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Uphill trek for NZ agriculture in 2023 – four ‘wildcards’ set to shape the climb

New Zealand agriculture faces an uphill trek in 2023, with the difficulty of the climb set to hinge on four ‘wildcard’ factors: the re-opening of China, global and domestic inflation policy, market signals for low or zero emission products and the upcoming New Zealand election campaign, according to a new report by agribusiness banking specialist Rabobank.

In the bank’s annual flagship report, New Zealand Agribusiness Outlook 2023, titled Rising to the Challenge, Rabobank says the industry traversed a mountain of challenges in 2022 and a testing climate confronts the sector as it begins its 2023 journey.

“During the course of 2022, Covid-19 pandemic aftershocks continued to impact our key export market, China, with the strict zero-covid policy in force for much of last year negatively impacting New Zealand export volumes and returns,” report co-author senior agricultural analyst Emma Higgins said.

Rabobank senior agricultural analyst Emma Higgins

Rabobank senior agricultural analyst Emma Higgins

“On top of this, war broke out in Europe, which disrupted market access and trade flows, and added fuel to the inflation fire taking off around the globe. These issues contributed to surging costs for farm inputs with fuel, fertiliser and finance costs all jumping significantly throughout the course of 2022.

“This in turn squeezed New Zealand farmer margins, with margins coming under even further pressure in recent months as agricultural commodity prices have moved to more modest levels following the near or record highs seen at the start of last year.

“If this wasn’t enough to contend with, we saw La Niña conditions for a third consecutive season, with 2022 turning out to be the warmest year on record for New Zealand. 2022 also achieved the accolade of having the wettest and warmest winter on record – bringing floods for Nelson and Marlborough – and already this year we’ve seen the lingering impacts of this weather pattern create significant flooding issues for food producers across the East Coast and top of the North Island.”

The report says these factors have drained sentiment among the country’s food producers* and New Zealand agriculture is now deep in a period of what feels like considerable frustration.

“Government policy impacting the sector continues to be a major source of concern for farmers and the industry. Additionally, weakening market prices across multiple sectors is further contributing to already low confidence levels,” Ms Higgins said.

“And all of this exists amidst a potent background of climate change urgency, a cost-of-living crisis, geopolitical fragmentation and extremely tight labour markets.”

With many of these challenges looking likely to linger longer, the report says, 2023 runs the risk of being characterised by margin pressure for many operators.

"In particular, the first quarter of 2023 looks tough,” Ms Higgins said. “And we anticipate low profitability will push some businesses to assess income diversification streams and explore complementary revenue options over the course of the year ahead.”

Four ‘wild cards’ set to shape sector prospects

Within this challenging outlook for the sector, Ms Higgins said, several divergent paths are possible.

“And we anticipate the sector’s fortunes will largely be shaped by four ‘wild cards’,” she said.

The first of these, according to the report, is the re-opening of China after the country’s Covid U-turn.

“China has now lifted its previously-strict Covid-19 policies alongside reopening its borders to international travellers for the first time since March 2020. With the Covid-19 wave now spreading rapidly in China, adverse short-term impacts will likely be felt on supply chains via temporary labour shortages,” Ms Higgins said.

“We expect a light recession in China, already kicked off in quarter four 2022, to end in the first quarter of this year. We think the journey might still be a bit bumpy, but there remains a chance that demand could improve earlier than forecast, with food services picking up after long lockdowns – providing a boost for commodity prices and New Zealand farmer bank accounts.”

The report says the second wildcard is global and domestic inflation policy.

“Policy makers – here in NZ and elsewhere – have already made concerted efforts to wrangle inflation back to desired levels. Upside risks of inflation persisting mean that interest rates still have a way to go, with central banks not done with hiking – yet,” Ms Higgins said.

“As the fight against inflation continues across the globe, recessionary risks are clear in several of our important export markets including China, Europe, and the US. Markets, however, also indicate that a turnaround of interest rates in several key countries could come as early as the second half of 2023.

“Here in New Zealand, the RBNZ expects demand will become increasingly constrained by higher levels of debt servicing costs which will help bring demand back in line and stamp out inflation.”

The third wildcard identified in the report is market signals for low or zero emission products.

“From free trade agreements to supply chain giants setting zero-carbon targets, the market signals for a lower emissions future are getting stronger and clearer,” Ms Higgins said.

“We have an early-mover advantage in New Zealand to supply low-emissions produce into these supply chains and countries, with the opportunity to leverage our emissions pricing framework to unlock further value. The direction of travel for change in New Zealand agriculture is largely set – so this is the time to leverage the opportunities presented locally and globally. To take advantage, we must act quickly, ahead of our competitors.”

Finally, the report cites the upcoming election campaign as a further variable that will influence the year ahead for New Zealand ag.

“October 14 is D-Day for kiwis to hit the polls for the 2023 election. Any change of government is unlikely to shift the direction for pending and proposed sustainability regulations, but the broader pace of regulatory change may be altered with this having already been flagged as an issue by recently-installed Prime Minister Chris Hipkins,” Ms Higgins said.

“The New Zealand ag community vote will be sought after, and we await to see how prominent specific New Zealand agriculture policy features in the upcoming election campaigns.”

Navigating the path ahead

While the year ahead is expected to test the industry’s resolve, Ms Higgins said, New Zealand’s farmers and growers have shown over the years that they can successfully tackle the many challenges that come their way.

“Business success in 2023 will balance on the sector’s ability to adopt a back-to-basics approach focused on reduction of business costs and selection of the right supporting team,” she said.

“This isn’t the first time commodity cycles or regulation have changed and there’s a wealth of experience in our rural communities which our farmers and growers will need to draw on over the months ahead.

“Where possible, food producers should also allocate time for themselves off farm to support their mental health and wellness.”

Commodity outlook

Dairy - Current farmgate milk price forecasts remain under pressure. Dairy commodity prices will see near-term headwinds likely to continue before returning to more promising levels in the second half of 2023.

Beef - RaboResearch anticipates the North Island bull price will track above the five-year average price range in 2023, supported by tight global beef supplies.

Sheepmeat - Lamb and mutton schedules face headwinds in all key markets. Import demand from China will likely improve from mid-2023, supporting farmgate returns in spring and summer.

Venison - The venison schedule is expected to continue to recover in 2023, but will be tested by tough economic conditions in all key markets.

Consumer foods - Consumer confidence is starting the year on a weak footing. While 2023 will see peak inflation, the real wage squeeze will drive ongoing consumer behaviour shifts towards trading down on food purchases and reducing non-food discretionary spending.

Farm Inputs - Overall supply and demand is adjusting to the new, new normal, with prices easing from record levels.

FX - With inflation still scorching hot, the Reserve Bank shows no sign of backing off. Higher interest rates and inflation are driving down consumer confidence. Labour shortages remain widespread and wage inflation is likely to remain buoyant.

Oil - Europe’s warm winter has caused energy prices to plummet, however supply will remain constrained.

Regulation - More regulation milestones loom large in the year ahead for farmers, from freshwater environment plans to the fate of Three Waters.

*As recorded in the Q4 2022, Rabobank Rural confidence survey

Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 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 operates in 40 countries, servicing the needs of about 10 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 offices throughout New Zealand.

Media contacts:

David Johnston
Marketing & Media Relations Manager
Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153

Denise Shaw
Head of Media Relations 
Rabobank Australia & New Zealand 
Phone: +612 8115 2744 or +61 2 439 603 525