for the New Zealand livestock sector and will require changes to future farming practices. The bill sets targets for reducing New Zealand's greenhouse gas (GHG) emissions out to 2050. The government has chosen to introduce a split-gas target, treating the methane emissions generated by livestock separately from carbon dioxide and nitrous oxide emissions. The livestock sector had advocated for a split-gas approach in order to recognise the different impact methane has on the environment, given it remains in the atmosphere for a much shorter period of time than other GHG emissions. Blake Holgate Analyst Animal Protein and Sustainability +64 3 955 4603 blake.holgate@rabobank.com The bill proposes reducing gross emissions of methane by 10% from 2017 levels by 2030, and 24% to 47% by 2050 (which, end of this scale, will depend on what actions our international partners are taking and the availability of emissions mitigating technology). These are absolute reduction targets and will not be able to be offset through the planting of trees. Carbon dioxide and nitrous oxide emissions will be required to reduce to net zero by 2050. Emitters of these GHGs who are unable to reduce their emissions to zero will be able to use activities such as tree-planting to offset any residue emissions. There are currently no tools or practices available to farmers to significantly reduce their methane emissions, beyond reducing stock numbers. The prime minister’s Chef Science Advisor has stated current good framing practices such as breeding and farm management might reduce methane emissions by an estimated 5% to 10%. Achieving deeper reduction will likely require productivity gains (while not increasing production), new technology, and land use change. What to watch • Regulation Public submissions on the bill. Farmers and industry groups will have the opportunity to submit on the bill as it passes through the select committee process. B+LNZ and DairyNZ have both stated they believe the proposed methane targets are too ambitious. Both organisations will push for the range of reductions to be lowered to 10% to 22%, to align with recommendations made last year by the Parliamentary Commissioner for the Environment. B+LNZ will also be seeking changes to enable farmers to be able to use on-farm planting to offset emissions. A Sharp End to the Season New Zealand milk collections continue to trail off as the season draws to a close. Milk flows for April 2019 are behind 8%, compared to the same time last year. This pulls season-to-date milk collections lower, to 2.3%. Rabobank expects final full-season production to land between 1.5% and 2% once the final tallies are counted. Oceania commodity prices remain firm during a quieter trading period. Milk production seasonally is winding down quickly in both New Zealand and Australia, and markets are now fully focused on northern hemisphere milk production. EU milk production for March 2019 moved into positive territory for the first time since September 2018, lifting 1.1% YOY. US milk production growth has pulled back into modest growth mode, with April 2019 milk flows marginally higher, by just 0.1% YOY. This compares to a decline in production for March 2019 – the first in six years. With the northern hemisphere new season well under way, the spring peak has passed, with reports emerging of strong milk flows – providing procurement options. Emma Higgins Analyst Dairy +64 3 961 2908 emma.higgins@rabobank.com Fonterra has come out of the start blocks for the new 2019/20 season with a wide-ranging milk price forecast of NZD 6.25/kgMS to NZD 7.25/kgMS. At the same time, the coop chopped NZc 20 off of the previous top-end forecast range for the current 2018/19 season, to NZD 6.30/kgMS to NZD 6.40/kgMS. Based on our forecasts for global supply and demand across the coming 12-month period, Rabobank still anticipates a milk price of NZD 7.15/kgMS for the new 2019/20 season. What to watch Dairy • A weaker Kiwi dollar. The NZD/USD cross continues to hover around mid-USc 60 levels. While helpful for exporters, the weaker currency will have a greater effect on the new season’s milk price (2019/20) than the current season and further support our milk price forecast of NZD 7.15/kgMS. EU Milk Flows Return to Growth Global dairy prices, 2014-2019 Production growth, key exporting regions 7,000 Latest month Last three months USD/tonne FOB 6,000 5,000 EU 1.1% (Mar 19) -0.1% US 0.1% (Apr 19) -0.1% -13.7% (Mar 19) -12.1% 4,000 3,000 2,000 Australia 1,000 NZ Butter Source: USDA, Rabobank 2019 SMP WMP Cheese Source: Rabobank 2019 2.3% (season to 30 Apr 2019) Pricing to Lift as Supplies Slow Rabobank expects tightening