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Falling dollar no panacea for primary sector

1 August 2006

Falling dollar no panacea for primary sector

The Ministry of Agriculture and Forestry (MAF) is predicting only modest growth from the primary sector over coming months, despite a surge in confidence due to the falling New Zealand dollar.

MAF today released its latest forecasts for the dairy, meat and wool, forestry, kiwifruit, apples and wine industries for 2006 to 2010.

The Ministry’s Situation and Outlook for New Zealand Agriculture and Forestry (SONZAF) report shows that the sector’s confidence has turned around since the beginning of 2006 and there are greater expectations of profitability. The confidence boost has been driven largely by the depreciating New Zealand dollar.

The MAF report supports this confidence by forecasting that export revenues in the sector will grow from $15.7 billion in the year ending March 2006 to $17.9 billion in the year ending March 2007. By 2010, exports are forecast to reach $20.5 billion, up $4.8 billion on 2006.

However, MAF Manager of Monitoring and Evaluation Peter Gardiner warned that increasing costs would affect profitability, and that income growth in the sector was only expected to be “modest” between April 2006 and March 2007.

He said energy costs, which account for around 20 percent of farm production costs, were likely to remain high.

“The weakening New Zealand dollar will raise the cost of oil, fuelling rising costs of fertiliser, transport and a range of other business expenses. Costs of imported goods will also increase, affecting primary producers and their associated downstream industries,” he said.

In addition, the report shows that international prices for meat and dairy products are in retreat and are expected to reach a low point in 2007. The price of horticultural and forestry products is improving, and is expected to continue to do so, but these industries are having difficulty attracting workers and labour costs are rising.

Peter Gardiner said international venison and wool prices were expected to recover from the relatively low levels in 2005. But rising costs would continue to affect profitability.

The dairy, meat and wool, forestry, kiwifruit, apples and wine industries make up about half of New Zealand’s total merchandise trade. Total agricultural, horticultural and forestry exports represent more than 60 percent of total merchandise trade.


SONZAF Highlights

General
- Gross revenue for the agricultural sector is forecast to reach $20.8 billion by 2010. Of this, dairy revenue will make up 35 percent – a slight increase from 34 percent in 2006.

Dairy
- MAF expects the dairy industry to continue to expand over the next five years, but at a slower rate than in the past few years.
- Production of milk solids in the year ended May 2006 is estimated to be up 4 percent on the previous year at 1260 million kilograms.
- Weaker international dairy prices are likely to be reflected in relatively static milk payouts over the next two years.
- By 2010, MAF expects milk solids production to increase to 1358 million kilograms. A moderate expansion of the dairy herd by 80,000 cows between 2006 and 2010 will drive this increase in production.

Lamb
- International lamb and mutton prices in New Zealand’s key markets are expected to fall during 2006. A recovery in prices is forecast from mid-2007.

Wool
- MAF expects international wool prices to continue their long run decline. The weaker New Zealand dollar is currently supporting improved wool returns, which are forecast to remain at these levels through 2007.
- Production of wool will fall in line with the decline in sheep numbers (from 39.3 million in 2005 to 38.5 million in 2010).

Beef
- In the short term, international beef prices will remain relatively high because of the supply of beef on international markets.
- MAF forecasts beef cattle numbers to decline by 100,000 between 2006 and 2010. However, production of beef for export is expected to remain relatively static at around 440,000 tonnes from 2007 to 2010, reflecting the dairy industry’s increasing contribution to beef production.

Venison
- European venison prices are expected to remain relatively low through 2006 as large volumes of New Zealand venison continue to enter Europe. However, a falling New Zealand dollar should translate this into a weak recovery.
- Production of venison for the year ended June 2007 is expected to be lower than the previous two years as the cycle of de-stocking runs its course and fewer animals are slaughtered. Export volumes are forecast to peak in the June quarter of 2006 and decline thereafter.

Horticulture
- Total apple production is expected to fall by 15 percent in the March 2007 year compared with 2006 as a result of tree removals and lower yields due to climatic conditions.
- International prices for kiwifruit are expected to rise slowly as the already high-quality standards are further enhanced and exports of the higher-priced gold variety increase.
- Wine production will be 20 percent higher in the March 2007 year compared with 2006. After 2007, production is expected to increase 10 percent per annum until March 2010, as new plantings mature.

Forestry
- New forestry planting during autumn and winter of 2005 is provisionally estimated at 6,000 hectares – significantly down on the 45,000 hectare average per year from 1990 to 2004.
- Average export prices are expected to fall 6 percent between 2005 and 2010.
- MAF expects a recovery in forestry production in 2007, reflecting increased harvesting from a maturing forest.
- Export volumes are anticipated to rise 10 percent per annum to 2010 – the increase coming mainly from exports of logs. Export values are expected to rise 44 percent from $3.1 billion to $4.6 billion over the same period.

--

The full SONZAF report is available on the MAF website at:
www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/sonzaf/2006/index.htm

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