Commodity prices hitting record levels, expected to stay ‘stronger for longer’

New Zealand’s agricultural commodities have been hitting record levels, bolstering our export earnings and helping offset big losses from international tourism and education. And unlike previous booms, analysts say this time prices are likely to stay stronger for longer.

Westpac senior agri economist Nathan Penny says being a food producer was positive during Covid-19 as people still need to eat in times of crisis.

The country was also well-placed as its key Asian markets handled Covid-19 well and got their economies back up and running quickly, ensuring resilient demand for our products that is pushing up prices.

Global prices for New Zealand commodities as measured on the ANZ Commodity Price Index have lifted for eight consecutive months, and hit a new record in May. Prices on the world index are up 18 per cent this year, and up 17 per cent in local currency terms.

“New Zealand commodity prices are on a tear,” Penny says. “We anticipate that more records will tumble over the remainder of 2021.”

Normally when prices rise, production steps up, but that’s not expected to happen this time around as environmental restrictions and higher grain prices constrain expansion.

“We anticipate a rather rare New Zealand event where commodity prices remain stronger for longer,” Penny says.

Dairy regained its crown as the top export earner for the country last year, having previously lost the position to tourism which came to a crashing halt when the border closed.

Penny says staple foods like dairy performed better than premium products during the pandemic because people were cautious about spending their cash. Products able to be consumed at home did better than those destined for restaurants due to widespread restrictions on dining out.

Staples exposed to rebounding Asian economies have done really well, Penny says.

China’s exports rose 28 per cent in May from a year earlier and imports soared 51 per cent as Asia’s largest economy recovers from the slump early in 2020.

“The Chinese economy is just steaming and Southeast Asia is not too far behind. That’s seen dairy really really surge over the back end of last year and through the start of this year,” he says.

The Global Dairy Trade price index is sitting about 40 per cent higher than a year ago, and Fonterra has forecast a record opening milk price for its farmers for this season, which could contribute more than $12 billion to the economy.

While a previous surge in dairy prices in the 2013/14 season was followed by a slump, this time prices are expected to remain at healthy levels for longer as producers are unable to step up supply like they had in the past.

“We think prices will moderate heading into 2022, but we think they are going to stay at healthy levels over 2022 and 2023 because of those supply constraints,” Penny says.

Concern about pressure on the environment is impacting food production globally with water increasingly scarce and tighter regulations constraining production, he says.

Penny is anticipating healthy export incomes for an extended period for most sectors and regions.

For meat, the country’s second-biggest commodity export, returns have been better for those types normally eaten at home, or used in takeaways, rather than consumed in restaurants. That’s expected to change as the Covid vaccine roll-out gathers pace in the United States, Europe and the United Kingdom, prompting people to return to dining out.

Cuts of lamb destined for general consumption in China have been a standout performer, hitting new records. Lamb flaps hit a record US$8.90/kg and lamb forequarters are at a record US$7.10/kg, according to AgriHQ.

Limited supply has helped underpin prices as African swine fever in China hurt pig meat supplies and droughts and fires in Australia curbed its lamb kill.

“There are not many other places to look for product and that’s why you get this big jump in prices,” says AgriHQ analyst Reece Brick.

“Some buyers have been ordering whole carcasses because they just want the lamb, and it’s the easiest way to get it,” he says. “They just don’t want to worry about getting caught short on supply, because our New Zealand kill starts dipping off around now so there’s going to be much less for them to buy in the next four or five months.”

Industry association Beef + Lamb NZ estimates a below-average lamb kill through winter.

“Some of those big lamb buyers overseas who are wanting product are going to have to get their orders in early and pay big money for it,” Brick says.

Orders are starting to come in from buyers looking ahead to the re-opening of the restaurant trade in the US as the vaccine roll-out gathers pace, and that’s lifting the price of higher value lamb cuts which have been pretty poor during the pandemic, he says.

US french racks which have been lingering around US$6.50 a pound (NZ$9.04) have shot up in the last few months to US$8.25 a pound, according to AgriHQ.

“There’s definitely enthusiasm there from the buyers, and probably a bit of speculative buying going on with everyone expecting that commodities that are destined for the restaurant trade to have a bit of a spike in prices once the restaurants get cranking again,” Brick says. “Time will tell how much further they have got to climb.”

Westpac’s Penny says farmgate lamb prices have been lifting over April and May at a time they normally fall, and he expects them to test $9 a kilogram, giving records a nudge, around late spring when prices normally peak.

Beef prices into China haven’t experienced the big lift of other commodities, probably because they faced competition from alternative suppliers like South America, Brick says.

Manufacturing beef destined for home consumption or fast-food burger patties has held up, underpinned by lower supply as farmers hold on to their cows for longer to benefit from higher milk prices and as Australia rebuilds herds following droughts, floods and fires last year.

