Good global prospects - but farmer patience to be tested in 2007

NEW ZEALAND - 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.

7 February 2007

4 minute read

Oceania

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."

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.

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.