Counting Stock. Higher Lambing Percentage? NZ Lambing Percentage

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1 Counting Stock Are lamb numbers lower than previous estimates? Fewer sheep vs higher lambing percentage Slaughter lagging last year Milk production lower, as expected A drag to consider for near term GDP Higher Lambing Percentage? Lambs per ewe mated NZ Lambing Percentage BNZ Estimate Recently released estimates of livestock numbers by Statistics New Zealand (SNZ) in partnership with the Ministry for Primary Industries made for some interesting reading. The annual figures always feel a bit dated being estimates for the middle of the previous year. And they are always subject to later (sometimes large) revision. But the provisional livestock estimates for 3 June 216 have some bearing on thinking about the current situation and beyond. Take sheep numbers for example. SNZ estimates there were about 27.6 million sheep in NZ as at 3 June 216, down just over 5% on a year earlier. Lower sheep numbers are unlikely to surprise anyone. The latest drop continues previous declines on poor returns and conversion to alternative land use. Pockets of adverse weather conditions around the country would have further dented the latest season s figures. But, importantly, the official provisional estimates were significantly lower than previous industry estimates, including for breeding ewe numbers. This means fewer lambs for any given lambing percentage. This raises the question: could lamb numbers be as many as 5, short of previous estimates? It s distinctly possible looking at the new provisional breeding numbers, at least in isolation. The lack of slaughter over recent certainly supports the notion of fewer lambs overall, although, of course, the weather has also had a big say on where and when culling as occurred this season. All that said, we wouldn t leap to the conclusion that lamb numbers this season are necessarily a lot lower than earlier estimates. This follows from SNZ lamb number estimates for the previous season coming in about 5, higher than previous industry estimates (on account of a higher lambing percentage). It might well be that this season s lambing percentage proves better than initially thought, providing offset to the lower breeding ewe number estimates Source: Statistics New Zealand, Beef+Lamb NZ, BNZ Our best guess is that this season s lamb numbers are similar to, although probably marginally lower than, initial industry estimates. Perhaps around 23.5 million. If that is close to the mark, it would represent a bigger drop (circa 4%) from the new official estimate for the previous season. Fewer Lambs? Millions Season Source: Statistics New Zealand, Beef+Lamb NZ, BNZ NZ Lamb Numbers Season BNZ estimate It all reinforces our view that meat export volumes will be lower in 217 as we discussed in the previous issue of the Rural Wrap. As noted, early season lamb slaughter numbers have been substantially lower than a year earlier, with fewer lambs then compounded by poor weather restricting weight gain. Lamb slaughter numbers in October through December were 13% lower than for the corresponding period last season. One consolation of fewer lambs is that it offers some support to prices, although it is hardly the best way to

2 create some upward pressure. Stronger demand would be much preferred, along the lines of what we are seeing for lamb flaps at present amid reported strong demand from China. Overall, lamb prices have not been quite as weak as we thought they might have been this season, but are still below five year averages as various factors weigh including a very weak British pound making selling to the UK extremely challenging (a weak EUR is also unhelpful). Early Season Lamb Slaughter Lower Annual % change, 3 mth ave Source: Statistics New Zealand, BNZ SNZ s provisional livestock numbers also recorded a small rise in the number of dairy cattle as at 3 June 216 compared to a year earlier. Industry figures show a mild decline. Let s call it stable. Regardless, cow numbers are not as low as they might have been given the very low milk prices that have prevailed over recent years. The latest cow number estimates, along with lower cull numbers for the current-season-to-date, add support to the idea that the current season s milk production declines are being driven by less milk per cow (associated with such things as less supplementary feed use and pockets of unfavourable weather in some parts of the country). This increases the likelihood of a production bounce back next season (weather willing). All considered we remain of the view that NZ s milk production in the 216/17 will be down around 3% to 4% on the previous season. This assumes the second half of the season will show similar declines to a year earlier that the first half of the season did. Risks around that view are Milk Production Forecast Unchanged Annual % change Lamb Slaughter Total kill ly Source: LIC, DCANZ, BNZ Milksolid Production 212 very favourable summer/autumn conditions Season Favourable 214 weather and rebound from drought 213 summer/autumn Fewer cows, drought very low prices, poor earlyspring weather Lower slaughter Forecast Static cow numbers, low prices, weather evenly balanced with improved milk prices potentially encouraging some additional late season supply, while spreading dry conditions in the north and east of the North Island are pushing the other way (highlighted by Northland s drought recently being declared a mediumscale adverse event). Regardless of how the current agricultural season finishes, the final quarter of last year certainly looked like a difficult one production wise. This is clear from our discussion above, around fewer lambs and difficulty getting them to finishing weights, resulting in lower slaughter numbers. So too in the sharply lower milk production recorded in the quarter. These things have already been weighing on export returns. We think such lower primary production and associated processing will probably show up as a headwind to overall economic growth when those latter figures for the final quarter of last year are released in mid-march (although overall growth is expected to be solid). We say probably because the initial agriculture GDP figures are notoriously difficult to gauge, and trust. They are often subject to considerable revision over subsequent years. Indeed there was yet another round of substantial revisions to agriculture GDP data published just before Christmas. For example, the new data shows agricultural real GDP grew by.6% in the four years to June 216 which is materially different to the previous quarter s information indicating growth of 11.2% over that period. This followed as new annual benchmarks were included in the national accounts. To be fair, the new numbers feel a bit closer to the truth given general climatic conditions over the period. Revisions like these just go to show how difficult it is to measure what has occurred overall in such an important sector of the NZ economy. This is true even a few years after the fact let alone for those of us trying to understand it in real time. The same applies to the livestock estimates discussed above. doug_steel@bnz.co.nz Agriculture GDP Revised Lower $m, 29/1 prices 2,8 2,7 2,6 2,5 2,4 2,3 2,2 2,1 2, 1,9 1,8 1, Source: Statistics NZ, BNZ Agriculture GDP June 216 data, published September 216 Quarterly Was 11.2% growth Post revision: September 216 data, published December 216 Now.6% growth

