Signs point to fall in beef prices

Beef prices may be the first of New Zealand's key commodities to begin the descent from record highs.

US demand for New Zealand beef has fallen in the past few weeks and Asian demand is "subdued", says industry analyst David Meares of Agri-Fax.

Farm-gate returns (the price paid to the farmer) have also slipped in the past few weeks.

The price for a 300kg steer is $3.21 per kg this week, down from $3.46 a month ago.

One of the biggest risks to the economy is a double-whammy of falling commodity prices and the high dollar.

That scenario would put further pressure on the $5.8 billion trade deficit.

For the past two years, international prices for dairy, beef and lamb have been at all-time highs, providing a buffer for farmers - and the wider economy - from the worst effects of the exchange rate.

Meares said the softening of beef prices was likely to be a short-term trend. In the longer term, global demand for beef still looked good.

Prices had been driven by big falls in US and Australian herd numbers at the start of the decade. It would be another year or two before those herd numbers fully recovered.

Rising fuel prices had had a big effect on US consumption in the past few months.

Meares said consumers were going out less, spending less and, more significantly, eating out less.

US domestic cattle prices had decreased significantly and were now at a large discount to the price of imported beef.

"Either the price of US beef has to come up or the price of imported beef will have to go down. Unfortunately, the latter is probably more likely," he said.

New Zealand beef has had a huge boost in Asian markets because of BSE (mad cow disease) scares in North America. Asian markets banned US beef at the end of 2003.

But there is speculation in the market that the borders will be reopened to US imports late this year or early next year.

Meat and Wool New Zealand economist Rob Davison said it would be a cause for great concern if commodity prices came off present highs without a balancing movement in the value of the dollar.

Unfortunately, the Reserve Bank's attempts to slow domestic spending by raising interest rates had instead propped up the dollar.

The longer the dollar stayed up the greater the risk to primary producers.

Davison said the drop in farm-gate returns was probably to do with the good winter weather that had enabled farmers to hold on to stock from the previous season. That was now entering the market at the same time as new-season stock, putting added pressure on the supply side.

Fonterra chief executive Andrew Ferrier last week warned dairy farmers that international prices for milk powder were probably as high as they could go.

Last year, dairy prices soared 20 per cent, allowing Fonterra to boost its final payout to farmers.

"We don't believe we will see the same upside this year and the delayed impact of the high dollar will also hit earnings," he said.