Brighter Outlook for Ag Industry: Industry Report
Brighter Outlook for Ag Industry: Industry Report
A brighter outlook for the New Zealand agriculture industry beyond 2006 is expected, despite difficult economic conditions, according to a recently-released industry report.
In its annual Agriculture in Focus Report, one of New Zealand’s biggest rural financiers, Rabobank says that New Zealand agriculture faces a testing year in 2006, due to the accumulated high impact of the New Zealand dollar, higher interest rates and higher farm input costs biting farm returns, which occurred throughout 2005.
However, the strength of the global economy remains positive and has mitigated these negative factors in a number of sectors, most notably dairy, beef and lamb, the report says.
“In comparison, throughout 2005, apple growers and deer farmers have been challenged with bleak global markets, which offered no protection from other external factors affecting their industries,” it says.
The global economy remains strong moving into 2006, with global economic growth forecast by the International Monetary Fund (IMF) to remain at a steady 4.3 per cent – well above the long-term average of 3.6 per cent.
Head of Rabobank’s Food and Agribusiness Research division, Dr Ben Russell says the continued expansion of the Chinese economy and relatively stable conditions in the United States and Japan, have underpinned the strength of the global economy.
“The strength of the global economy and the strength in New Zealand’s main trading partners are critical to maintaining good demand for food and rural commodities,” Dr Russell says.
“Most short and medium-term price volatility in agriculture commodities is driven by supply fluctuations, but strong economic conditions are essential to maintaining long-term demand tension in markets.”
While the economic conditions in New Zealand’s trading partners remain strong, the slowdown in the New Zealand economy that started in 2005 looks set to continue into 2006.
Rising interest rates have been a significant headache for New Zealand agribusiness, Dr Russell says. “Since 2004, official interest rates have increased nine times, by a total of 2.25 per cent.”
The most recent rise occurred in December 2005, when the Official Cash Rate (OCR) was increased to 7.25 per cent – the highest rate since the OCR was introduced in 1999.
Slower rates of economic growth in 2006 should bring the pattern of interest rate increases to an end.
New Zealand Dollar
The high New Zealand dollar has also contributed to the difficult business conditions for agribusiness. This persisted through most of 2005, with the New Zealand dollar remaining around 20 per cent above its long-term average exchange rate against major trading partners.
The strength of commodity prices and relatively high interest rates are providing continued support for the dollar, to the consternation of almost all agricultural sectors.
Highly export dependant, all of New Zealand’s major agricultural sectors, along with forestry, account for over 60 per cent of the country’s total merchandise trade.
“The relatively small domestic market provides limited protection from exchange rate appreciation,” Dr Russell says. “And in most commodity markets, the higher currency translates directly into lower New Zealand dollar returns for exporters.”
“In 2006, there is a reasonable likelihood of a downward correction in the currency, due to global commodity prices softening and the domestic economy weakening,” Dr Russell says.
Despite oil and fuel prices retreating towards the latter part of 2005, further volatility is expected in 2006.
The unwelcome sharp increase in fuel costs in 2005 was almost entirely driven by demand, due to a buoyant world economy and with the Chinese economy having a particular impact.
“Higher fuel prices contributed to the decline in New Zealand farmers’ confidence last year. Over 65 per cent of New Zealand farmers expect the agricultural economy to worsen over the next year. However, in a reflection of longer-term confidence, 80 per cent of farmers expect to maintain or increase the level of their investment in the farm business,” Dr Russell says.
Rural Property Values
In 2005, rural property values continued to break new ground, with growth of over 50 per cent throughout the last three years. This has been a result of several years of good product returns, assisted by strong commodity markets and increasing productivity.
“Rising land values are tangible evidence of a strong agricultural sector, but they are also a double-edged sword – and can reduce capital returns further, making expansion more difficult,” Dr Russell says.
It is expected that the rate of growth in rural land values will ease in 2006 as rising interest rates take effect.