High-end cuts headed for the restaurant trade have struggled, but as the world economy gets cranking again that’s likely to change, Brick says.

Venison prices are about 30 per cent lower than the five-year average but demand should improve as restaurants start to re-open as vaccination rates increase in Europe and the US, according to ANZ agriculture economist Susan Kilsby.

Logs, the third-biggest export commodity, were among the first to be hit by the pandemic when the China trade dried up in February last year.

A-grade log prices in China slipped to US$105/JAS in February last year from US$122/JAS in January. They shot up as harvesting resumed following New Zealand’s lockdown, and were recently at US$180/JAS in May, the highest level since AgriHQ began tracking the grade in 2011, and probably the highest since the previous record in the early 1990s.

Prices aren’t expected to rise further from here. While there’s been less supply from Russia and North America, European traders will re-enter the market soon and Chinese sawmills are starting to struggle with the high prices and look for alternative wood.

It’s hard to see prices being sustained at these levels, but the fundamentals underpinning the market remain, Brick says.

“There’s heaps of logs being used and being taken off port, the construction rate seems to be good in China, and the economy in general seems to be in a pretty decent state considering there was a pandemic less than 12 months ago,” he says. “The general perception is it will be decent for a little while, but it wouldn’t be surprising if it came back a little bit in the short term.”

High shipping costs have crimped returns to New Zealand foresters but nevertheless A-grade logs are also close to record levels at $160/JAS.

Brick says it’s hard to predict when shipping costs will decline, allowing more of the returns to flow through to forestry exporters.

“Everyone has been semi-optimistic about it coming good for a long time but it hasn’t really changed probably for a good six months, if anything it has got worse,” he says.

In April, shipping costs to China spiked higher to US$50/JAS from US$35/JAS, and lifted a further US$5/JAS in May.

“I think it’s near the max of where it is going to be,” Brick says. “The question is when will it come back, and how much will it come back.”

Horticulture returns have also hit new records but labour shortages have been a constraint on some exporters, and disruptions to shipping are making it more challenging to get fruit to market.

Kiwifruit growers achieved record returns last season with Zespri recording record payouts per tray across all its fruits. Green kiwifruit payments lifted to $7.50 per tray from $6.67 the previous season, while gold kiwifruit increased to $12.46 from $11.86.

Global sales volumes were up 10 per cent on the previous year to 181.5 million trays, and direct returns to the New Zealand industry increased by 15 per cent to $2.25 billion.

Zespri chairman Bruce Cameron says the results reflect the continued strong demand for kiwifruit around the world.

The co-operative is expecting another record-breaking crop of kiwifruit this year, underpinned by the expansion of gold kiwifruit and its new red variety. However returns for all varieties are expected to be down from last year’s records.

NZ Apples & Pears is predicting its export earnings will be reduced by between $100 million to $130 million as it struggles to harvest crops.

The industry organisation expects its export crop this year to be about 347,718 metric tonnes, or 19.3 million cartons. That’s 3 million cartons, or 14 per cent, below last year.

NZ Apples & Pears chief executive Alan Pollard says labour availability on orchards and in post-harvest operations was well short of numbers needed by the industry. Hail in Nelson and Central Otago and smaller fruit sizes also weighed on returns.

Wine industry returns have been mixed, with trade through supermarkets and big retail chains doing better than restaurants or tourism.

Bottles of sauvignon blanc retailing at $15 to $20 have held up well, but more expensive varieties like pinot noir at $35 to $40 a bottle have taken a hit.

“Consumers were making active choices to be a little bit more careful in their purchasing and choosing more affordable options because they are obviously worried about their jobs and incomes, so they were trying to help their budgets go further,” says Westpac’s Penny.

Export volumes and prices were maintained last year, but export volumes are forecast to fall sharply this year due to a smaller harvest as frost during the vulnerable flowering period in spring meant the grape harvest was down by about 20 to 30 per cent, according to ANZ’s Kilsby.

The lack of grapes meant the harvest was completed quickly and was less affected by labour shortages. Export prices should be maintained this year due to the high quality vintage and lower volumes, although winemaker margins may be squeezed by higher grape prices, Kilsby says.

Seafood took a big hit as consumers shied away from fresh or live seafood and many restaurants were shuttered during the pandemic. It’s likely to bounce back as vaccine rollouts see economies open up and restaurants start to thrive again.

Merino wool prices took a hit last year but have since stabilised and are expected to rise by the time New Zealand supply ramps up as apparel spending increases as economies open up.

However coarse wools typically used for carpets are still struggling.

“We expect them to improve but fundamentally prices are still low and we don’t expect that to change because of Covid or otherwise,” Penny says.