Farmers brace for falling returns

Dairy farmers on both sides of the Tasman are bracing for a fall in returns in the 2012/13 season, according to the latest report prepared by Rabo Bank’s  Food & Agribusiness Research and Advisory division (FAR).

The reason for the predicted drop in returns is that most international dairy prices continued to trend down in USD terms throughout May.

The global market is taking some time to digest the additional production volumes, and with inventories continuing to build, it is likely to be at least a few months before the prospect of market tightening will appear on the horizon, the report says. As expected, New Zealand and Australian farmers are bracing for a fall in farm-gate prices in 2012/13 seasons.

Local beef prices continued to soften in New Zealand and Australia, albeit by small margins. A weakening of currencies in both markets should help support local farm-gate prices. US beef markets have continued to firm as tight supply combines with improved summer demand.

Across most of New Zealand, winter temperatures and soil moisture levels are at reasonably normal levels, but May did bring with it a cold snap and some snowfall in the South Island. May brought drier-than-normal conditions to most of Australia. The latest Australian seasonal outlook favours wetter-than-normal conditions across much of the east coast, and drier-than-normal conditions throughout southern Western Australia and South Australia.

The European sovereign debt crisis continues to captivate the attention of markets. Mounting concerns in Europe, coupled with a slowdown in the US economic recovery and some weaker-than-expected economic data from Asia, further eroded market confidence.

In New Zealand, the trade balance in April was a surplus of NZD355 million - markedly below the NZD1158 million surplus of April 2011. The Reserve Bank of Australia (RBA) cut the official cash rate by 25 basis points in June citing modest domestic growth and a weaker and more uncertain international environment.

In currency markets, May saw investors take flight to the safety of the US dollar. As a result, the NZD and AUD both retreated against the USD over the past month. Global risk sentiment will likely dictate future direction of currency markets, and with confidence set to remain weak in the short-term, it may well bring further welcome news for exporters.