ANZ Agri Focus

Dairy prices have fallen sharply in the past month. Milk production has been very strong in New Zealand and every other key exporting market, but the immediate trigger for the recent downswing is EU production, up 4.8% y/y in the past three months, which has proved especially bearish for butter prices. ANZ’s forecast for the 2025/26 farmgate milk price has been revised lower to $9.65/kgMS (from $10).

Meanwhile, the summer is shaping up nicely for both pastoral farmers and fruit growers, although conditions can change quickly, as the late October storms showed.

Beef and kiwifruit have benefited from rollback of the 15% “reciprocal” US tariffs, although both sectors have been thriving with or without them.

All systems are still go across the red meat sector, with record prices for beef and lamb. Demand is healthy while global supplies are limited, and the balance is unlikely to change soon.

The wider macroeconomic picture continues to support the rural economy. The RBNZ lowered the OCR another 25bp in November and signalled the end of the current easing cycle. Partially in response, the NZD/USD rate has strengthened to 0.58, but remains at the lower end of its 20-year range. The New Zealand economy is showing signs of recovery, and consumer spending is clearly picking up. No further OCR cuts are expected, and wholesale swap rates have risen recently as markets have reassessed the monetary policy outlook.

On the policy front, a replacement for the Resource Management Act (RMA) has been announced, along with an extension for existing consents until the new system is implemented. In other policy developments, New Zealand’s carbon market has reacted negatively to recent changes to the NZ Emissions Trading Scheme.

Also in this report, we take a closer look at Australia’s agricultural output and the drivers pushing farmers towards cereal and beef production and away from dairy and sheep.

The trifecta of high prices, low exchange rates, and strong production remains on the table for New Zealand’s agri sector.

Farmgate milk prices are still around the $10 mark despite a few softer Global Dairy Trade auctions. Sheep and beef prices continue to climb – although they are likely to approach their seasonal peaks in November/December, and wool prices have popped above $4.00/kg for the first time since 2016.

Overall, pasture growth is looking good as the season kicks off. As is normal, there are a few watch points: unsettled westerlies have made early spring dry on the east coast, La Niña conditions are gradually emerging, and there’s orchard wind damage in the Bay of Plenty.

Lower interest rates – needed to help urban New Zealand turn the corner – provide a further tailwind for the rural sector along with a weaker NZD. A surge in revenue from dairy, sheep & beef and kiwifruit is generating plenty of justifiable optimism, and Fonterra’s special dividend would add to the positive story (if approved). However, not all is rosy in rural New Zealand, with the forestry, wine and grain sectors feeling left out of the good news story.

On the policy front, the Government has announced new biogenic methane emissions to target 14-24% below 2017 levels by 2050. The previous target was 24-47% below. Meeting methane targets will now be less disruptive for the agri sector, though debate around the optimum approach to the issue will undoubtedly continue. Separately, from 31 October only 25% of a farm’s LUC Class 1 to 6 land will be eligible to enter the ETS from 31 October, with the intent of limiting farm-to-forestry conversions.

Farmers with livestock in their paddocks or fresh fruit in their orchards are feeling optimistic in 2025. Farmgate milk prices might exceed $10/kgMS two years in a row, with Fonterra looking to top up their shareholders with a further $2 per share. Lamb and beef prices are at record levels. Zespri is forecasting record or near-record orchard gate returns for all varieties in 2025/26 for the second season in a row. These sectors are enjoying a rare trifecta: strong consumer demand, low exchange rates, and good weather. 

While the outlook is incredibly bright for the largest export-earning sectors of the rural economy, there is a very different situation in forestry, wine, and grains. These sectors are facing the same higher input costs as the fresh fruit and livestock folks, but without the higher commodity prices needed to make a profit. Farms and forests impacted by the Tasman floods this winter are also facing a difficult situation.

It costs 27% more to farm now than it did in 2019 (per Stats NZ’s farm expense price index). Inflation is trending lower, and interest rates are on the way back down, but most farm expenditures cannot fall back to pre-2020 levels. Wages, equipment, electricity, rates, and insurance prices are ‘sticky.’ Once these costs rise, they don’t tend to go back down. Prices and/or productivity must rise to cover that gap. At the moment that is happening for some rural New Zealand businesses, but not others.

New Zealand’s primary sector is recovering, but at varying speeds across sectors. 

The dairy sector is doing well, with milk prices now forecast to reach record levels this season. Most dairying regions are also ahead on production, which will bolster returns.

Beef markets are also doing well, and this is expected to continue despite the threat of the US imposing import tariffs. Beef is our largest export to this market.

Other sectors, such as wine and lamb, may be at risk if tariffs were to be imposed.