3 Key Macro Drivers for Commodity Producers Interest Rates % Interest Rates day bank bill year wholesale year wholesale Source: Reuters The Reserve Bank of New Zealand held the Official Cash Rate (OCR) at a historic low of 1.75% at its 9 February Monetary Policy Statement. We continue to expect the OCR will be maintained at 1.75% through 217, before gradual increases from the first half of 218. Borrowers can expect a historically low OCR to keep floating rates well contained for some time yet. However, recent trends in bank funding costs and forces from offshore have created some upward pressure, particularly in term interest rates. The US Fed is expected to lift its cash rate at a slightly faster pace in 217 than over the past two years, as US economic growth continues and inflation pressure builds. This is expected to keep offshore pressure on domestic interest rates in an upward direction in 217, but we are wary of many global uncertainties, particularly political ones. Foreign Exchange Index NZ Dollar 85 NZD/USD (rhs) TWI (lhs) 55 NZD/GBP (rhs) Source: BNZ NZD/USD The NZD continues to be buoyed by NZ s strong economic performance. With a combination of above trend economic growth, low (although rising) inflation, a low and falling current account deficit, rising fiscal surpluses, strong employment growth and a below average unemployment rate, it s not difficult to understand the local currency s strength. Eventually, all the positives will be built into its value and then it may give back some ground. This is indeed what we expect, especially against a forecast stronger USD later in 217. But, on an overall TWI basis, the NZD is expected to remain relatively stout with the balance of risks that it stays stronger for longer than currently anticipated. Global Growth Ann avg % chg Consensus Growth Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Source: Consensus Economics Inc US Eurozone Asia ex Japan Main trading partners Quarterly Forecast Politics is currently dominating most international commentary with Trump s antics at the forefront, Brexit issues a distant second and far from done with, and upcoming elections in parts of the EU gaining more market attention. How it all affects the global trade agenda is important for NZ. Meanwhile, global growth indicators have ticked upwards over recent and global inflation seems to be edging higher. The latter is reflected in a combination of generally rising commodity prices, increased headline inflation in the USA and the end to deflation in the Chinese PPI. Accordingly, US interest rates are pushing higher and this is reverberating around the world. How the Fed tightening process pans out against the Trump policy background may yet be the key to global economic health over the next few years.

4 Key Commodities Dairy Index Dairy Auction Prices - GDT NZD terms Following very strong gains in 216, global dairy prices have been consolidating in the New. We anticipate more of the same near term. Lingering global supply tightness is expected to continuing offering price support, although dairy prices still look a bit stretched relative to the likes of international grain and oil prices, which may ultimately see dairy prices a touch lower by year s end. The longer prices hang around current levels the more likely Fonterra is to lift its current 216/17 milk price forecast from $6.. Our current milk price forecast sits at $ USD terms GlobalDairyTrade, BNZ Twice ly Source: Whole milk powder (US $/t) Lamb UK p/lb International NZ Lamb Prices US /lb UK Leg (lhs) US Rack (rhs) Source: AgriHQ Lamb prices have lifted some 15% in the UK over the past six. But the plunge in the GBP post the Brexit vote has offset all of that and then some, creating very challenging conditions from an NZ exporter s point of view. Post-Brexit UK and EU potential trade conditions remain in sharp focus. Meanwhile, Chinese demand indictors have been positive and fewer NZ (and Australian) lambs has added some support to prices. The 216/17 season average price is shaping up to be a bit over $5/kg; not quite as low as previously thought, but still below its five year average. Lamb leg (UK p/lb) Beef US /lb International Beef Prices US /lb Prime Steer Cuts (rhs) US Imported Bull (lhs) Source: AgriHQ US bull beef prices have staged a surprising bounce in early 217. This is true both in terms of extent and speed, with prices up around 12% within a few weeks. Tighter supply (including from NZ and Australia) and positive US demand indicators have helped. But the price gains to date have only recouped losses over the latter of last year. The global trade agenda holds the market s attention as the new US President settles in. For current domestic pricing, a firm NZD/USD has been a headwind but NZ beef prices are at solid levels and a touch above their five year average. Imported bull (US /lb)

