Agribusiness Monthly November New Zealand

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1 Agribusiness Monthly November 2015 New Zealand

2 Commodity outlook Sector Dairy Driver Milk intake remains lower for the season to date compared to last year, down around 3%, as at October Beef Farmgate prices have come under pressure this past month, as high domestic and imported supplies in the US underpin weak buying. Sheepmeat Wool Wine Fertiliser FX Farmgate prices generally trended lower throughout October, but have rebounded slightly as at the middle of November. We are seeing a close relationship between price volatility and swings in the NZD/USD exchange rate. In the first few weeks of November crossbred wool prices have improved from the lows seen in October. New Zealand wine exports increased by 6.4% in volume and 10.5% in value in the 12 months to September Despite increased urea prices, markets are expected to remain weak as a result of seasonally decelerating demand in the US and Europe. After keeping interest rates on hold at 2.75% in October, there is increasing speculation that the RBNZ is likely to ease rates in the coming months. Oil Oil stocks have reportedly reached historic highs in key markets including China and the US. 2

3 Climate International guidance suggests El Niño is certain (100% chance) to continue now and into the new year (November 2015 to January 2016), with NIWA expecting conditions to intensify and peak in the coming months. Soil moisture anomaly (mm), 17 November 2015 Rainfall is likely to be in the normal range for the west of the North Island and the top of the South Island, while the west coast of the South Island has a chance of above normal rainfall from now and into the New Year. The remainder of the country, however, has a chance of below normal rainfall levels between November and January Soil moisture levels are likely to continue to be below normal for the Northern North Island region, as well as the east coast of the South Island. The west coast in the South Island has a chance of above average soil moisture levels, but the remainder of New Zealand is likely to have near normal or below normal soil moisture levels. Southern Oscillation Index, November 2015 Source: NIWA, Rabobank,

4 USD/tonne FOB Dairy World dairy prices Further culling of low performing dairy cows took place in September, as farmers reassessed herd sizes and budgets. The total New Zealand dairy herd is smaller this season, with total cow slaughter 26% higher than last year around 238,000 more cows for the 12 month period to September Drier weather is beginning to affect key dairying regions. The Waikato and Canterbury regions in particular are feeling the effects of belowaverage soil moisture. 5,500 4,500 3,500 2,500 Milk intake remains lower for the season to date compared to last year, down around 3%, as at October This is in line with Rabobank s production forecast for the remainder of the season (7-10% below last season s total milk supply). Global dairy commodity markets remain weak, as shown by recent GDT auction results. Rabobank believes it will be a few months yet before the global market rebalances. 1,500 Source: USDA, Rabobank, 2015 Butter SMP WMP Cheese Production growth in key exporting regions: What to watch: Latest month Last 3 months Chinese milk powder import volumes returned to growth in recent months. China is likely still carrying some inventories and will need to work through these. The EU has seen positive growth in milk production in the six months since the removal of quotas. Markets are expecting the rate of growth to slow in the coming months. EU 2.2% (September) 2.3% US 0.4% (September) 0.8% Australia 0.8% (September) 3.0% NZ -3% (October estimate) -3% (season to date) 4

5 thousand head NZc/kg cwt Beef North Island bull price, Jan Nov 2015 Farmgate prices have come under pressure this past month, as high domestic and imported supplies in the US underpin weak buying. As at the middle of November, the North Island bull price averaged NZD 5.45 kg/cwt, slightly lower compared with last year. At the conclusion of the processing season (Oct Sep), total cattle slaughter hit 2.64 million head 13% higher YOY and 18% above the five year average. Overall exports in September jumped 32% YOY, to 27,676 tonnes swt, with large increases across most key markets. Shipments to the US (10,658 tonnes swt) increased by 21%, while volumes to China (4,402 tonnes swt) surged 106% YOY. Reflecting the current difficult trading environment in the US, imported 90CL prices (US cents/lb) at the middle of November are the lowest since September NZ cow slaughter processing season 1,200 1,100 1, Source: NZX Agrifax, NZ Farmer, Rabobank, 2015 What to watch: NI Bull 300kg 2014 NI Bull 300kg 2015 After numerous years of strong growth, dairy cattle numbers for the year to June 2015 declined for the first time in ten years. This fall was underpinned by low dairy prices and will ensure much tighter beef supplies in the 2015/16 season. Source: NZ Meat Board,

