Analyst Intel

8 January 2021

PULSE | Dollar knocks farm gate prices

As the new year gets underway, there’s keen interest to understand where farm gate prices are at. Simply put, livestock slaughter prices have started off 2021 in a more structured, settled position than this time last year. Prices have shown some marginal downside over the holiday period, but nothing to the extent witnessed this time last year.

Last January there was little awareness of covid-19 or what it meant, but farm gate returns for sheep and cattle were plummeting for other reasons. The overheated export market in December 2019, driven largely by insatiable demand from China, reinforced the theory of what goes up must come down. But in this case it was in dramatic fashion.

There was very little festive cheer 12 months ago. AgriHQ data shows lamb and beef prices were slashed by 50-60c/kg over the Christmas break, as processors scrambled to realign farm gate prices with export prices. Unfortunately, it didn’t stop there as processing backlogs ballooned and returns continued to fall week on week. The slaughtering of farm gate prices through those early weeks of 2020 also put the wind up store buyers who stepped back from the rails to reassess the market. On top of that, many regions were already looking to the skies for rain. By the end of January many had pushed the offload button and had to accept significantly weaker prices than only six weeks earlier.

From their peak in mid-December 2019 to late January 2020, bull and prime steer slaughter prices fell by 90c-$1.10/kg, compared to the usual 20-40c/kg fall. Lamb prices fell by $1.40-$1.50/kg, compared to the average 70-80c/kg. At that point of the season, global markets had yet to unravel amid covid-19 lockdowns and the full force of the 2020 drought was yet to be felt. Yet that sudden downside in farm gate prices created a negative market environment that had a long-lasting impact on cashflows.

Fast-forward to now and there is an expectation that having survived 2020, this year can only get better. The relatively stable market environment that we are experiencing is a good start. The overseas markets that NZ’s red meat exports rely so heavily on are yet to fully awaken, but the general feeling so far is that things have started off better than expected, although caution remains a key element at this early stage. Overseas beef prices have nudged higher and demand for chilled lamb is gathering pace while being supported by firm interest for frozen cuts and mutton carcases. Current farm gate prices for beef are sitting below average levels, while lamb prices are only just keeping their head above average levels, suggesting prices are nearing the bottom.

Global political uncertainty is weighing heavily on currency rates, which is eating into processor margins and therefore farm gate returns. This is one of the biggest factors currently forcing farm gate prices lower. Covid-19 lockdowns impacting foodservice demand are a close second, but despite the global pandemic, consumers still need to eat, and this is supporting our export volumes, but not necessarily our export values.

The direction of farm gate prices over the next month will largely depend on overseas market changes as well as local weather conditions. Generally, most are comfortable with feed, reducing the desperation to offload and allowing for a smoother flow of stock into processing plants compared to 12 months ago. It’s always a gamble at this time of the year to expect weather conditions to play ball, however memories of last year’s drought have challenged how some farm through the summer months. This may go some way to balancing other market factors that influence farm gate prices, which farmers often have little control over.