Trade liberalisation continues to loom as an ongoing challenge for the sector in 2006 and beyond, the report says.
“While the key outcome of the World Trade Organisation’s Ministerial Conference in Hong Kong in December last year – that agricultural export subsidies must be removed by 2013 – is a positive move, it is just a small step on the road to free trade,” Dr Russell explains.
The 2013 date to end farm export subsidies is many years away, indeed three years later than free- trade countries like New Zealand would have preferred. But, more than that, agricultural export subsidies represent only a small proportion, estimated to be only two per cent, of all subsidies.
The biggest failure of the Hong Kong meeting, the report says, was its inability to make significant headway on improving market access for agricultural exports into the EU, Japan and the United States, particularly in relation to tariffs.
“Agricultural trade liberalisation still has a long way to go,” the report concludes. “For the time being, full tariff reduction and market access opportunities for agricultural exporters such as New Zealand remain out of reach, certainly within the current Doha Round, scheduled for completion by the end of 2006.”
In the meantime, the report reasons, bilateral and regional trade agreements – which have proved easier to manage and market to local populations – will continue to be the focus.
Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 100 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and, in recent years, has twice been awarded the title of the world’s safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 28 branches throughout New Zealand.
New Zealand Agriculture in Focus – Sector Summaries
Demand for dairy products has remained at a good level in 2005 and due to the tight availability of product supply around the world, and minimal intervention stocks, commodity prices have held at close to record levels.
Consumption in developing countries, particularly Asia, has continued to drive growth in demand for dairy products with per capita consumption increasing more than 50 per cent over the past five years.
The major transaction of the dairy industry in 2005 was the exchange of the Mainland and Anchor dairy brands by Fonterra and New Zealand Dairy Foods. However, the key focus for the industry in 2006 will be the impact of the global markets – due to 95 per cent of New Zealand milk production being exported.
New Zealand dairy will have a challenging time in 2006 to maintain its leading global position. Increasing production costs balanced against farm gate returns impacted by unfavourable exchange rates will test the profitability of New Zealand dairy farmers. The evolution of the Dairy Industry Restructuring Act (DIRA) will also have an impact on the industry.
After a strong 2005, the outlook for the beef industry remains positive for 2006. However, global beef market dynamics – already volatile over the past two years – will experience further instability as the year unfolds.
The timing and longer-term impact of the re-entry of US beef to Japan, following the reinstatement of import bans in January this year, will become clearer in 2006. A number of factors, including strict conditions placed on US beef imports by the Japanese government, are likely to limit the speed of US beef re-entry.
Elsewhere, Foot and Mouth Disease (FMD) problems in Brazil and Argentina in late 2005 are likely to restrict trade flows of beef from those countries, both significant exporters, into 2006. Balancing this, US beef production is expected to increase by 4.8 per cent in 2006.
A key risk for the New Zealand beef industry to manage from 2006 forward is the very high concentration of beef exports to its key markets in the US and North Asia (accounting for more than 75 per cent of the value of our beef exports).
Building and extending New Zealand beef’s premier market positioning is a real opportunity in 2006 and beyond.
New Zealand’s dominance of the global sheep meat trade and particularly lamb has seen exports surge to over NZD2 billion per annum, in the last five years. World lamb prices have risen substantially since 2001, which has resulted in record prices being received by New Zealand farmers in 2004 and 2005. However, consumer resistance to high lamb prices (relative to other meats) emerged in late 2005, which combined with the high New Zealand dollar has caused farm gate returns to ease, heading into 2006.
Driving this price strength has been the FMD outbreak in the United Kingdom and the positioning of lamb in developed markets as a high quality, lean and healthy, disease-free product, alongside increased demand for all meat products fuelled by rising world economic growth.
New Zealand’s outlook for lamb production in 2006 and beyond is steady. The absence of adverse climatic events and good lambing percentages has increased slaughter numbers by approximately three per cent for 2005/06.