domestic supplies to put upward pressure on farmgate prices over the coming months, as production begins to wind down from its the seasonal peak. Prices held steady through May, supported by solid export market returns and a weakening NZ dollar. With plentiful supplies of cattle available for slaughter, there was also no pressure on processors to move prices higher to secure supply, resulting in very little price movement over the month. As at the end of May, the North Island bull price is 1% higher MOM, averaging NZD 5.20/kg cwt, while the South Island bull price is down 1% MOM, to NZD 4.90/kg cwt. Prime cattle prices were also steady, with a North Island prime price of NZD 5.50/kg cwt (+1% MOM) and South Island prime price of NZD 5.05/kg cwt (+1% MOM). Cattle supplies will begin to dry up in June, as the national dairy cow cull wraps up and farmers place cattle on winter feed. New Zealand’s season-to-date cattle kill is similar to where it was heading into winter last year, sitting up 1.6% YOY as of 27 April. Given Rabobank expects the total kill for the 2018/19 season to be in line with last season’s kill, cattle supplies through to the end of the season are likely to tighten along normal seasonal patterns. This will ensure there is an element of procurement pressure over the coming months. Blake Holgate Analyst Animal Protein and Sustainability +64 3 955 4603 blake.holgate@rabobank.com US imported beef prices have come back slightly off their recent highs. This is normal at this time of year, given the increased availability of manufacturing beef supplies out of New Zealand, resulting from the national cow cull. Demand from China remains strong, with reduced availability of domestic protein sources due to the African swine fever outbreak forcing China to increase its reliance on protein imports. What to watch Beef • Soft store cattle market. Store cattle prices have been back this season, with poor autumn pasture growth impacting feed availability and, consequently, demand for stock. At the same time, large supplies of dairy beef have come online, putting buyers in a strong position when it comes to setting the sale price. This has seen prices for South Island Friesian bulls dropping to the lowest they have been in over five years. North Island Bull Price 580 NZc/kg cwt 560 540 520 500 480 Oct Nov Dec Jan Feb 2016/17 Source: NZX AgriHQ, Rabobank 2019 Mar Apr 2017/18 May 2018/19 Jun July Aug Sep Further Price Gains Ahead Rabobank expects farmgate prices to continue to strengthen out to the end of the 2018/19 season (September). International demand for New Zealand lamb remains strong, which will underpin prices over the coming months, as domestic supplies tighten. The timing and magnitude of pending price lifts will be determined by the flow of lambs to the processors. There was a healthy jump in farmgate prices during May, as lamb production came off its seasonal peak, increasing procurement competition amongst processors. As of the end of May, the slaughter price in the North Island averaged NZD 7.55/kg cwt (3% higher MOM), while South Island lamb averaged NZD 7.15/kg cwt (5% higher MOM). Farmgate prices are now largely in line with where they were heading into winter last year, down just 1% YOY in both islands. Blake Holgate Analyst Animal Protein and Sustainability +64 3 955 4603 New Zealand’s lamb kill for the 2018/19 season is down 3% YOY (as of 27 April). While the lamb kill had been tracking at similar levels to last season a month earlier, limited supplies through April have now seen it fall behind. Beef+Lamb New Zealand forecast the total slaughter numbers for the 2018/19 season to be down 3%. This would indicate that supply availability for the remainder of the 2018/19 season will be at least as tight as it was from Jun-Sep last season, which corresponded to a healthy lift in farmgate prices over that period last year. The demand outlook from New Zealand’s key export markets remains positive. China and the US continue to lead the way, with demand and pricing levels holding strong. There has also been an improvement in sentiment from the UK and continental European markets, with the delay in the Brexit decision providing some short-term certainty for importers. blake.holgate@rabobank.com What to watch Sheepmeat • Crossbred wool prices are improving. A weakening NZ dollar has helped to lift crossbred wool prices over the last month. Lamb’s wool, in particular, has made some notable price gains since the start of the year, primarily driven by strong demand out of China. South Island lamb’s wool prices across all classes are up on where they were a year ago. In the North Island, poor colour has been an