In late August the NZ dollar was up 8.3% year-on-year against the currencies of this country’s biggest trading partners.
Unfortunately for farmers the gains against those of the most significant sheep meat importers were even more pronounced.
Most dramatically the kiwi was up 30% against the British pound as investors dumped sterling in the wake of the Brexit vote on June 27.
Against the euro, the United States dollar, and Chinese renminbi, the kiwi had also gained strongly, up by 10-14% year-on-year, as international investors piled into the currency to take advantage of the widening gap between low interest rates overseas and higher rates here.
Beef + Lamb NZ’s initial stab at prices for the 2016-17 season was for a 3% decline from the $91.50 a head for an average-weight lamb of 18.3kg in 2015-16.
It estimates a 14-15% decline in farmgate prices for every 10% appreciation on a trade-weighted basis (TWI) of the NZ dollar.
The meat industry is unlike its dairy counterpart where currency effects are smoothed from season to season through an active and comprehensive hedging policy.
Among meat exporters hedging is on a hand-to-mouth basis with processors locking in exchange rates on the day of sale and leaving farmers exposed to the prevailing rate when they send livestock to the works.
B+LNZ chief economist Andrew Burtt said the high kiwi could moderate if the US Federal Reserve raised interest rates at its September 20-21 meeting but that was contingent on no economic hiccups before then either in the US or globally.
Any new economic headwinds could delay a hike by the Fed until December or even next year and keep the Kiwi at elevated levels for longer.
The downdraft from the high NZ dollar is in contrast to the 2015-16 season when currency weakness buffered farmers from the full impact of a collapse in prices in China and the United Kingdom.
‘We are in the zone that we have got to be cautious but at the same time because of the exchange rate we realise there is a lot of pressure to keep that price going up or we are going backwards in NZ dollar terms.’
As exporters head into another seasonal production peak prices have staged substantial recoveries in NZ’s two largest markets. Since reaching rock-bottom in March prices for Chinese-style cuts have bounced back by 15-20%.
Exporters Alliance Group and Silver Fern Farms said inventories of flaps and price slump had cleared and both were confident price increases would hold for the peak NZ production period.
Culling of China’s domestic flock of 120 million-130m ewes had eased as farmers got on top of a mystery disease affecting ewe fertility.
In the United Kingdom the collapse in sterling had made British lamb exports to Europe more competitively priced and shortages in the local market were possible.
Silver Fern Farms group category manager Grant Howie said while there had been good price increases it remained to be seen whether these would be enough to offset a 30% fall in the value of the currency exporters here would be paid in.
“We will be trying to get that sort of increase through. But the hard part about that is, are UK housewives prepared to pay that much extra for lamb?
“Some of them will not be prepared to do that and volume will be less.”
Exporters are also reporting a pick-up in demand for middle cuts in the North American market since the middle of 2016.
Cheap gasoline and a gradual recovery in the US economy had put extra cash in the pockets of American consumers and this had been reflected in good increases in prices in local currency terms.
Prices had surpassed the US$8-9/kg considered affordable for racks and were heading towards the US$12/kg at which restaurants had only two years ago pulled them off menus because they were too expensive.
Alliance Group general manager of marketing Murray Brown said exporters were treading carefully on pricing.
“We are in the zone that we have got to be cautious but at the same time because of the exchange rate we realise there is a lot of pressure to keep that price going up or we are going backwards in NZ dollar terms.”
Helping underpin firm to stronger prices in most markets some importers were building up stocks in anticipation of a decline in lamb exports from NZ in 2016-17.
B+LNZ estimates lamb numbers this year will decline by between 500,000 and one million to 23m-23.5m compared to 24m last year.
This reflected lower stocking rates in drought-hit Canterbury and lower scanning percentages in some parts of the North Island hit by facial eczema in the lead-in to tupping.