The niche producer status of New Zealand wine has been successfully managed throughout the 2005 season, despite the difficulties faced by the global wine industry. New Zealand wines continue to enjoy healthy sales and a significant premium in the global arena. Domestically, the reduced 2005 vintage has generally underpinned the price of grapes, particularly the flagship Marlborough Sauvignon Blanc.
Currently 85 per cent of all exports are sold into three markets: the United Kingdom, the United States and Australia. To maintain the momentum within export markets, New Zealand will need to look for additional markets.
New Zealand had built its reputation in these markets on the ability to produce a quality product and not just in the Sauvignon Blanc variety. It is imperative going forward that the focus be maintained on quality standards of wine.
In the coming year, New Zealand wine will face challenges surrounding an increased demand for labour, high exchange rate, consumer demand and the development of new markets. Fortunately, the New Zealand industry appears to be prepared to take on these challenges.
Wool prices continued to fall throughout 2005. Many expected moving into 2006 that it would take some time before there was a substantial improvement in wool prices due to the market perception that there is sufficient wool supply to meet present and near-term demand. Significant forward commitments by exporters over the Christmas/ New Year period, due to declining inventories, very low wool prices and increased confidence in the market following strong European winter retail sales, led to strong interest in the market from the Europeans buyers for the first two months of 2006. Increased competition in the market place has seen prices surge, particularly for the medium and finer wools.
The New Zealand wool clip has remained reasonably steady in recent years, but has grown slightly over the past season as higher sheep meat prices have led to a rise in sheep numbers. Overall, global wool production is expected to increase modestly, mainly from an increase in production of broader micron wools. Consequently, there is increasing interest as to whether supply influences or demand fundamentals will have a greater influence on prices for the remainder of 2006.
2005 was a challenging year for the wool industry, but hopefully this recent recovery in prices will provide a positive platform to rebuild the industry’s confidence. Building consumer demand for wool is a task that will take years, if not decades, and scale and efficiency remain the keys to profitable wool production, rather than short-term price recovery.
The New Zealand deer industry continues to dominate world markets for venison and velvet products, exporting 29,000 tonnes of venison for the 12 months to September 2005 – an increase of 22 per cent over the previous year.
Germany remains the key venison market for New Zealand – importing over 10,000 tonnes per annum. Other significant markets are emerging in Australia, Belgium, France and Sweden – all importing around 2,000 tonnes each.
As a niche, luxury product, velvet demand is not expected to significantly increase in the medium term. Therefore market prices will be heavily influenced by supply. A short seasonal window for culling stags and a comparatively low slaughter rate to date indicates that the New Zealand supply of velvet appears set to remain at high levels. Asian importers and consumers will benefit from this imbalance of supply and demand, as prices will continue in their favour.
For many within the horticulture industries of New Zealand, 2005 has proved to be a difficult year, with many of the fundamental issues to continue into the 2006 season, bringing with it some interesting challenges for the industry.
The continued strength of the New Zealand dollar and higher interest rates have provided little sanctuary for the horticulture industry – due to it being heavily export focused. As a result, New Zealand producers have lost some ground in the competition stakes, which has translated into diminished grower returns – a situation that looks to continue in the short term.
The New Zealand industry, in 2006 will experience a full year under the guidance of its new national body – Horticulture NZ, which may prove to be an interesting and progressive time for the horticulture industry, due to the highly experienced individuals on the board of Horticulture NZ.
Media contact: Rabobank analyst Neil Burgess on +61 2 8233-8022.
The spotlight on the use of New Zealand’s natural resources has been increasing its glare over recent years, particularly in light of the publication in 2005 of the ‘Growing Good’ report by the Parliamentary Commissioner for the Environment.
As a result, New Zealand is seeking a different path to sustainability. Throughout the supply chain, initiatives are underway to improve sustainable production of agricultural products. Processors across all sectors are supporting environmental programs alongside farmers and producers.
The challenge during 2006 and beyond is for the momentum to be maintained.