5 Forestry Annual total $m Log, Wood and Wood Article Exports 4,5 4, 3,5 3, 2,5 2, 1,5 1, Quarterly Source: Statistics New Zealand Forestry indicators have continued to show strength over recent. Prices are well up on a year earlier and volumes higher. It all adds up to pushing export values to record highs. Forestry exports in 216 were up 17% on 215 levels. The domestic market also remains strong. The overall outlook remains positive although there are a few factors to watch like a firming NZD against the USD, potential for shipping rates to push higher with oil and, domestically, signs that the trend in residential building consents is pulling back from recent highs. But, really, there seems nothing there to derail current strength. Most attention is on China, post-lunar New. S1/S2 log price (NZ $/t) Oil US $/barrel Oil Prices Brent WTI Crude oil prices have pushed higher in 217. In averaging around US$54 / barrel since the start of the year, oil prices have nudged above their predominant US$4 to US$5 range of 216. This amid signs that OPEC producers, combined, achieved at least a majority of their previously agreed production cuts. Upward price pressure has been partly offset by plentiful US supply and inventory. Oil prices are expected to edge up toward US$6 / barrel through Source: Reuters West Texas Intermediate (US $/b) Southern Oscillation Index Index Southern Oscillation Index 3 La Nina El Nino -3 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan- Jan-3 Jan-6 Jan-9 Jan-12 Jan-15 Source: Australian Bureau of Meteorology, BNZ ly Too much rain early in the season for some, then too dry more recently in parts. Climatic conditions have not been as benign as the pre-season indicators would have had you believe. The Southern Oscillation Index remains neutral, even close to zero. ly spreading dry conditions in the north and east of the North Island are causing disruption (highlighted by Northland s drought recently being declared a medium-scale adverse event). Soil moisture levels are lower than normal across most of the North Island, particularly in northern and eastern areas. Weather forecasts for late summer-early autumn do not offer much change, indicating rainfall totals are most likely to be below normal in the north and east of the North Island with more chance of closer to normal rainfall elsewhere.

6 Quarterly as at 1 February 216 Key Economic Quarterly % change unless otherwise specified Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 GDP (production s.a.) Retail trade (real s.a.) account (ytd, % GDP) CPI (q/q) Employment Unemployment rate % Avg hourly earnings (ann %) Trading partner GDP (ann %) CPI (y/y) GDP (production s.a., y/y)) Interest Rates Historical data - qtr average Government Stock Swaps US Rates Spread Forecast data - end quarter Cash 9 Day Libor US 1 yr NZ-US Bank Bills 3 month Ten year 215 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Exchange Rates (End Period) USD NZD EUR/USD USD/JPY GBP/USD NZD/USD AUD/USD NZD/EUR NZD/JPY NZD/GBP NZD/USD NZD/AUD TWI Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ TWI Weights

7 as at 1 February 217 March s December s Actuals Actuals GDP - annual average % change Private Consumption Government Consumption Total Investment Stocks - ppts cont'n to growth GNE Exports Imports Real Expenditure GDP GDP (production) GDP - annual % change (q/q) Output Gap (ann avg, % dev) Household Savings (gross, % disp. income) Nominal Expenditure GDP - $bn Prices and Employment - annual % change CPI Employment Unemployment Rate % Wages - ahote Productivity (ann av %) Unit Labour Costs (ann av %) External Balance Account - $bn Account - % of GDP Government Accounts - June Yr, % of GDP OBEGAL (core operating balance) Net Core Crown Debt (excl NZS Fund Assets) Bond Programme - $bn Bond Programme - % of GDP Financial Variables (1) NZD/USD USD/JPY EUR/USD NZD/AUD NZD/GBP NZD/EUR NZD/YEN TWI Overnight Cash Rate (end qtr) day Bank Bill Rate year Govt Bond year Govt Bond year Swap year Swap US 1-year Bonds NZ-US 1-year Spread (1) Average for the last month in the quarter Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ

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