The kiwifruit export season has drawn to a close, with strong prices achieved for this season’s record crop.  

Farmgate prices for lamb are starting to retreat but have been high for longer than expected. As more lambs become available, prices are expected to drop rapidly.

Weather conditions are varied. East Coast farms are already very dry, so farmers are quitting stock early. Conditions have now improved in Southland following an extremely tough winter and spring.

The outlook for New Zealand’s primary sectors is mixed.

The dairy sector has improved considerably. Export prices for dairy products have firmed, and the milk price is forecast to be the second highest on record.

Global beef markets are also strong, despite losing a bit of ground recently. Local demand for cattle is strong, as spring pasture growth takes off. Lamb prices have shot up, driven by domestic procurement pressure. We expect this spike to reverse rapidly later in the year, unless there is a dramatic improvement in export prices.

Economies around the world are receiving stimulus, through either direct support (as in China) or easing monetary policy. It may take some time for this to translate into improved economic activity and higher consumer confidence but it is good news for New Zealand’s exporters.

Weather conditions have varied greatly across the country. Southland farmers have had a terrible start to spring, but other areas have been better. It is much drier than usual on the east coast of the North Island, prompting concerns about a potential dry summer ahead.

Global markets for New Zealand’s commodity exports are showing glimmers of improvement, but this is not consistent across products or regions. The primary driver for higher prices is tighter supply of particular products, rather than strong consumer demand.

Consumers across the world are feeling the impact of slower economic growth, which is weighing on confidence and capacity to spend. This means demand is soft for several products, particularly higher-priced proteins, for which consumers are seeking cheaper alternatives. 

New Zealand’s winter so far has generally been favourable for pasture production and animal wellbeing, with most farms heading into the spring in good shape. However, some North Canterbury hill country and other regions had not recovered from drought before the winter arrived. 

Dairy and beef returns are forecast to improve this season, but it is expected to be another tough year for sheep farms. Returns from forestry are also expected to remain subdued. 

Farm profitability will continue to be hampered by high costs, including borrowing costs, in the year ahead, although inflationary pressures are fading and interest rates are starting to ease.

Global economic markets remain subdued, and this is impacting demand and returns for New Zealand’s export products. 

Some industries are faring better than others, and small but positive signs are emerging as global supply and demand rebalance.

This is apparent in the dairy industry where next season’s milk price is forecast to be stronger than returns for the 2023-24 season.

Slower economic growth in China is weighing on industries with a high exposure there, including logs and mutton. These industries are diverting some produce to other markets, but China is still their main buyer.

Consumer demand in the US is proving more resilient, particularly where exporters can tap into wealthier segments prepared to pay for high-quality, healthy products.

Autumn and early winter in New Zealand have been cooler and drier than usual, making it tough for regions hit hard by drought last year. But the drier conditions have been favourable for harvesting.

Most of the country is expected to have a drier-than-normal winter, meaning drier soils in eastern and northern regions, while western regions are expected to normalise.

The global outlook and the climatic outlook vary hugely between industries and locations.

Consumer confidence in China remains low and this has reduced demand for a range of New Zealand’s export products, from lamb and mutton to logs. What these products have in common is a dependence on sales into China, which has tended to pay higher prices than other markets for many years.

Demand from European markets is proving more robust, despite the region’s current economic downturn. This should probably come as no surprise, as many of our food exports are staple foods there.

New Zealand’s autumn has so far been hot and dry, which has assisted with the harvest of many horticultural products, particularly grapes. However, pastural farmers are being hindered by drought.

Mid-way through the predicted long, hot summer, some parts of New Zealand are benefiting from regular rainfall, but areas of the east coast are parched, particularly Wairarapa and Marlborough. Wine producers will be happy, but it will be tough going for pastoral farmers.

As we head into the main meat processing season, lamb prices are weak, as international demand remains down. Beef prices are also down on last season but are faring better than lamb.

A slowdown in global milk supply is putting a little upward pressure on prices and benefitting the dairy sector.

Farm costs remain high, but upward pressure on pricing is easing. We see the Reserve Bank (RBNZ) continuing to lift the OCR in the coming months, putting further pressure on interest rates, though this will be mitigated by the likelihood that the market will continue to price eventual cuts. 

Freight costs are rising as hostility blocks the Suez Canal and drought limits both the numbers and weights of ships traversing the Panama Canal. Asian routes are not directly affected, but costs overall are rising. Higher freight costs, like the high New Zealand dollar, erode farmgate profitability.

