The hope was that after Covid, China would come roaring back to its freewheeling, dynamic self.
That’s not the way it’s panning out.
China has been very slow to escape from the pandemic era, and that’s hurting New Zealand’s primary producers, most of whom count the People’s Republic as their biggest customer.
From meat to dairy to logs, the market is still a long way from where it was before Covid.
It’s not all bad news. The kiwifruit trade to China is doing well and prices have been firm. And in the meat trade, Alliance Group’s Shane Kingston, fresh back from a trade mission to China led by Prime Minister Chris Hipkins, said engagement with Chinese officials was “positive and progressive”.
Yet back home, farmers face the immediate problem of prices being well off the pace.
“I think everybody at the moment is finding it challenging in China,” said Kingston, the co-op’s general manager of sales. ”There is no question that the speed of the recovery, post-Covid, is not what anybody expected.
“There are a number of real challenges in the marketplace and it is playing out in terms of how the consumer is subsequently behaving in the categories such as ours.
“I think a lot of the discussions and engagements that we were involved in validated what we already knew, and further enhanced our understanding of the situation.”
China’s producer price index — which measures monthly changes in prices of industrial products for the domestic market — last month fell by 5.4 per cent, year-on-year, its ninth straight decline and its steepest fall since December 2015.
The price of pork — the biggest meat category in China — fell by 7.2 per cent in June, putting downward pressure on already subdued consumer price inflation.
Trade mission participants heard Premier Li Keqiang talk about the need for targeted and co-ordinated policy to help support the Chinese economy.
“All we have seen, since we returned from the trade mission, is an extension of tax breaks for the electric car industry — and a promise to help boost consumption of household products, but we just have not seen the details of that,” said Kingston.
China’s Politburo, in a communique issued this week, said: “The government must adapt to the new situation in which the dynamic of supply and demand in the property market is changing significantly ... The meeting also urged expanding the supply of government-subsidised housing and renovation of urban villages.”
The China and Hong Kong sharemarkets rallied in response to the communique, even though it was light on detail.
The Chinese Government wants to ensure that it meets its growth target of 5 per cent for 2023, but is not keen to go deeper into debt to achieve it.
As for any light at the end of the commodities tunnel, Alliance’s Kingston says it’s too early to tell.
“The long-term macro factors still hold,” hesaid. “There was quite a bit of discussion around the continuing growth of households moving into the middle and upper-income bracket.
“I think that in the medium term, the fundamentals remain attractive up to a point.
“But in the short term, there is almost this economic paralysis which is stunting any real growth, and that’s what we are seeing immediately, so we have all got to navigate our way through that, where possible.
“We have a continuing eye on the long-term opportunity, but it is particularly stilted at the moment — subdued.”
Alliance is New Zealand’s biggest sheep meat exporter.
“In sheep meat, it’s a bit out of season at the moment and in China, consumption is typically not high at this time of year,” said Kingston.
Already-weak prices have fallen further over the past few weeks, driven by a continued lack of consumer demand.
“The next number of months are going to be key, as China normally ramps up with a view to Chinese New Year and other significant celebrations in which our proteins feature strongly.
“So we are really going to get a better sense of how quickly the country is recovering, and what the real outlook is, as we pass through October and November.”
In constant currency terms, taking an average for both sheep and beef, Kingston says prices are down by 15 per cent on their five-year average, and as much as a third down from last year.
He said he had spent time with Alliance’s customers in China. “There is no question that there is still some concern, post-Covid, around the lockdown regime and whether it could be deployed again,” he said.
Kingston said record unemployment among young people — 21.3 per cent for 16-to-24-year-olds last month — was clearly playing a part in subdued demand.
“When we talk to our food service customers, they say their patronage has been down, particularly among the under-30s.
“There are no real green shoots that anyone is pointing or believing in terms of a pathway to better performance.
“There are a few knowns but quite a few unknowns, and the blend of those is creating a lot of concern around about the future, so I think the government stimulus packages are critical.”
Commentators have said New Zealand needs to diversify its mix of export destinations, rather than remaining too reliant on China. But Kingston says that in these days of transparency of pricing and import/export flows, information is a lot more visible than it was.
Any exporter, regardless of whether it was directly or indirectly trading in China, would still feel the pinch of a downturn given the PRC’s size and importance.
Alliance, a farmers’ co-operative, has been holding “woolshed” meetings to communicate the current state of play in the marketplace.
“It’s been particularly challenging behind the farm gate, with higher costs and rising interest rates,” Kingston said. “Regardless of what their situation is, everybody is feeling the impact of it all coming at once — higher costs and lower returns are creating a squeeze behind the farm gate.”
Until recently, sheep and beef farmers had enjoyed several years of better returns, due in no small part to increased demand from China.
“We believe the long-term outlook for demand is positive, but due to a number of macro factors — partly geopolitical, partly economic — are creating a challenging period of time to navigate through, but I do believe the outlook is brighter and better.
“We have been advocating caution and I think the current position that we are in could last for months — probably more months than fewer months,” Kingston said. “There is uncertainty because there are so many variables that we are dependent on improving.”
While many primary-sector industries are feeling the pinch, kiwifruit looks to be the exception to the rule.
