As the country’s front-line export sector, NZ agriculture is bearing the brunt of the global trade slowdown. ANZ Bank’s chief economist Sharon Zollner says the human and economic damage from the Covid-19 outbreak is taking a heavy toll on sentiment in the agriculture sector.
“Our best hope is that the disruption proves short-lived but there is not question the export-oriented sector is reeling”.
Authorities such as Keith Woodford believe NZ, as well as most of the world, will head into recession. Woodford contends the key issue becomes rapid support for those who lose their employment.
He sees a “considerable risk” that the government and Reserve Bank will use the wrong macro tools.
“Adjusting interest rates looks like the wrong medicine. The priority should be to get cash into the hands of those who currently live week-to-week”.
Many farmers are already stressed by the effects of drought and lack of feed. The latest NZ Business Outlook survey recorded confidence among the agriculture sector collapsing, falling 30%, while expectations on the part of individuals have almost halved.
Hardest hit could be meat producers who had been enjoying high prices, but – as Keith Woodford points out – meat companies lack the financial power to purchase large quantities of stock without clear visibility as to where markets are going. They may well need bridging finance from government.
ANZ, releasing its latest commodity price index review, says the meat and fibre index fell 4.6% in February continuing the downward trend in pricing which has been present for the past three months. Exporters have been diverting meat into other markets such as the US for beef and more lamb is heading to Europe, but stocks are building.
Prices for the higher-end cuts of lamb have been maintained but prices for the lower value cuts and manufacturing grade beef are rapidly falling.
For the dairy sector, it was a rather different story. ANZ reports dairy prices were stable in February as higher cheese prices offset lower prices for milk powders.
“This data is yet to reflect the recent fall in GDT prices which are back 9% since early February. Dairy exports remain robust but are not immune to the supply chain challenges all industries currently face”.
Though prices fell again at the latest GDT auction this week, the impact was limited because of the decline in the exchange rate.
Dairy farmers also have the reassurance of Fonterra’s reaffirmation of its farmgate milk price and earnings forecasts for the year, though the co-op conceded the coronavirus outbreak is affecting Fonterra’s food-service customers in China. Fonterra has contracted a high percentage of the 2020 financial year’s milk supply “and this is helping us manage the impact of coronavirus”.
A2 Milk has reported demand for its products remains strong and its staff in China have been working hard to ensure product is available in the online sales channels. CEO Geoff Babidge says the nature of A2’s product means there is inherent demand.
“So our main focus is on ensuring our product is available for the various channels of distribution…Product is flowing and products such as ours are getting priority for clearance at ports”.
With $618.4m sitting in the bank, A2 Milk, which until now has been solely a marketer of a1 beta-free milk products, said it is looking at manufacturing in its own right, due to the increased scale of its infant nutrition business. For the full 2019/20 year ending in June the company said it anticipated continued strong revenue growth across its key regions supported by increased marketing in vestment in China and the US.
In recent weeks the Chinese Government has advised its citizens they should consume the equivalent of 300 ml of milk per day to help with their immune systems.
Mengniu Dairy, China’s second largest dairy producer, is racing to add more vending machines to the 10,000 it currently has, saying the epidemic has driven unexpectedly strong demand for the sales channel.
Its system allows customers to order products like milk and yoghurt online which can then be picked up from their local vending machine.
So if the Chinese government’s actions in seeking to control the Covid-19 outbreak are beginning to succeed, demand for NZ’s dairy products may return to an upward curve.
That will mean the NZ industry will get through the current global crisis, hopefully with not too many scars.