Global commodity markets currently vary in performance from ‘weak’ to ‘improving’. Dairy and log prices have lifted, both supported by relatively subdued supply. Meat prices remain under pressure, however, as global supplies are generally strong, whilst demand is still subdued. Looking ahead, both demand and supply conditions should improve in 2024, although it may not be until later in the year for some sectors. Weather conditions for pastoral farming have been favourable through spring, with most farmers now managing excess pasture growth. The presence of El Niño means a hot summer is probable, which will favour horticulture production, particularly grapes. Horticultural markets for New Zealand’s main exports vary. A smaller than normal kiwifruit crop has kept prices elevated this season, but the market for wine is oversupplied, and this is pushing down prices and returns for wine producers. New Zealand’s newly elected Government has vowed to limit new regulations. All coalition partners are well represented in the agricultural space. The addition of new ministers with agricultural knowledge is expected to feed into more pragmatic regulations.

Global economic conditions are challenging, but export returns are currently holding or improving. Tighter supply is helping balance the relatively lacklustre demand for products such as logs and dairy. Meat supply from competitors is high, but only small volumes of beef and lamb are being processed locally. There is still reasonable underlying demand for New Zealand’s products; it is just a challenge to get high prices, as consumers across the globe are cutting spending in response to tighter economic conditions. Interest rates are expected to remain high for some time, and many farm operating costs are up. Most farms are cutting costs where they can, to try to break even this season. The longer-term outlook is more positive, as global competitors are facing similar challenges and curbing production. Discussion on pricing New Zealand Emissions Units (NZU) is expected to resume after the 14 October election. Once details are agreed the outlook will become clearer for many farm businesses.

Global economic conditions are challenging, and export returns have taken a turn for the worse. Demand has eased in many markets, but it is the muted level of demand from China that is having the biggest impact on farm incomes in New Zealand. Farmgate returns for most industries are dropping rapidly, while interest rates are rising and other farm costs are stubbornly high. Conditions on farms vary considerably. Many regions are wetter than normal, but the winter has generally also been milder. September weather tends to vary hugely year-to-year, and what we are dealt this year will have a major impact on lamb survival rates and spring pasture production. Farm cashflows will be severely impacted this season by soft farmgate prices. Keeping on top of cashflows will be imperative to managing through this downturn. This is not the first downturn our primary sectors have encountered, and it is unlikely to be the last. Working out what options are available and having a variety of plans to manage through this period will be vital for success.

Global demand for most of our export commodities has softened recently. China’s economy has not recovered as quickly as expected, putting downward pressure on prices. Farmgate returns for most industries are at or above a five-year average, but cost increases mean, in many cases, returns are barely covering costs. The rapid rise in interest rates is a major cost that is taking a toll on heavily indebted businesses. Autumn’s warm wet conditions mean most farms are entering winter with plenty of feed. Farmgate prices for milk and meat have softened, although procurement pressures have kept movements in meat schedule prices in check. For the horticultural sector autumn harvests are now almost in. The sector’s overriding theme is smaller harvests and slightly stronger prices, but overall returns are well down for many growers.

The Reserve Bank of New Zealand (RBNZ) has made it clear that their battle with inflation is far from over. Inflation is not yet under control despite strong efforts from the central bank to curb demand through deploying higher interest rates. Given it takes considerable time for OCR changes to work their way through the economy, the debate over “how much is too much” is only likely to get louder over the months ahead, as the impacts of past tightening become more evident beyond the housing market. Rural sector businesses are facing very tight margins as they juggle lower incomes, higher operating costs and increased interest rates. Autumn weather has generally been favourable for pastoral farms, with the exception of those regions still trying to get back on their feet following the massive February floods. The harvest of horticultural produce this autumn will be considerably lighter than usual for two of our major export crops, apples and kiwifruit. Reduced output is expected to be somewhat supportive of prices, but returns are not expected to be exceptional due to global economic challenges. Meat prices have benefited from China’s reopening but dairy prices are yet to bounce back as increased global milk supplies weigh on the market. Labour remains a challenge for the primary sector, and this is expected to result in a bottleneck in meat processing this autumn. A backlog of cattle is already building as processing weeks shorten due to the Easter and ANZAC holidays.

Both opportunities and challenges will be abundant in 2023. As we start the year, global economies are feeling the negative impacts of inflation, slower economic growth and tighter monetary policy. But forecasts of global growth are generally now being revised up rather than down, with more resilience than expected in European growth, in particular. And in terms of the impact of the pandemic, the worst of the health, labour and supply chain issues are now likely to be behind us. Prices for our main export commodities have eased, but the situation should improve later in the year when demand, primarily from China, is expected to lift. Fertiliser prices are now trending down; one of the few inputs where prices aren’t still rising. Operating margins have tightened considerably. The situation on farm varies considerably across the country. The recent heavy rains in northern regions have severely affected some properties. Meanwhile, most southern regions are rapidly drying out and would welcome some gentle rain.

