7 February 2007
The same challenges that dominated 2006 will continue to plague New Zealand agriculture in 2007 as high interest rates and input costs, along with a strong New Zealand dollar test the resilience of New Zealand's agricultural and export sectors.
The annual New Zealand Agriculture in Focus report produced by Rabobank, the world's leading food and agribusiness bank, says that while global market conditions are favourable for many key commodities, supporting high US dollar commodity prices, the strength of the New Zealand dollar has constrained growth in local farm gate prices.
And with interest rate and currency relief unlikely to materialise before the 2007/08 season, Senior Rabobank New Zealand analyst, Hayley Moynihan says that pressure has been placed on profitability for farmers, processors and exporters alike as input costs continue to rise.
"Cost increases accelerated sharply during 2006, compounding into three years of rising costs since 2003. The fastest growing costs have been fuel and electricity. Land related costs have also moved higher, reflecting the surge in property values during this period," she says.
New Zealand's agriculture sector may also face the prospect of higher average exchange rates over the longer term, with the Reserve Bank signalling that further OCR increases may be required in 2007 to keep a lid on inflation as the domestic economy appears robust and economic growth is expected to firm.
"The coming year is likely to test the stamina and hardiness of New Zealand farmers and exporters with little respite likely from domestic economic conditions," Ms Moynihan says. "The ability to adapt to a changeable, and often harsh, environment is a cornerstone of New Zealand agricultural success and these skills will be required through 2007."
"Despite these challenges, our view remains that the medium to long term prospects for New Zealand agriculture remain positive, underpinned by good demand and supply conditions in key sectors, efficient production systems together with the quality and safety of New Zealand's food and agribusiness products."
Export opportunities
On the supply side, the Rabobank report says that with trade volumes restricted in many markets New Zealand may benefit from disruptions to supply from key competitors during 2007.
The severe drought in Australia is expected to contribute to reduced dairy product availability globally in 2007, with beef, lamb, wool and wine export sectors also likely to be affected.
"With the EU reducing its export presence on the world stage across a number of commodities and the US grappling with restrictions on its beef exports to Asia and a drought of its own, New Zealand has the opportunity to further build its market position in key sectors over the coming years," Ms Moynihan says.
High Value Consumer Markets
New Zealand's positioning in higher value niche markets globally is likely to prove important in 2007, according to the report, with developed consumer markets continuing to prefer high quality agricultural products.
"The appeal of high quality agricultural products to the 21st century consumer is that they are traceable, disease free and produced in a sustainable manner. Modifications to portion size, convenient packaging and enhanced consumer information are also features the 21st century consumer demands."
The ability to meet these stringent requirements will continue to differentiate New Zealand's products and in many instances, according to the report, provide New Zealand with preferential access to higher value consumer markets that would otherwise be denied.
"The value of these factors cannot be underestimated. The ability of New Zealand to continue to differentiate itself will be crucial in ensuring New Zealand agricultural products retain their global reputation for excellence in 2007 and beyond," Ms Moynihan says.
Trade
The optimism that followed the conclusion of the Doha Round of Ministerial meetings in Hong Kong at the end of 2005 didn't linger long into 2006, with the April 30 deadline passing without an agreement being reached.
The Doha Round, that was set to reduce barriers and subsidies to promote more efficient world trade, would have brought increased agricultural trade opportunities to New Zealand if it had succeeded, the report says.
"With the possibility of failure for the Doha round, expect to see an even stronger emphasis on bilateral and regional trade deals with New Zealand trading partners in the future," Ms Moynihan says.
For New Zealand, free trade negotiations continue with China, Malaysia and an economic partnership agreement with Hong Kong, with work continuing on an ASEAN - Australian - New Zealand free trade agreement. New Zealand's trade minister had an initial meeting with trade representatives from the Gulf Cooperation Council in December to discuss a possible free trade agreement.
There is little chance of substantial change in 2007 for multilateral free trade, according to the report However, Ms Moynihan says that the emphasis and renewed commitment to bilateral and regional agreements should mean that significant headway will be made, leading to improved agricultural trade outcomes beyond 2007.
