Despite any attempts to diversify away from China, exports to China will be increasingly important in coming months as much of the world descends into increasing turmoil
With COVID-19 now dominating all of our lives, it was easy to decide that COVID-19 would determine the focus of my rural-focused article this week. However, in choosing COVID-19 and agricultural trade, I want to focus primarily on the world beyond the current lockdown and explore where we might be heading in the months thereafter.
The starting point is that in times like these, export markets choose New Zealand, rather than New Zealand choosing its export markets. In this environment, all we can do is hang out our shingle, and help potential buyers to manage the logistics.
Within New Zealand, there has been an increasing belief in recent years that we have become too dependent on China. To those who have said ‘we must diversify so as to be less reliant on China’, my response has always been: ‘Specifically, where do you think we should focus?’ I have yet to get a specific answer that aligns with macro prospects. At the micro level there are always options, but at the macro level it is not so easy.
The reason that we have been exporting so much to China is that Chinese businesses are the ones who have come knocking at our door wanting our product, particularly as it relates to dairy, beef and sheep meats, but also more broadly for all of our land-based products.
Some of the keyboard warriors are currently unwilling to accept that China has to a large extent managed to stamp out COVID-19 and is opening up for business. My own Kiwi-China networks all confirm that China really is getting back to work, albeit not yet fully there.
There is also scepticism as to whether China can handle any rebound of the virus once its society gets fully back into action. My own judgement is very clear on this. They will manage any outbreaks with great rapidity and stamp hard before it gets a hold. They have all the mechanisms in place to do this.
In contrast, nowhere else in the World is showing evidence to date of having COVID-19 matters under control. For much of the world the journey is just starting. It is going to be a long journey.
Apart from China, and arguably some other North-Asian countries, we in New Zealand are in as good a position as any. Our current lockdown has come close to ten days too late, and that surely has increased the challenges we now face. But most places are in a much worse situation. I have been writing about the broader issues of COVID-19 for the last six weeks here and here.
My expectation in light of the above is that, like it or not, China is going to become even more important as an export destination over the next few months. The movement is going to be major and not just at the margins.
The other overarching factor that will determine market demand for our land-based products in coming months is whether specific items are discretionary or essential. People do still have to eat but they don’t have to eat out at restaurants.
So, let’s first deal with the worst of the bad news.
Unfortunately, wine is going to struggle greatly. Australia, the United States and the United Kingdom are all key markets and there won’t be many Sauvignon blanc parties there for quite some time. There are also going to be big constraints this year in managing the grape harvest. I see zero evidence of good news for wine beyond the benefit of a low exchange rate.
Kiwifruit is going to face similar challenges, but for many of us kiwifruit is now regarded as an essential. It comes at the top of the supermarket list in our family. Also, the Chinese regard it very highly and the kiwifruit market there has been growing rapidly. The Japanese market may also hopefully hold up. The two big questions are whether or not the crop can be fully harvested in the current environment, and whether North-Asian growth can balance the challenges from elsewhere in the Northern Hemisphere.
Turning to pastoral products, we know that China has already become the most important market for NZ beef, followed by the USA. We are also fortunate that for many Americans there is no culinary alternative to the burger.
Sheep meats are more complex. China is by far the largest market for mutton from older animals and I expect that market will continue to give good returns. China is also important for lamb, but so are Europe, the United Kingdom, and the United States. I see only bad news for lamb meat to the United States for at least the next six months. For Europe and the UK, I also see very challenging times, but I hope to be surprised.
Our dairy products are exported widely to many parts of the World. Alas, I see only bad news for everywhere except China. Traditionally, there has always been a strong relationship between oil prices and dairy prices, with a lot of the demand for New Zealand milk products coming from oil-producing countries. That link is not as strong as in the past, but the crash of oil prices will leave some potential buyers with no money to pay.
Conversely, I see China’s own milk production being adversely affected for multiple reasons, not all related to COVID-19, and so Chinese demand for milk powder is likely to increase. I could write a whole article on that local industry, and at some time may do so. My current expectation is that the combination of Chinese demand plus a weak New Zealand dollar will give a good milk price for the 2020/21 season based on whole-milk powder which the Chinese can then reconstitute.
Although I have some confidence about the milk price, I have less confidence about Fonterra’s profit which depends more on value-add products, together with overseas-based operations in China, Australia and Chile. Fonterra has made some good progress in the last six months and has built somewhat of a cushion, but coming through the full year with a profit looks highly challenging.
There is an old saying that making predictions is tricky, particularly when they relate to the future. And right now, the future is more opaque than what it has ever been. Accordingly, all of the above comes with a big caveat that nothing is certain. Also, freight logistics have the potential to mess things up, particularly in the next few weeks. Nevertheless, this is the way I read the evidence and hence the indications as to how things are likely to pan out.
I also expect to see increasing but at times grudging acknowledgement over the next six months that agriculture and food are the fundamentals of the economy that provide the funds for most of the items we have to import. Further, within agriculture, it is our pastoral products that are the products with most reliable international demand. Unfortunately, there will still be some who remain unwilling to acknowledge that reality.