issue which has had some negative impact on prices. South Island Lamb Price and NZ Lamb Slaughter New Zealand lamb slaughter (YTD – 27 April) South Island lamb price 900 16,000,000 12,000,000 700 head NZc/kg cwt 800 8,000,000 600 4,000,000 500 400 Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sep 2015/16 2016/17 Source: NZX AgriHQ, Rabobank 2019 2017/18 2018/19 0 2017/18 South Island Source: NZ Meat Board, Rabobank 2019 2018/19 North Island Royals Not to Be Pipped by a Kiwi The kiwifruit sector has reported another strong export performance, with all-time high exports of New Zealand-grown kiwifruit into key export markets helping to set a record for revenue. The new export season has also kicked off in a similar fashion for kiwifruit, as it has also for apple exports. Rabobank expects continued export growth for these sectors, but China’s economic performance remains of key interest for the fortunes of fresh produce exporters across 2019. Kiwifruit export values hit a record for 2018/19, with Zespri’s reported operating revenue exceeding NZD 3bn. Exports of New Zealand-grown kiwifruit lifted by 35% in value, to NZD 2.2bn for the year, with export data showing volume up by 21% YOY, to 152m (3.6kg equivalent) trays. Exports for the new marketing year have shown a strong start, with volumes running well ahead of the same time in 2018, supported by an increase in Fob values. Strong import growth is occurring in the US, Australia, and Japan, but with a slower start to the season for Chinese imports of New Zealand-grown kiwifruit. Hayden Higgins Senior Analyst Horticulture & Wine +64 6 974 9504 hayden.higgins@rabobank.com Not to be pipped by its larger cousin, the apple sector has also experienced a strong start to the 2019 season for exports. Export volumes and values have lifted year-on-year across the first quarter of 2019. China continues to favour New Zealand apples, and the year-on-year increase in volume and value across Q1 2019 has been strong, when both Hong Kong and Taiwan are included. Prices for Royal Gala in China have underpinned this start, with Royal Gala the largest share of Q1 export volumes. This is against a backdrop of a slowing domestic economy in China and rising food price inflation. The performance of China’s economy will continue to be of importance for exporters to monitor, if the consumer spending slowdown seen for manufactured goods flows into food consumption in 2019. What to watch Horticulture Horticulture • European avocado consumption growth. The World Avocado Organization reports it expects European consumption per capita to match the US within eight years. This will be welcome news for New Zealand avocado exporters, as domestic production volumes increase and export strategies evolve to cater for this. Any increase in European demand will cater for larger volumes of fruit from South American exporters, who also compete with New Zealand across Asia. Strong Start to 2019/20 Season Exports Kiwifruit exports to key markets, April 2019 vs. April 2018 90% 80% change YOY 70% 60% 50% 40% 30% 20% 10% 0% -10% Japan China (Including Hong Kong and Taiwan) EU Volume US Australia Total exports Value (fob) Source: Statistics NZ, Rabobank 2019 Exports of kiwifruit have made a strong start to the new marketing year across many of our key markets, with impressive YoY growth to the US. Gold kiwifruit accounted for 70% of total export value. New Zealand Imports Sparkle The overall market mix of imported wines into New Zealand remains unsurprisingly dominated by Australia, but the mix is changing. Imported French wine has increased market share in New Zealand, led by sparkling wines. The year-on-year increase of total NZ sparkling import volumes is ahead of still wine by almost two-thirds to March 2019. Further, imported wine from some of the larger world producers across Europe and South America has increased over the past 12 months, as world bulk wines remain in a surplus environment. Imports of Australian wines are running 9% ahead of 2018 for value YOY to March 2019, with import volumes tracking to a similar level to that of the year ending June 2018. Bulk wine represents the majority of imports from Australia. Imports of French wine have seen a marked lift since 2009, with a tripling of imported volume and value for the period, led by sparkling wines. NZ French wine import CAGR is 11% for the ten-year period to June 2018, with YTD import growth of 7% YOY to March 2019. Hayden Higgins Senior Analyst Horticulture & Wine +64 6 974 9504 hayden.higgins@rabobank.com Wines from other countries such as Chile, Portugal, and Spain have made inroads into the New Zealand import market in the past 12 