China's economy has been slow to recover from Covid-19. Photo / 123rf
Prices for New Zealand’s key commodities have been depressed because China’s post-Covid recovery is taking longer than expected.
As Fieldays, billed as the Southern Hemisphere’s largest agricultural event, gets under way this week, prices for the key commodities - dairy, meat and timber - are giving producers little cheer.
China is the cornerstone market for all three, and is proving to be very slow at regaining its pre-Covid glory.
In dairy, the latest Global Dairy Trade auctions showed that China, the mainstay for dairy, was again inactive.
Whole milk powder prices, which are key to Fonterra’s farmgate milk price calculations, last traded at US$3173 a tonne - almost US$1000 a tonne down from this time last year.
Faltering prices have led Fonterra to a mid-point milk price forecast of $8/kg for 2023/24. That’s high relative to history, but many farmers will still struggle to break even at that level because of very high on-farm inflation and higher interest rates.
“China has not recovered from the economic harm caused by the lockdowns as quickly as anticipated,” said ANZ agriculture economist Susan Kilsby in a recent report. “Consumers are wary about spending and many sectors of the economy are struggling.”
China’s economic forecasts have been revised down, and ANZ now expects the People’s Republic’s economy to expand by just 4.9 per cent in 2023. If that doesn’t sound too bad, it’s low by historical standards - China’s official GDP growth rate for 2019 was 5.95 per cent, and the year before it was 6.75 per cent.
In the log trade, ANZ’s forestry index fell 4.4 per cent, month-on-month, in May.
China’s demand for logs has dropped sharply, to the point where prices are down 20 per cent from where they were less than a year ago.
“The log market is not expected to recover for some time and harvesting of logs has now slowed in response to market conditions and adverse weather,” Kilsby said.
In meat, the Alliance Group’s general manager sales, Shane Kingston, said the export trade was nowhere near pre-Covid levels and prices were coming off quickly.
Looking at the Chinese economy, Kingston pointed to the official manufacturing purchasing managers’ index (PMI), which fell to a five-month low of 48.8 - below the 50-point mark that separates expansion from contraction.
And joblessness among Chinese youth - a record 20.4 per cent in April - was having major effect on consumer spending.
“That really has a huge impact on spending power, social habits and really impacts on categories like ours, where socialising and out-of-home meetings are impacted,” Kingston told the Herald.
He said China’s food service sector - the part of the industry that sells to the restaurant trade, retailers and food manufacturers - was well below par.
The total value generated in food service in China in the past few months was about 70 per cent of what it was pre-Covid. Kingston said that reflected fewer people visiting and less spending per transaction.
Data from JD.Com - the big Chinese online trading platform - showed total sheep meat sales fell by 42.75 per cent in May, year-on-year, while beef sales dropped by 31.56 per cent.
“We believe that because of the slow recovery, post-Covid, people have less money and are considerably more cautious on how they are spending, where they are spending, and how much they are spending,” said Kingston, who will be on Prime Minister Chris Hipkins’ trade delegation to China this month.
On top of that, a deteriorating yuan against the US dollar - down 3 per cent in May - was hitting Chinese consumers in the pocket.
Kingston said sales during seasonal events, such as Chinese New Year, had been healthy, but had remained low outside those events.
“The older population is reluctant to leave home for fear of Covid infection,” he said, adding that the return to pre-Covid behaviour had not come with the speed that some had expected.
In food service, Chinese businesses were having trouble attracting young workers back into the industry due to their fears about continuing employment in the sector, so building back the labour force had been slower than expected.
On top of tepid consumer demand, there had been a big increase in the supply of beef in the Chinese market.
Over the January-April period, China imported 820,000 tonnes of beef, up 16.3 per cent on the same period last year. At the same time, domestic beef production was up by 5.1 per cent.
“There is a lot of volume, but consumption is nowhere near close to that.
“Based on what we can see today, there are relatively high inventories, in-market, and relatively slow, cautious consumption, so the rate of recovery has to improve to allow the whole environment to recover to pre-Covid levels.”
In pork, China imported 670,000 tonnes - up 20 per cent year-on-year, while domestic supply grew by 2 per cent. “There is a lot of stock kicking around, in-market.”
Data from AgriHQ shows that New Zealand lamb forequarter prices have dropped by US$4.80 a kg, down from US$5.10/kg in May, and US$6.30 at the same time last year.
Similarly, lamb flap prices had dropped to US$6.90/kg from US$7.20 in May and US$8.55/kg a year ago.
In beef, the average price across the basket of items was US$5.23/kg for May, from US$6.84 in June 2022 - a 24 per cent fall.
“China remains subdued, and we have to apply a level of caution around the recovery within it.”
But Kingston said he expected the market to improve, based on the continued expansion of China’s higher-earning middle class.
“But right now, consumers have been very cautious around their spend.
“The post-Covid recovery will be much slower than anyone anticipated.”
Data from China’s National Bureau of Statistics showed that milk production increased by 8.5 per cent in the first quarter of 2023.
Farm expansions and continued gains in milk yields are driving production higher, agricultural banking specialist Rabobank said in its latest quarterly report.
Meanwhile, Chinese dairy imports declined by 36 per cent, year-on-year, in the quarter, adding pressure to already weaker global prices in the short term.
Rabobank said China remained oversupplied with dairy, and that the market was rebalancing. “China’s weak demand recovery may make traders hesitant to purchase large volumes prior to the fourth quarter of 2023,” it said.
New Zealand dairy exports to China took a hit in the first quarter, due to subdued demand.
March shipments of whole milk powder plummeted by over 30 per cent, year-on-year, in the face of weak local demand, strong local production and growing inventories. However, April exports showed some recovery.
“Any improvement in farmgate milk price forecasts will depend on the strength of China’s buying patterns in the second half of 2023, particularly during New Zealand’s spring peak,” Rabobank said.
The cumulative effects of high food price inflation over the past 24 months, along with slowing economic activity in 2023, have translated into lower dairy demand in both developed and emerging markets, it said.
The report said it had been a lean autumn for New Zealand dairy farmers, with the forecast milk price moving lower over 2023 and wet weather hitting milk production.
Rabobank dairy analyst Emma Higgins said the bank’s milk price forecast for the new 2023/24 season sits at $8.20/kg – a little higher than Fonterra’s opening milk price forecast of $8.00/kg.
“A farmgate milk price around these levels means dairy profitability will remain a real challenge for many dairy farmers over the coming season,” she said.
“While profitability depends on farming systems and management styles, forecast farmgate milk prices are now at or below Rabobank’s estimation of average costs of production,” Higgins said.
Westpac senior agri economist Nathan Penny said there was no doubt that China was the mainstay of the New Zealand primary sector.
He said the current slack demand out of the PRC was “more cyclical than structural”.
‘Yes, it is a challenge to work through in the short term but more broadly, the underlying demand from key markets is still there,” he said.
All up, Penny estimates that China and the rest of Asia take about 60 per cent of New Zealand’s commodity exports, with the PRC clearly in number one spot.
But the elephant in the room for exporters was the deterioration in diplomatic relations between China and the West.
“There is a lot more attention and thinking about it, in terms of understanding the dynamic.
“Obviously, the risks have increased in recent years.
“What is not obvious - and maybe a bit more debatable - is what we do about it.
“The challenge is: is there a replacement for China? And the answer is no, not in the next five years.
“We can sit on the fence a little bit, but in the medium term, I guess that question becomes more difficult.”
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
Consumer spending has been in a slump since the end of the pandemic.