Dairy prices, lamb returns drive optimism

Some encouraging signs have emerged from the latest ASB Farmshed Economics report with dairy markets moving back towards normal and lamb a quiet achiever.

ASB chief economist Nick Tuffley said dairy farmers had reined in production to better reflect current demand, reducing oversupply.

Dairy prices reflected the better balance. Overall prices had lifted more than 50% and whole milk prices more than 70% since August. However, supply and prices still had more work to do.

''For now, New Zealand production is doing the heavy lifting in terms of supporting prices. Other suppliers globally are also likely to lower supply growth, albeit belatedly and modestly, as farm gate prices remain low.''

Global demand growth remained modest and prices were only likely to climb back to average levels over the season, Mr Tuffley said.

The pause and change of pace in price gains was consistent with ASB's milk price forecast of $5/kg of milk solids.

The price of a 17.5kg lamb rose back above the $6/kg benchmark and was headed higher, with little fanfare.

Prices in New Zealand dollar terms had lifted despite the strong dollar. While the lamb price index had lifted about 5% in New Zealand dollar terms, it was more than 12% higher in Great Britain pound terms, Mr Tuffley said.

''This strength bodes well heading into the important Christmas shipment period. We expect lamb and mutton prices to firm over this period, mainly on the back of low New Zealand lamb and mutton production.''

The threat of El Nino loomed large for the sheep sector and another dry summer was likely to hurt the sector's sales, as it did last summer, he said.

Beef prices continued to perform well compared with other rural commodity prices.

Prices were now 28% above the five year average.

From here, prices were expected to drift lower over the remainder of the year. New Zealand was fast filling its 2015 United States quotas.

Filling the quota meant average export prices were likely to come under pressure as meat companies were forced to divert beef to other lower paying markets.

ASB expected a high dairy cow cull once dairy farmers got past peak milk production and the extra slaughter was likely to lean on prices further, Mr Tuffley said.

Heading into next year, the risks were more balanced as the US quota was reset but that might be offset by the threat posed by El Nino. If a drought emerged and led to increased slaughter, prices might come under pressure.

Rural land prices were expected to stabilise in coming months following a weakening from high levels set earlier in the year, he said.

Dairy auction prices had lifted strongly since August, pushing the Fonterra forecast milk price up to $4.60/kg of milk solids. Those developments had lifted rural sector confidence.

At the same time, low interest rates and healthy incomes in non dairy sectors underpinned prices.

The ASB expected interest rates to remain low over the remainder of this year and into 2016, if not head lower, Mr Tuffley said.

The dollar had been the surprise package recently, lifting more than US4c. Pundits had expected that the dollar would fall towards US58c heading into 2016.

''Eventually, given we retain our call for a Reserve Bank rate cut and a US Federal Reserve rate hike, we expect the dollar to come under pressure.

''But also, as we don't expect either move until December at the earliest, the dollar is likely to maintain much of its recent strength over the next month or so.''

At a glance

• Dairy markets have moved back towards normal with overall prices spiking more than 50% since August.
• Lamb has been the quiet achiever with prices moving back above $6/kg.
• Beef prices continue to perform well compared with other rural commodity prices.
• Rural land prices have weakened from high levels earlier in the year.
• Short term interest rates are expected to fall, but most likely not just yet.
• The New Zealand dollar has been the surprise package.

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