months. Increased supply and competitive value propositions from these countries has facilitated imports, used for blending of both varietals and countries of origin for the domestic wine market in New Zealand. Rabobank expects this to continue across 2019. On the export front, China has stepped up its imports of New Zealand sauvignon blanc, which is against the run of play from a market that has seen declining imports and one that favours red wines. Chinese imports of NZ wine appear to be running against the tide in China, where overall volumes of imported wines contracted in 2018 and are down by 24% YOY for the first quarter of 2019. What to watch Wine • China import slowdown. A continued economic slowdown in China could push further into wine consumption. As China is a market that traditionally favours red wines, any consumption reduction could translate into lower import volumes for white varietals if consumers align their behaviours to more traditional consumption patterns of favouring red wine. French Wines Sparkle in the NZ Market Market share for New Zealand wine import value (NZD cif) 100% Germany Argentina 80% Portugal South Africa 60% Chile United States of America 40% Row Spain Italy 20% France Australia 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics NZ, Rabobank 2019 Imports of Australian wine remain the dominant category for both volume and values. French wines have performed ahead of Australia for increasing share of wine imports in percentage terms. Global demand to remain subdued Our bearish view on global fertiliser markets is unchanged month-on-month, primarily based on expectations of continuing low global demand. US planting of spring wheat, corn, and soy is progressing, albeit slowly due to poor weather. This month saw an escalation of the US-China trade war, which should have further incentivised US farmers to plant more corn and, in turn, buy more fertiliser. A new tender for 778,000 tonnes of urea from India gave urea benchmarks a shot in the arm this month. Global benchmarks for urea (spot Middle East) increased 8% MOM, closing at USD 271/tonne during the last week of May. Global DAP prices were stable month-on-month. It was also a relatively quiet month for local retail markets, all local benchmarks remained unchanged month-on-month. Local urea prices remained unchanged in February. Wes Lefroy Agricultural Analyst +61 2 8115 2008 wesley.lefroy@rabobank.com What to watch Fertiliser • Peak demand ahead of the spring flush. Soil across a majority of New Zealand’s productive regions are drier than usual. If significant winter rains arrive, alongside forecast warmer temperatures, this will stimulate demand for nitrogen ahead of the spring flush. A healthy milk price this season will support purchases should weather conditions improve. Local Prices Unchanged MOM NZ reported retail prices 1,000 NZD/tonne 850 700 550 400 250 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 Super Phosphate (SSP) Source: Ravensdown, Rabobank 2019 May-16 Urea Nov-16 May-17 Nov-17 Cropmaster DAP May-18 Nov-18 May-19 NZD Falls (Yet) Again – And We Now Think the Bottom Will be Lower We have revised down our forecasts for the NZ dollar and now expect it to reach USc 63 within 12 months, as monetary policy in the US and New Zealand diverges. In the US, we expect monetary policy to ease, but not until 2020. On 1 May, the Fed kept the target range for the federal funds rate unchanged at 2.25% to 2.50%, stating that it didn’t see a strong case for a rate move either way. We feel differently. With the yield curve still partially inverted, Rabobank continues to expect the economy to fall into recession in 2H 2020. Consequently, we think that the Fed will be forced to start cutting rates – but not until 2020. Tim Hunt Head of Food & Agribusiness Research, Australia & New Zealand +61 3 9940 8406 tim.hunt@rabobank.com The Reserve Bank of New Zealand (RBNZ) reduced its OCR by 25bps, to 1.5%, on 8 May, and we think there are more cuts to come. The RBNZ saw need for these cuts “to support the outlook for employment and inflation”, after this data disappointed recently. More importantly, RBNZ Governor Orr didn’t rule out further cuts if they prove to be necessary: “Our forecast track is a slightly lower path than just one cut, but the uncertainties around that path are large.” Although the RBNZ’s next move clearly remains data-dependent, these comments bolstered the market’s expectations of another cut this year, and may put some further pressure on Kiwi rates and the New Zealand dollar. At USc 65.5 on 27 May, the NZD was down almost another cent since late April. Rabobank forecasts the NZD to hit USc 63 by May 2020. What