26 February 2009
Action taken by New Zealand farmers to confront the challenges of the global financial crisis will strengthen the industry for the future and allow farmers to capitalise on an expected recovery in rural commodity markets from 2010, according to a recently-released industry report.
In its annual
New Zealand Agriculture in Focus report, leading agribusiness lender Rabobank says many of the country’s primary producers – particularly those involved in dairy and wine – will focus on cost reductions and operating efficiencies in 2009 as they face unprecedented challenges and uncertainty in international markets and on the domestic front.
But it’s not all bad news for the agricultural sector, according to the report, with some impacts of the global financial and economic crisis working in the industry’s favour and expected to provide some buffer in the year ahead. Further, the outlook for New Zealand’s sheep and beef sector has improved significantly with tightening supply providing a much-needed boost to farm gate prices.
Action taken by producers in 2009 to control costs and improve efficiency and productivity – rather than just increase production and scale – will stand the sector in good stead to reap the rewards and prosper with economic recovery in future years, the report says. "This will present the perfect opportunity to re-establish the competitive advantages that have been the basis of New Zealand’s long-term agricultural success," it says.
Grappling with challenges
"New Zealand’s agricultural sector has entered 2009 grappling with the impact of the most turbulence ever seen in international markets and producers are undoubtedly faced with a very challenging outlook in the year ahead," says report co-author, Rabobank senior analyst Hayley Moynihan.
A dramatic drop in several agricultural commodity prices (after the boom levels of 2007/early 2008), along with reduced consumer spending and extremely tight credit availability, are three of the key factors hitting the sector hard, the report says.
Dairy and wine are most impacted, facing a large drop in farm-gate prices and confidence levels, although beef and sheep farmers have a stronger outlook, with record peak-season payments.
"In response to these challenges, many New Zealand producers are expected to ‘batten down the hatches’ in 2009 and focus on cost reductions and operating efficiencies to ride out the storms in international markets," Ms Moynihan says.
Impact of global market woes
Undoubtedly the most important factor shaping the 2009 outlook for New Zealand agriculture is the global economic downturn, Rabobank’s report says, with the world economy to remain weak.
"Improvement is now not expected until at least 2010, when the flow-on benefits of expansionary monetary policy and reduced energy and commodity costs are expected to start being felt in the real economy, although this is by no means guaranteed," Ms Moynihan says.
The report says the impact of the global financial and economic crisis on New Zealand agribusiness has already been significant.
"Most directly, the availability and cost of credit changed markedly," it states.
"Credit availability became extremely tight and shortage of credit had several major flow-on effects for agriculture, including pushing down commodity prices as there was an exodus of capital from futures markets and a shortage of credit for companies physically trading in agricultural commodities," Ms Moynihan says.
Demand for New Zealand agricultural products was also impacted by the damage to consumer wealth, incomes and confidence wrought by the collapse of asset markets, rising unemployment and uncertainty regarding future economic prospects, the report says.
Upside benefits
While many of the flow-on effects of the global market turmoil have been negative, there have been some upside benefits, Rabobank’s report finds.
"In particular, the significant decline in the New Zealand dollar and the collapse in global input prices – such as fertiliser, fuel, chemicals and international freight rates – alongside lower interest rates, will provide much-needed relief to New Zealand’s agricultural sector," it states.
These factors have partly offset the effects of sharply lower global commodity prices for the New Zealand agricultural industry, Ms Moynihan says.
Domestic issues
The 2009 performance of New Zealand’s agricultural industry will not be determined by external factors alone though, the report says.
The trend towards business expansion – fuelled by factors including growing asset values, substantial changes in land use, structural shifts in the industry mix and significantly increased investment activity in the sector – is expected to abate, with an increased focus on consolidation and cash profitability.
"The 2009 year is expected to see producers prioritise cash profitability and return on assets above business growth and place greater focus on controlling costs than in previous years," Ms Moynihan says. "Strong periods of growth and activity are typically followed by a slowing and consolidation phase and this part of the cycle for New Zealand agriculture will be exacerbated by the additional pressure of the economic downturn experienced by all our trading partners."
New Zealand producers will also face critical decisions impacting their future enterprise mix on-farm in 2009, she says, as better prospects for sheep and beef may make restocking expensive as climatic conditions improve.
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 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and has a AAA credit rating from Moody’s and Standard & Poor's. The bank operates in 43 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank New Zealand is one of the country's 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.
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Key Sector Summaries:
Dairy
Sentiment in the world dairy market remains extremely bearish, with little sign of imminent turnaround.
Demand is expected to remain weak at least through the first half of the year. Some improvement in the global economy, lower retail prices and improved credit conditions should bring buyers back into the market in the second half of 2009.
Supply growth will be limited as farmers respond to a further decline in milk prices in many parts of the world by cutting production. World prices are therefore likely to experience some upward pressure in the second half of 2009 or early in 2010.
Beef
Overall, New Zealand beef producers can be expected to benefit from the relatively more robust international market for manufacturing beef in 2009, however prime beef is likely to feel greater price pressure as consumers shift away from premium to more budget cuts.
New Zealand faces intensified export competition in the US, EU and North Asia, as competitors increase supply volumes back into these markets.
However, the combination of a declining New Zealand beef cattle herd, fewer dairy beef calves reared over the past two years and a greater proportion of beef production coming from dairy cows, suggests support for firm beef prices for most producers during 2009.
Sheepmeat
Despite weaker global demand for sheepmeat, lower supply availability is expected to support international prices at, or near, current levels in most markets.
New Zealand sheep farmers can therefore expect to enjoy lamb prices in 2009 at higher levels than those seen over the past three years and to seek to restore profitability to their businesses.
Many sheep farmers will also be confronted with the opportunity to rebuild flocks as seasonal conditions improve and demand from the dairy sector for feed and land ebbs, however, high livestock prices are likely to curb significant flock expansion in 2009.
Wine
2009 is the year for New Zealand to make a statement to the world that it intends to preserve its position as a premium-priced, niche player by managing yields and production.
To date, prices and volumes of wine achieved in export markets have not reflected the difficult trading environment facing New Zealand wineries.
But, with expectations of weakening demand (solely due to the economic crisis) and all indications that New Zealand will have a bumper 2009 harvest that will exceed global demand, the industry will need to take action to avoid a situation of over supply. Stringent yield management throughout the growing season and at harvest time will produce a better long-term outcome for the New Zealand wine industry than retail shelves full of heavily-discounted wine with no market.