Zespri’s head of public affairs, Michael Fox, said China makes up about 25 per cent of its total sales volumes, with some $1 billion of fruit sold every year.
“We’re still seeing strong demand in China for Zespri Kiwifruit,” he said. “We have strong marketing programmes underway in China this season, with sales running above target.
“Overall, we haven’t seen any softening in demand for our fruit and are expecting the year to be comparable with last, despite the lower New Zealand crop volume we have this season.
“We expect China to remain an incredibly strong market for us and some of our new partnership agreements signed during the Prime Minister’s trade delegation to China will help grow our presence.”
For dairy, meanwhile, it’s still very early in the season, but prices have been depressed.
The mid-point of Fonterra’s farmgate milk price for the current season is $8.00 per kilogram of milk solids — a price that’s barely at break-even for many farmers.
Westpac this week lowered its 2023/24 milk price forecast to $7.80/kg from $8.90/kg, based on ongoing sluggishness in the Chinese economy.
“As a result (chiefly) of weak Chinese demand, the downward price trend in global dairy prices has been sustained much longer than we expected,” said Westpac senior agri economist Nathan Penny.
Prices have fallen at 10 of the 14 Global Dairy Trade auctions held this year, with prices down 22 per cent in annual change terms. “In contrast, we had expected that prices would have bottomed by now, if not begun to turn higher.”
While continued soft Chinese demand accounts for most of the price weakness, other factors are playing a role, such as bumper autumn milk production in New Zealand.
NZX dairy analyst Alex Winning said that while a sluggish post-Covid recovery in China had pushed prices down, she did not expect them to stay low for long.
Winning said weaker demand showed the Chinese economy was still recovering from stringent, long-lasting Covid shutdowns.
“Their domestic consumption of dairy was impacted by Covid lockdowns and their domestic production of dairy has increased over the last few years, and has had record months of production this year.”
China has purchased less volume of dairy. However on a value basis it is neck-and-neck with this time last year, Winning said.
“In addition, they are not just purchasing less from us, they are purchasing less globally.
“However, they are purchasing a higher percentage from us than from other countries, so the preference is still for New Zealand dairy,” she said.
Winning said Free Trade Agreement (FTA) quota buying — or the lack of it — may have created distortions in the market. “FTA quota was used up at the start of last year on dairy, which meant that they bought less comparatively in January and December, when they would normally bulk-buy, in whole milk powder in particular.
“They have not done that this year because that quota was used up.
“However, the tariff comes off the FTA from January 2024 and we are already seeing on GDT and in derivatives trading that there is more purchasing in those later contacts, set to ship in December and January,” she said.
Milk price futures are low at around $7.70 a kg, but Winning points out that it is still just two months into the season. She said the telling months will be October to December, when New Zealand reaches peak milk production.
While global supply had been high, it looked look like it was now easing. “As supply gets shorter and demand increases, we should see prices return,” she said.
Winning said that despite a surplus of product, prices had remained within a range over the past few auctions.
Domestic prices in China for whole milk powder have been low, and the product has a shorter shelf life than the New Zealand equivalent.
Winning said she would be “shocked” if Chinese supply kept growing, given current low prices there.
And she was positive on the medium- to long-term outlook for New Zealand dairy trade to China. “We have such a good relationship with China when it comes to dairy,” she said.
“While everything looks a bit uncertain, I can’t see it not returning back to normal over the next few years,”
Grant Dodson, president of the New Zealand Forest Owners Association, said China’s slow recovery from Covid, a severe housing downturn and a more subdued economy were driving down log prices while producers’ costs were going up.
Log prices over the past quarter have been around $80 to $90 per cubic JAS metre, down from $110-$120 earlier in the year, and $130 a cubic metre this time last year.
The big corporate foresters had curtailed activity somewhat, while the smaller woodlot owners had stopped harvesting altogether.
“Certainly, the forest industry and harvesting activity have been impacted quite dramatically over the last quarter due to reduced log prices in the key Chinese log market.
“That’s led to a modest slowdown in production for most of the major corporate forest owners and a quite dramatic slowdown or near halt in production for many of the woodlot harvesters. There are not many woodlot people still operating.”
Dodson said recent market signals from the People’s Republic suggested the market had bottomed out and was starting to improve slightly, perhaps driven by China’s attempts to stimulate economic activity.
About 45 per cent of New Zealand’s harvest is processed domestically, while the rest is exported as logs — most of it to China.
“The market is mostly reflecting the big problems in the housing market last year, the disruption of Covid, and a general slowing of the Chinese economy.”
In China, New Zealand logs are mostly used in concrete forming and packaging.
“China has been the big source of demand over the last few years and they certainly have been the price-setting market.”
Westpac has made significant downward revisions to its forecasts for Chinese economic growth this year. Last month, the bank started with a growth forecast of 6.2 per cent. Since then, it has made consecutive cuts — first to to 5.7 per cent, and now 5.2 per cent.
Penny said lower primary sector prices would affect New Zealand’s terms of trade — its ability to fund imports from exports.
“On top of that, we are exporting less in volume terms,” Penny said.
“So not only are prices of our own exports falling, we are not compensating for that by exporting more.”
However, Penny expects prices to bounce back. “It may not be a story for this year, but next year we think that there will be a decent rebound.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
The local market was directionless as it snapped its positive start to the week.