A change in the weather - rural economic commentary

The US and China are the two global heavy weights for a number of key soft commodities. While the impact of the Trump administration is hard to predict, any tit for tat trade disputes between them could have a number of different implications ranging from: a general trade recession, which is negative for all commodity prices; through to improved opportunities and less competition for a range of New Zealand products into China and the broader Asian region, due to reduced US access.

Actions by the EC (including the purchasing of huge amounts of skim milk powder) have been critical in reducing milk surpluses from the region and, in turn, the recovery in international prices over the second half of 2016. The EC now has to try and sell this stockpile, without negatively impacting on the commercial market.

An agreement amongst oil producers to reduce output should support prices back above US$60 a barrel. Oil producing countries are a key buying block of soft commodities, so an improvement in their terms of trade should be positive for soft commodity prices. Higher oil prices also lift general energy prices.  This lifts the cost of production, especially for intensive feed-based livestock systems.

Reforms aimed at improving food safety standards and consumer confidence continues to have large impacts on investment activities and import requirements. The current focus is on the infant formula market where there is a drive to reduce the number of brands, tighten marketing activities and promote breast feeding. This is not just important for direct infant formula sales of New Zealand dairy companies, but also whole milk powder (WMP) as infant formula accounts for one third of WMP usage in China. Another area to watch is the recent bird flu outbreak which is likely to support red meat demand in 2017.

An improving US economy brings with it a higher US dollar (USD) and interest rates. While we expect short-term rates to hold steady over coming quarters, there is scope for higher longer-term rates as NZ yields move gradually higher in line with US yields. All else being equal, a strong USD generally supports New Zealand farm-gate returns – but all else is not equal. Many soft commodities are priced in USD, so if the USD appreciates too far against the currencies of China and emerging markets that purchase these products, it reduces purchasing power in these countries and can impacts international prices.

The United States has made its decision and as a result, it looks like the end of the road for the Trans-Pacific Partnership (TPP). While this is a setback and lost opportunity, especially for Vietnam and Malaysia which were expected to be the biggest beneficiaries from TPP, it is not the end for multilateral agreements.

There is an alternative in the form of the Regional Comprehensive Economic Partnership (RCEP), which should be the main focus for the region.