6 thousand head NZD c/kg cwt Sheepmeat South Island lamb price, Jan 2014-Nov 2015 Farmgate prices generally trended lower throughout October, but have rebounded slightly to sit at NZD 5.85/kg cwt as at the middle of November 5% lower YOY At the conclusion of the processing season, lamb slaughter volumes increased 3% YOY, reaching 21 million head, while mutton slaughter declined 4% over the same time, to 4 million head. Challenging seasonal conditions across most of NZ underpinned the increase, with the highest lamb volumes processed since 2008/ Total sheepmeat exports in September increased 9% YOY, to 22,834 tonnes swt, although average export returns declined slightly over the same time, to average NZD 7.88 kg/fob. Average returns in China (NZD 4.68 kg/fob) declined 9% YOY, although the EU (NZD kg/fob) increased 3% over the same period South Island 17.5kg YX 2014 South Island 17.5kg YX 2015 NZ lamb slaughter processing season 23,000 22,500 22,000 21,500 21,000 20,500 20,000 19,500 19,000 18,500 18,000 Source: NZX Agrifax, NZ Farmer, Rabobank, 2015 What to watch: Demand factors are reportedly weak, particularly for frozen product. One potential positive for exporters is a likely further easing in the NZD/USD given the potential for the US Federal Reserve to lift interest rates in December. Source: NZ Meat Board, Rabobank,

7 tonnes NZD/tonne NZD c/kg Wool NZ coarse crossbred wool prices The price of coarse crossbred wool continued to contract throughout the latter stages of October, to a low of NZc 574/kg on October 30. Prices have rebounded in the first half of November to near the NZc 600/kg mark. With some early volumes coming through the sales, the first lambswool indicator has been released at NZc 750/kg which is 6.1%, or 43 cents, higher than last year s close. Once again we are seeing a close relationship between price volatility and swings in the NZD/USD exchange rate. Clearance rates in week 17 were at a two year low of 69%, but rebounded to around 90% in weeks 18 and 19 and a season high of 99% in week 20. These clearance rates were aided by a weakening NZD/USD, which has fallen by 3.49 cents (5%) in the month to November New Zealand exports have continued their strength in the 2015/16 season, with exports for the month of September up 6% YOY. In value terms, aided by the underlying weakness in the NZD, export earnings were also up 14.5%. Coarse Crossbred 2014 Coarse Crossbred 2015 Source: NZWSI, Rabobank, 2015 NZ wool exports 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 What to watch: The Commerce Commission has approved Cavalier s application to acquire NZWSI s wool scouring business. Citing that despite creating substantially less competition, the rationalisation of the industry should result in lower administration and production costs as well as freeing up a number of industrial sites in the near future. There is an expected appeal from Godfrey Hirst. Tonnes clean 14/15 Tonnes clean 15/16 Price per tonne 14/15 Price per tonne 15/16 Source: NZ Beef & Lamb, Rabobank,

8 volume change Volume (million HL) Net balance (million HL) Wine Global wine supply/demand, (f) New Zealand wine exports increased by 6.4% in volume and 10.5% in value in the 12 months to September Export shipments in the month of September fell by 5.0% in volume but increased by 12.2% in value versus the same month last year, illustrating the support that the short 2015 harvest and lower NZD is providing to pricing Average prices for New Zealand wines exported in bottled format jumped to NZD 9.22 per litre in the month of September, the highest level recorded since January Average prices to the UK, US and Australia markets in particular have rebounded strongly since harvest back in March/April New Zealand wine exports, MAT September % 18% 16% Global Supply Industrial Use (RHS) Source: OIV, Rabobank, 2015 Global Balance (RHS) 14% 12% What to watch: 10% 8% 6% 8% 9% 8% 6% Early indications suggest that global wine production will see a mild increase in Production increases in places such as Chile and Italy appear to be enough to overcome projected declines in Spain, the US and 4% Argentina. Even still, the level of increase does not 2% 0% 0% UK Australia USA Canada Total appear to be placing any significant downward pressure on bulk wine prices at the present moment. Source: NZ Winegrowers, Rabobank,

9 USD/tonne Fertiliser Global fertiliser prices Despite a lift in global urea prices, markets are expected to remain weak as demand in Europe and the United States seasonally decelerates Indian import demand for phosphates remains weak. A deficient monsoon and continued depreciation of the rupee have contributed to an increase in carryover stocks Global potash prices are under pressure on limited demand. There is potential for further price falls in the coming months on weak fundamentals What to watch: 250 Potash market attention turns towards the tender season across South-East Asia. Confirmed deals are putting more pressure on Chinese contract talks. Urea DAP Source: Bloomberg, Rabobank,

