City dwellers, preoccupied by Covid, may not have observed that the country’s export economy is being sustained by its primary industries. Last week came the news that Fonterra had signalled a record payout to its suppliers, pumping $13.2bn into the regions.
Some analysts think that may be on the conservative side and the final payout will surpass $9kg/MS.
In any case, the ANZ commodity price index lifted 2.8% in November, pushing it into new territory. The bank’s economists, noting that dairy prices led the charge, reported they were supported by strong gains in meat.
Again, because of the preoccupation with the pandemic, it may have gone unnoticed that meat exporters achieved record returns in the season ended in September. Total export receipts for beef and sheepmeat equalled the record returns of 2019–20 and were 17% up on the five-year average.
Beef export volumes reached a record high in 2020–21, up 8% on 2019-20 and 16% up on the five-year average. The high volumes reflected the numbers of steers and heifers processed.
The higher volumes were easily absorbed by strong consumer demand and tighter global beef supply.
Lamb export volumes in the 2020–21 season were about the same as in the previous season and the five-year average. The average export value was 4% down on the record high of 2019–20, but 8% above the five-year average.
With volume much the same as in 2019-20 and average value down, total export receipts for lamb were down 4% on 2019–20.
So what’s happening to woolgrowers who – if they produced anything but merino – barely covered the costs of shearing their animals for a couple of seasons? Again the news is better, although still not as bright as in the other primary industries.
Higher demand for sportswear, rugs and other wool products has resulted in wool prices showing some resilience. Prices across all wool types lifted in the year to October, Beef and Lamb’s latest wool export data shows.
Merino was up 28.4% to just over $18,000 a tonne and strong wool, which has been struggling with depressed prices, rose 12.1%.
PGG Wrightson general manager of wool Grant Edwards said prices are lifting due to higher demand.
“A lot of that has been driven in that strong crossbreed space. We are coming off a very very low base but in the same token we are seeing a general increase in demand overseas and we’re certainly seeing a waking-up overseas to that natural, biodegradable, sustainable product.
“With the merino, we’ve seen prices back up to those extreme highs three years ago, which is based largely around that active sportswear market and to a degree the suit market.
“We also believe the world has settled down as best it can around Covid so a lot more countries are up and running now.
“The mills that we deal with in Europe are really busy they’re operating at full capacity.”
Edwards said the market had changed a lot in recent months with Covid-related shipping delays and increased costs causing issues.
“We’ve seen a resurgence with from the Indian markets, and a lot more wool has been exported to India over the last four months than what we’ve seen in previous years. We’ve seen a lot less going into China, though that’s starting to balance itself back out.”
Edwards said the higher strong wool price meant farmers were no longer making a loss for shearing their sheep but prices were still low and could rise further.
The NZ dollar’s decline in the currency market has strengthened prospects for the farming industries. It has fallen to 67c against the greenback, down from 72USc in October.
ANZ reports, too, that global shipping costs have eased, although pricing remains elevated.
Other costs are rising rapidly. This is particularly tough on the sectors where returns are low, like venison, wool and logs. Inflation is evident in many parts of the economy, but a lot of costs of production in the primary sector are increasing even more quickly than the general rate of inflation.
Back to the Fonterra story: the co-op’s farmer-shareholders could be in a cheerful mood as they move to a critical decision next week on the capital structure of their co-op.
Certainly chief executive Miles Hurrell sounded buoyant, when saying the revised price forecast is the result of consistent strong demand for dairy at a time of constrained global supply.
“While we’ve seen demand soften slightly in China, global demand remains strong, and we think that will remain the case for the short to medium term,” Hurrell said.
However, the higher cost of raw milk has flowed through to higher costs for wholemilk powder, a key ingredient in many products, resulting in higher manufacturing costs. Accordingly, Fonterra has cut its dividend forecast by five cents to between 25c and 35c a share.
“A higher forecast farmgate milk price at this level can put pressure on our margins and therefore our earnings, which is why we’ve reduced the top end of our earnings guidance,” Hurrell said.
First-quarter trading showed a 5% rise in revenue to $4.4bn, despite a drop in sales volumes, but higher milk prices pushed up its cost of goods by 8% and its margin falling 3 percentage points.
Overall group earnings before interest and tax (EBIT) were down 19% to $190m for the three months ended October.
Hurrell said local milk supply was currently down about 3% on a year ago, and full-season production was expected to be marginally down on last season at 1525 million kg/MS.
US production had stalled because of higher feed prices, and European production was also lower.
Fonterra’s various divisions were feeling the effects of higher prices but steady volumes, while its Chilean business, which is earmarked for sale, was improving.
“Looking at the whole picture, I’m proud of what we’ve achieved. With EBIT of $190 million and a strong farmgate milk price, we are starting to consistently deliver solid commercial outcomes,” Hurrell said.
Clearly he’s hoping for a favourable result on December 9.