This year has delivered its share of challenges and tested the resilience of many of our primary producers. Market returns have generally softened, operating costs have increased, and the weather has caused plenty of challenges for farmers and growers. But as the year draws to a close, signs of positivity are also emerging. The excessively wet spring now means soil moisture levels are in good shape heading into summer, with some regions still actually battling with excess moisture. Regulatory change is still occurring at pace, but the way forward is becoming clearer. Or at least, the destination is becoming apparent even though we may take various paths to get there and move at differing paces. Global economic conditions are deteriorating, with activity forecast to slow further in 2023. This slower growth is impacting demand for many of the goods we export. At the same time, we are seeing upward pressure on the cost of producing food as high fertiliser prices push up feed costs and impact production, which in turn is helping to keep prices higher than otherwise would be the case. Unfortunately, costs are also rising rapidly, and 2023 will therefore most likely favour those who have a sharp eye on costs and work to a budget. Imported goods are particularly pricey at present due to the low NZD so keep this in mind before asking Santa for a new tractor.

Global economic conditions are as volatile as our weather at present, making the outlook murky. Purchasing power is deteriorating in many markets, impacting demand for the goods we export. But on the other hand, supply of these goods is relatively constrained, which is why prices are still high. The weak NZ dollar is also bolstering returns at the farmgate level, but increasing the price of imported goods such as fertiliser and fuel. The weather has been unsettled throughout the spring with several cold spells and most regions much wetter than normal. There have also been some really hot days and periods of high winds, meaning soils will dry rapidly once the rain slows. Regulatory change continues at a pace that is hard to keep up with. Methane emissions pricing is now a step closer with the Government pricing proposal recently revealed. The intent of all the new regulations is to push our primary industries in a positive direction that will set us up for the future, but the speed of the change is challenging to manage.

Wet conditions prevail across most of New Zealand, which has made it very difficult for wintering stock as soils are saturated. Some regions have received more rain in the past month than they have all year. Delays getting stock to processors also mean some farms are carrying more stock than normal for this time of the season. The labour shortages that meat processors have been faced with mean we may need to reconsider our heavy reliance on being able to get space at processors when desired with little notice. More forward planning, including supply contracts, could be beneficial for all parts of the supply chain. The upside of the recent heavy rains is that irrigation dams have filled up nicely, which will be beneficial later in the year. Commodity prices remain elevated, but the heat has come out of some markets recently as demand continues to be disrupted. Lockdowns in China have had an impact, as have tightening economic conditions in most markets. Within New Zealand, the flood of regulatory change shows no sign of letting up. While there is widespread support for the intent of many of these rules, the practicality of implementing rules and unintended consequences remain a key concern for many. Recently the Climate Change Commission has recommended sharp upward changes in pricing guidelines for carbon credits released in the quarterly government auctions, and have advised they don’t support including sequestration within the He Waka Eke Noa framework. What is very clear is that we still have some way to go in terms of regulatory change, and consents will be something most landowners will need to get used to.

Global food prices continue to strengthen as shortages loom for basic foods such as grains. This means there will also be a shortage of carbohydrates to feed livestock. This won’t directly impact New Zealand food production systems, but it will impact our competitors who rely on grain to produce beef and milk. At the same time, the price of growing pasture has also gone up, as global fertiliser costs have soared. The shortages of these basic feed stocks will underpin global production costs and keep production in check, but it will also erode the ability of poorer countries to import the higher-value foods that New Zealand exports.

Widespread autumn rain has devastated many arable and fruit crops, but has been welcomed by pastoral farmers. Food commodities are in short supply globally. New Zealand will also export less produce than normal this season as production of most of our export commodities is impacted for varying reasons including delays processing livestock and impacts of labour shortages.

Commodity prices for dairy produce and most meat cuts are currently very strong, which, combined with a slightly weaker NZ dollar, is delivering exceptionally strong prices at the farmgate level. Unfortunately production is constrained in many areas, as soils have dried out rapidly. On-farm costs are also rising exceptionally quickly, and labour – or rather the lack of it – is becoming a major constraint for most primary industries. The unemployment rate is now the lowest it has been since the early 1980s. This is making it exceptionally hard to find short-term labour. The labour shortage means it is very unlikely that all of the fruit will be harvested this autumn and there could be significant delays at meat processors. If labour availability falls further due to surge in COVID-19 cases then the situation will only worsen. Interest rates are on the rise here in NZ and globally. Central banks are now starting to tighten monetary policy in an attempt to rein in inflation.