10 Annual change (% QoQ) NZD / USD FX NZD/USD: 12-month price movement The Reserve Bank of New Zealand (RBNZ) elected to hold the official cash rate at 2.75% at its meeting on 29 October. The NZ dollar has given up ground over the past month, with commodity prices coming under renewed pressure, while US jobs growth bounced back in November to renew speculation of a December rate rise. The RBNZ has reiterated its view that further easing of the official cash rate seems likely. Underlying consumer price inflation fell again in Q3-2015, below the bottom of the RBNZ s target range, with little pressure expected from still subdued wages growth. NZ consumer prices and wages growth, Source: RBNZ, Rabobank, What to watch: We forecast NZD/USD falling towards 0.61 in a 12-month view. Weak commodity prices, ongoing signs of slower economic growth in China, and the easing bias from the RBNZ are expected to weigh on the NZ dollar against a backdrop of an improving US economy and stronger US dollar. Headline CPI CPI excl. 'volatile items' Labour cost index Source: Statistics NZ, Rabobank,

11 USD/BBL Index Oil & Freight Oil stocks have reportedly reached historic highs in key markets, including China and the US, amid an expected pickup in supply from the Middle East. This has been largely due to the lifting of sanctions on Iran. Consequently, Rabobank remains bearish on oil prices in the short term. The Baltic Dry Index is at its lowest November level of all time, and continues to be a strong indicator of where the global economy stands at this point. Brent Oil Baltic Dry Index Source: Bloomberg, Rabobank,

12 Agri price dashboard As of 19/11/2015 Unit MOM Current Last month Last year Grains & oilseeds CBOT wheat USc/bushel CBOT soybeans USc/bushel ,005 CBOT corn USc/bushel Australian ASX EC Wheat AUD/tonne Australian Canola AUD/tonne Beef markets Eastern Young Cattle Indicator AUc/kg cwt Feeder Steer AUc/kg lwt North Island Bull 300kg NZc/kg cwt South Island Bull 300kg NZc/kg cwt Sheepmeat markets Eastern States Trade Lamb Indicator AUc/kg cwt North Island Lamb 17.5kg YX NZc/kg cwt South Island Lamb 17.5kg YX NZc/kg cwt Venison markets North Island Stag NZc/kg cwt South Island Stag NZc/kg cwt Dairy Markets Butter USD/tonne FOB 2,850 3,175 2,900 Skim Milk Powder USD/tonne FOB 2,500 2,163 2,450 Whole Milk Powder USD/tonne FOB 2,050 2,763 2,550 Cheddar USD/tonne FOB 3,150 3,200 3,850 12

13 Agri price dashboard As of 19/11/2015 Unit MOM Current Last month Last year Cotton markets Cotlook A Index USc/lb ICE No.2 NY Futures (nearby contract) USc/lb Sugar markets ICE Sugar No.11 USc/lb ICE Sugar No.11 (AUD) AUD/tonne Wool markets Australian Eastern Market Indicator AUc/kg 1,252 1,169 1,048 NZ Coarse Crossbred Indicator NZc/kg NZ Fine Crossbred indicator NZc/kg Fertiliser Urea USD/tonne FOB DAP USD/tonne FOB Potash USD/tonne FOB Other Baltic Dry Index 1000= ,306 Brent Crude Oil USD/bbl Economics/currency AUD vs. USD NZD vs. USD RBA Official Cash Rate % NZRB Official Cash Rate %

14 Food & Agribusiness Research and Advisory Marc Soccio Senior Analyst Wine, Horticulture & Rural Economics Marc.Soccio@rabobank.com Michael Harvey Senior Analyst - Dairy & Farm Inputs Michael.Harvey@rabobank.com Graydon Chong Senior Analyst - Grains & Oilseeds Graydon.Chong@rabobank.com Angus Gidley-Baird Senior Analyst - Animal Proteins Angus.Gidley-Baird@rabobank.com Matthew Costello Analyst - Animal Proteins Matthew.Costello@rabobank.com Georgia Twomey Commodity Analyst Georgia.Twomey@rabobank.com Emma Higgins Research Analyst Emma.Higgins@rabobank.com Ben Larkin Agricultural Analyst Ben.Larkin@rabobank.com Maddie Armstrong Business Co-ordinator Maddie.Armstrong@rabobank.com Rabobank Australia Nearest branch call This document is issued by a Rabobank Group member. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by any Rabobank Group member to enter into a transaction. This information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any financial or strategic decisions. This information is general in nature only and does not take into account an individual s personal circumstances. All opinions expressed in this document are subject to change without notice. No Rabobank Group member accepts any liability whatsoever for any direct, indirect, consequential or other loss or damage howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of a Rabobank Group member. By accepting this document you agree to be bound by the foregoing restrictions. All copyright is reserved

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