China remains an enigma for New Zealand commodities exporters.
For most, prices have either been mixed or depressed, but there are nevertheless pockets of optimism.
While dairy has generally fared better in recent months,
yesterday’s Global Dairy Trade auction ended a string of steady gains.
In the meat trade, there’s been no let-up in the decline in demand from China, but in logs, the last three months have seen a modest improvement compared with the second half of last year.
Against this background, China’s immediate economic prospects look unclear.
At this week’s National People’s Conference, the 3000 delegates were told that China is targeting economic growth of about 5 per cent this year.
International analysts said that might be a big ask, given the property slowdown and weak investor confidence in the world’s second-biggest economy.
Westpac said China could struggle to meet its growth targets without significant policy stimulus – which so far has been modest.
“Hence, we suspect the operating environment for exporters to China will remain challenging,” Westpac said.
Dairy prices have been improving, and Fonterra last month increased its 2023-24 season forecast range by 30c, giving it a new mid-point of $7.80 per kg of milksolids.
But yesterday’s Global Dairy Trade (GDT) auction saw whole milk powder prices drop by 2.8 per cent to an average price of US$3286/tonne and skim milk powder fall 5.2 per cent to US$2640/tonne.
The GDT price index fell by 2.3 per cent – the biggest slump felt on the platform since August last year.
As far as Fonterra’s current milk price goes, the recent auction should not threaten the co-op’s forecast for the current season, which ends in May.
However, it does cloud the outlook for next season, as current pricing suggests a 2024/25 milk price of $8.24 per kg, down from $9/kg previously signalled by the market.
New Zealand dairy producers will, however, take some comfort from reduced global milk production, particularly in Europe and the United States, which should support prices.
On the regional buying front, North Asia – mostly China – continued its reign as a top buyer of both milk powders and butter at yesterday’s auction.
Stu Davison, a consultant for Chicago-based commodities house HighGround Dairy, said that in the current market dynamic, demand for New Zealand dairy product is a little lighter than in previous years.
“We are seeing that within the Chinese domestic market, that local milk powder is at a discount to imported milk powder, which is not abnormal, but it’s a larger discount than is normal,” he said.
Milk production in China is still running higher than in previous years, so there remains an oversupply.
“So demand from China remains steady but soft,” Davison said.
“They are still taking reasonable volumes of whole milk powder, skim milk powder, cheese and butter, but the growth rate is not what it was in 2021-22.
“[Yesterday’s] GDT was more a measure of a market without the Middle East driving things, because in the last few months the Middle East has been quite prominent.”
Against the background of this week’s National People’s Conference, Davison said: “They have a few challenges to get their economy up and running, and that will have an effect on the New Zealand dairy market, given the relationship the two have in trade”.
“In the domestic market in China, they have made it pretty clear that they are going to continue to grow their local liquid milk capacity and consumption,” he said.
“That could present a challenge to imported dairy product, such as the milk powders, but again the expectation is that New Zealand would have an advantage over competing countries due to our free trade agreement.”
Meat weighs
Data from the Meat Industry Association (MIA) showed China was weighing heavily on that sector.
New Zealand’s red meat sector exported products to the value of $759 million in January 2024, according to MIA analysis, the lowest January result since 2019.
MIA chief executive Sirma Karapeeva said the results – down 8 per cent on January 2023 – reflected the ongoing volatility in global markets.
“Clearly, challenges remain for our red meat exporters,” Karapeeva said.
The main contributor to the drop was China, with exports down 21 per cent year-on-year to $263m.
However, overall exports to the US were up 10 per cent to $182m and to the United Kingdom by 34 per cent to $38m.
Overall, volumes of sheep meat and beef exports were relatively unchanged compared to last January, but the value of sheep-meat exports fell 9 per cent to $305m and beef by 6 per cent to $320m.
This reflected the influence of China on overall export values.
Exports to China fell both by volume and value, with the free-on-board (FoB) value of sheep meat down by $1.45/kg to $5.07/kg and beef by $0.99/kg to $7.28/kg.
James McWilliam, global sales director at Alliance Group – the country’s biggest sheep meat exporter – said China remained an anchor for pricing globally for lamb and beef.
“The Chinese economy is under pressure with slower growth and weaker demand from consumers due to cost-of-living pressures and stagnating incomes,” he said.
The food service sector, which is where a significant amount of New Zealand’s meat products are consumed, continued to be weak.
“Although it is early days, there are indications of increased sales activity post-Chinese New Year so we will be focused on leveraging this to support increased consumption over the coming months,” McWilliam said.
Log demand
Grant Dodson, president of the New Zealand Forest Owners Association, said log prices over December, January, and February had improved after being mostly flat over the second half of last year, but were still well short of the highs seen in 2018/19.
Post-Chinese New Year, there had been a build-up of stock levels, which was normal, but which was nevertheless putting downward pressure on prices.
“At the moment, there is a downward bias on returns but it has been reasonable over the last three months.”
Current log pricing was at about US$120 per JAS metre.
“New Zealand has been quite fortunate in that we have been one of the major suppliers and one of the most cost-effective suppliers,” Dodson said.
“It’s still our biggest log export market, and I think it will be for many years to come.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