Sustainable Agriculture
The image of New Zealand agriculture was challenged in key export markets during 2006, with the 'Food Miles' campaign in Europe highlighting the distance that food travels globally to reach consumers and the oil and energy cost associated with its transportation.
With New Zealand's agricultural exports often travelling the greatest distance, they often incur the highest energy cost in distribution, according to the report.
"Although Lincoln University published a report showing that New Zealand had significantly lower total energy costs for food production, including transportation, compared to the United Kingdom, the potential of such campaigns to turn consumers away from New Zealand produce cannot be ignored."
New Zealand will be faced with tough decisions over the coming year, the report says, as it strives to meet its first Kyoto commitment period from 2008-2012. And with agriculture contributing approximately 50 per cent of New Zealand's greenhouse gas emissions, this sector will need to be at the forefront of reduction proposals, the report says.
The current government discussion paper on Sustainable Land Management calls for submissions by 31 March 2007. The document contains potential implications for land use, particularly any future change in land use, and this will have an associated impact on agricultural investment activities, Ms Moynihan says.
"The New Zealand farming sector will need to give priority to involvement in this consultation early in the year, as the policy decisions made in 2007 will have far-reaching effects on New Zealand's agricultural production over the next decade."
New Zealand Agriculture in Focus 2007 - Sector Summaries
Beef
The global beef boom is to continue in 2007, with New Zealand benefiting from continued demand both offshore and at home.
Recent higher slaughter rates in the US, combined with higher feed grain prices are expected to restrict US herd and beef production growth in 2007. US beef demand is also expected to benefit from higher prices for chicken; a major competitor to beef in recent years in the fast food sector, a key destination for New Zealand's manufacturing beef.
New Zealand producers are also likely to continue to benefit from the ongoing market access restrictions on key competitors, such as the US, which faces ongoing difficulties regaining its foothold in the lucrative Japanese and Korean markets.
In the US, despite some easing in beef demand in 2006, US dollar prices for imported 90CL beef remained relatively steady. Prices were supported by the reduction in supply of imported beef - a result of Uruguay's change in focus to capitalise on the Russian and EU markets, which are normally supplied by the Foot and Mouth Disease troubled Brazil and Argentina. However Uruguay is likely to partially refocus on the US during 2007.
Sheep Meat
With solid markets for sheep meat internationally, New Zealand producers are likely to be impacted more by domestic events in 2007.
The strength of the New Zealand dollar, seasonal procurement activity and climate variations can be expected to provide challenges over the coming year.
Lamb prices internationally have eased and now remain in touch with other meat alternatives, such as beef, while retaining their premium positioning. This moderation in prices bodes well for growth in lamb demand as its high quality characteristics continue to attract consumers.
New Zealand increased its export volumes to key market destinations in 2006, with exports to the United Kingdom, Germany and Belgium all increasing. The US market also remains an important destination for around 10 per cent of New Zealand's sheep meat exports.
Exports to Japan increased 40 per cent in the three years to 2005 and to September 2006 were 13 per cent higher than the previous year. Demand is expected to be sustained in 2007.
New Zealand lamb production in 2007 is expected to be similar to 2006. Early spring slaughter rates have been 10 per cent higher than the same period last year. However, the variable spring weather has seen lighter average weights processed.
In terms of competition, Australian lamb supply is expected to be good in early 2007. The drought is likely to slow the rate of Australian lamb production growth in the future, but maintain the current level of competition in export markets in the near term.
Dairy
New Zealand's dairy industry is set to capitalise on its recent growth in 2007 as global markets try to quench their thirst for milk.
Vigorous growth in Asia, the Middle East and Latin America will be met mainly by local supply, as governments and companies alike promote the development of dairy farming. However, not all regions will be able to meet their own requirements, and the world will still be looking for increased volumes of importable dairy product in 2007.
The combination of strong demand growth and weak exportable supply growth is expected to underpin high export prices in 2007.