to watch • FX The yield curve. It is important to distinguish between coincident, lagging, and leading indicators. The US economy may be growing at a rate of 3.2%, but this does not tell us anything about growth in the future. Inversions of the yield curve have a strong forecasting record when it comes to recessions 12 to 18 months in the future. The explanation for the current yield curve inversion at the short end is that investors expect short-term rates to fall in 2020. We take the inversion of the yield curve seriously and continue to expect the economy to fall into recession in 2H 2020. NZD Falls Again, Bringing it Nearer Our 12 Month Forecast NZ/US dollar Cross Rate 0.80 NZD/USD 0.76 0.72 0.68 0.64 0.60 Nov-14 May-15 Source: RBNZ, Rabobank 2019 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Higher Prices Ahead for Brent Crude Despite finishing lower month-on-month, Rabobank maintains its outlook for Brent Crude to move toward USD 75/bbl in the weeks ahead, buoyed by a seasonal pick-up in demand and geopolitical tensions. Negative macro fundamentals and unseasonal growth of US inventories pushed Brent Crude back below the USD 70/bbl mark this month. The escalation of the US-China trade war prompted a selldown in ‘risk assets’ such as oil, while a strengthening US dollar also brought some selling pressure to the market. Ahead of the northern hemisphere summer, it was another move upward for ocean freight prices this month. The Baltic Dry Index finished up 26% MOM. Brent Crude Oil, May 2016-May 2019 Baltic Dry Index, May 2016-May 2019 1800 80 1500 Baltic Dry Index 90 USD/bbl 70 Oil & Freight 60 50 900 600 40 30 May 16 1200 May 17 May 18 May 300 Brent Crude Source: AIP, Bloomberg, Rabobank 2019 Source: Bloomberg, Rabobank 2019 Agri Price Dashboard As of 24/5/2019 MOM Current Last month Last year USc/bushel USc/bushel USc/bushel AUD/tonne AUD/tonne ▲ ▼ ▲ ▲ ▼ 490 8 30 404 338 574 435 8 54 351 334 58 3 530 1,036 404 317 558 AUc/kg cwt AUc/kg lwt NZc/kg cwt NZc/kg cwt • ▼ ▲ ▲ 469 276 520 490 469 276 515 48 5 472 270 520 490 AUc/kg cwt NZc/kg cwt NZc/kg cwt ▲ ▲ ▲ 8 29 755 715 713 730 68 0 597 750 725 NZc/kg cwt NZc/kg cwt ▼ ▼ 880 900 900 905 1,060 1,110 USD/tonne FOB USD/tonne FOB USD/tonne FOB USD/tonne FOB ▼ ▲ 5,513 2,563 3,175 5,263 5,725 2,538 3,313 4,350 5,700 2,038 3,263 3,963 Unit Grains & oilseeds CB OT wheat CB OT soybean CB OT corn Australian ASX EC Wheat Non-GM Canola Newcastle B eef markets Eastern Young Cattle Indicator Feeder Steer North Island B ull 300kg South Island B ull 300kg Sheepmeat markets Eastern States Trade Lamb Indicator North Island Lamb 17.5kg YX South Island Lamb 17.5kg YX Venison markets North Island Stag South Island Stag Dairy Markets B utter Skim Milk Powder Whole Milk Powder Cheddar ▼ ▲ Agri Price Dashboard As of 24/5/2019 Unit MOM Current Last month Last year USc/lb USc/lb ▼ ▼ 79 68 88 77 94 87 USc/lb AUD/tonne ▼ ▼ 12 371 12 396 12 397 AUc/kg ▼ 1,8 33 1,943 1,98 3 USD/tonne FOB USD/tonne FOB ▼ ▼ 260 365 275 38 3 170 407 1000=198 5 USD/bbl ▲ ▼ 1,066 69 889 72 1,109 79 vs. USD vs. USD % % ▼ ▼ • ▼ 0.693 0.655 1.50 1.50 0.704 0.666 1.50 1.75 0.758 0.693 1.50 1.75 Cotton markets Cotlook A Index ICE No.2 NY Futures (nearby contract) Sugar markets ICE Sugar No.11 ICE Sugar No.11 (AUD) Wool markets Australian Eastern Market Indicator Fertiliser Urea DAP Other B altic Dry Index B rent Crude Oil Economics/currency AUD NZD RB A Of f icial Cash Rate NZRB Of f icial Cash Rate RaboResearch Food & Agribusiness Australia and New Zealand Tim Hunt Head of Food & Agribusiness Research and Advisory, Australia and New Zealand +61 3 9940 8406 Tim.Hunt@Rabobank.com Angus Gidley-Baird Senior Analyst – Animal Protein + 61 2 8115 4058 Angus.Gidley-Baird@rabobank.com Michael Harvey Senior Analyst – Dairy +61 3 9940 8407 Michael.Harvey@rabobank.com Cheryl Kalisch Gordon Senior Analyst – Grains & Oilseeds +61 2 6363 5900 Cheryl.KalischGordon@rabobank.com Hayden Higgins Senior Analyst – Horticulture and Wine +64 6 974 9504 Hayden.Higgins@rabobank.com Wes Lefroy Agricultural Analyst +61 2 8115 2008 Wesley.Lefroy@rabobank.com Emma Higgins Analyst – Dairy +64 3 961 2908 Emma.Higgins@rabobank.com Blake Holgate Analyst – Animal Protein and Sustainability +64 3 955 4603 Blake.Holgate@rabobank.com Charlie Clack Commodity Analyst +61 2 8115 2471 Charles.Clack01@rabobank.com Dennis Voznesenski Associate Analyst +61 2 8115 3920 Dennis.Voznesenski@rabobank.com Catherine Keo Business Coordinator +61 2 8115 4154 Catherine.Keo@rabobank.com Rabobank New Zealand Nearest branch call 0800 722 622 www.rabobank.co.nz This document is issued by a Rabobank Group member. 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