The first export licences to designated markets under the Dairy Industry Restructuring Act 2001 are due to expire in June and July 2007 and, while these particular licences represent relatively small product volumes, specifically to the Dominican Republic and Canada, the new arrangements made post expiry will set a precedent for the higher value licences that expire from 2008 to 2010.
The ongoing evolution of industry structures in New Zealand will be the main feature over the coming year, as new processors make their mark, current legislation reaches some important milestones and decisions are made that will have a significant future impact on the dairy sector.
Wine
Over production of grapes, a surplus of wines, increased competition and intense pressure on prices continue to dominate discussion and are likely to persist in 2007. Despite these difficulties, New Zealand wines continue to retain their appeal and continue to defy global trends.
As expected, the flagship variety Sauvignon Blanc continued to lead the way in production stakes, accounting for over 50 per cent of production volumes - a trend that is expected to continue.
The rate of growth is expected to ease over the medium term as land values continue to increase and the availability of suitable land becomes limited. Over the next twelve months, growth rates are expected to continue at similar levels to 2006.
While additional wine is now available from the larger 2006 vintage, overall volumes are still very small. The supply shortage for New Zealand wine should remain in the short to medium term.
Deer
Venison demand has increased in key export markets. The image of game has returned to favour, with European consumption increasing. Farmed venison has also gained market share, as some alternative game meats have been negatively impacted by Avian Influenza.
Velvet demand has also been solid. New Zealand's most important market, South Korea, continues to experience solid economic growth. While real GDP growth is expected to slow moderately to four per cent in 2007, private consumption growth is forecast to remain at four
per cent, which will provide a positive and stable basis for demand.
The combination of strong demand and weak supply growth has pushed venison prices up in export markets. As 2007 gets underway European prices are 10 - 15 per cent higher than 12 months ago, with prices for some cuts the highest for several years.
Firm demand and a lower level of New Zealand supply are also likely to provide support to farm gate velvet prices in 2006/07 and looking ahead to next season.
Keeping venison and velvet supply volumes finely balanced with market demand should provide an opportunity for steadily increasing returns within the deer industry during 2007.
Wool
While 2007 brings the prospect of firmer fine and medium wool prices on the back of the Australian drought, longer term profitability from wool production will continue to feel the pressure from rising shearing costs and stiff competition from other fibres.
Lower Australian supply into world markets is likely to benefit wool prices during 2007. With deepening drought in the 2006/07 season, total Australian wool production is expected to reduce to a 20 year low of 421,000 tonnes.
During drought, sheep generally produce finer wool. This means relatively higher fine wool production (<19.5 microns) over medium and broad wool production. With New Zealand's production based on a greater proportion of strong and cross bred wool, this is likely to provide support to fine and medium (21-25 micron) wool prices during 2007.
The margin per stock unit between wool income and shearing costs declined to around NZD 5.60 over the past season. The cost impact combined with declining wool income has farmers seeking alternatives, such as shearing less frequently, to minimise costs.
Horticulture
New Zealand has continued to maintain its world wide reputation for high quality produce, which has, in the past, commanded a price premium. This market positioning as a niche supplier has served, and continues to serve, New Zealand well.
The competitive conditions in the international markets expected throughout 2007 will again prove to be challenging. Despite this, there will be many opportunities available to producers who are prepared to innovate in order to retain a premium position in the market.
The ban on the export of New Zealand apples to Australia has been lifted after 85 years. However the export protocols remain onerous and prohibitive to New Zealand exports, so much so that the political arguments are still raging. 2007 will see this continue with no resolution on the immediate horizon.
Kiwifruit had a tough year with competition from Northern Hemisphere fruit. Grower returns for the 2006/07 season are expected to improve from last season as the New Zealand dollar has been lower on average during the main selling period. While currency weakness has abated, good prices in export markets are likely to ensure growers see solid demand and prices in 2007.
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 is ranked the world's safest private bank by Global Finance magazine. Rabobank operates in 38 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 29 branches throughout New Zealand.
Contact
For further information please contact Hayley Moynihan (Tel: +64 3 341 4218) or please email wellington.pr@rabobank.com.