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THE AGRICULTURAL, HORTICULTURAL AND FORESTRY SECTORS

Contribution of Agriculture, Horticulture and Forestry to the Economy

Land-based sectors contribution to exports

  1. The land-based sectors are of key importance to New Zealand. In the year ended 30 June 1999 New Zealand's total exports (excluding re-exports) were provisionally valued at $21,573 million, up 1.7 percent on the June 1998 year. The land-based sectors contribution of $13,374 million accounted for 62 percent of New Zealand's total exports in the June 1999 year.
  2. Dairy products (which exclude casein products of $763 million) at $3,861 million is the largest single grouping. Meat, wool and by-products were valued at $4,291 million. Forestry products were valued at $2,445 million or 11 percent of New Zealand's total merchandise exports.

Land-based sectors contribution to employment

  1. An estimated 115,000 people are employed on farms, with another 100,000 people directly employed servicing agriculture and horticulture either at the input stage or in processing agricultural and horticultural products. An estimated 9,000 people are directly employed in forestry and logging. Processing of forestry products through sawmills, panel products plants and pulp and paper manufacture accounts for another 16,000 people.
  2. The agriculture, horticulture and forestry sectors, together with first stage processing, employ about 240,000 persons or 13 percent of the estimated total labour force of 1,867,000 at the June 1999 quarter.

Land-based sectors contribution to GDP

  1. For the March year 1999, New Zealand's Gross Domestic Product (GDP) was estimated to be $99 billion. The land-based sectors, together with first-stage processing, contributed 15.4 percent. This figure compares with a 12.8 percent contribution from wholesale and retail trade, and 14.7 percent from finance, insurance, business services and real estate.
  2. Further details on the agricultural, horticultural and forestry sectors are provided in Appendix 1.

Situation and Outlook

  1. While key global commodities are now showing signs of recovery (on average) following the Asian downturn and renewed strengthening of economic activity in major world markets, many of the prices of commodities of interest to New Zealand remain depressed or falling. This is having a significant impact on farmer returns, particularly in the wool, dairy and apple sectors.

Changing farm sizes, land uses, and production trends

  1. The average land area of sheep and beef, and dairy farms has continued to increase, as have average stock numbers per farm, as farmers take advantage of economies of scale in order to minimise costs.
  2. There is a strong trend on sheep farms to concentrate on lamb meat production and ignore wool production. Wool returns are so low that it is almost being disregarded in farm plans. As a result of poor wool incomes and land use changes to deer and forestry, sheep numbers in New Zealand have been declining steadily for many years. Sheep numbers currently stand at a 40-year low.
  3. There is a noticeable trend on sheep and beef farms away from sheep to beef, finishing stock and sometimes deer. Farmers are watching price trends closely and are adjusting stock policies to maximise returns.
  4. Dairy cow numbers have continued to increase at a rate of between 2.5 percent and 3 percent a year, especially in the South Island where the average herd size of new dairy conversions is approximately 500 cows, compared to the national average herd size of 220. At the same time, the total number of herds has followed a generally declining trend as the national herd is consolidated into fewer, but larger, herds.
  5. Kiwifruit blocks have tended to increase in size over the past five years and the pipfruit industry is consolidating on bigger units with tightly managed debt levels. The number of small traditional family units in the pipfruit industry is shrinking.
  6. Confidence is particularly strong in the viticultural sector. Increased investment in the sector continues in the upper South Island, with 500 hectares of new planting in grapes expected in Marlborough in 1999, an increase of 200 hectares on the previous year.
  7. For other horticultural crops, there is a perceived trend of growers consolidating into larger full-time units, with a corresponding reduction in the number of part time/hobby operators.
  8. The arable industry trends show some farmers developing large grain enterprises, while others are developing very specialised seed crop varieties including vegetables. However, many growers are facing reduced opportunities to secure contracts and are uncertain about their future.
  9. There has been strong growth of between 4 percent and 5 percent per year in the number of lifestyle blocks. It is estimated that currently there are around 100,000 lifestyle blocks, compared to only 60,000 farms/orchards.
  10. Aggregate farm investment in real terms has declined since peaking in 1985, and has not maintained the capital base, that is, annual depreciation exceeds annual investment. Investment has been occurring in some industries at a higher level than in others, for example dairy, forestry and some horticulture.

Farm and orchard viability

  1. The viability of many farms and orchards in New Zealand is marginal. There is a growing gap in the financial performance between the top and bottom performing dairy, beef and sheep farms, with the bottom farms showing significant losses.
  2. In the sheep and beef sectors approximately one third of farmers are making a profit, the bottom third are struggling to remain viable, and the middle third are remaining static. Change among the bottom group is slow and they are very vulnerable to further declines in land prices. Leasing, diversification and changing land use are all being explored, and many farmers have required new borrowing and/or the sale of off-farm assets such as life insurance shares.
  3. Many sheep and beef farmers are not applying sufficient fertiliser to maintain sustainable production, or spending enough on repairs and maintenance or on capital equipment replacement. This suggests a developing problem.
  4. Farm performance in the dairy industry is better on average than sheep and beef, but there are still significant numbers of marginal and loss-producing farms, and a growing gap between the top and bottom performing farms.
  5. The opportunities to get established in farming are decreasing as average unit size (particularly dairy) and herd sizes are increasing in order to remain viable through economies of scale. The average cost of purchasing a viable farm is now about $1 million.
  6. The viability and profitability of the kiwifruit sector has strengthened considerably in the last two seasons, with a leap in prices for kiwifruit, resulting from favourable exchange rates, improved marketing under the Zespri brand, and new varieties.
  7. Pipfruit grower confidence and orchard viability has been dramatically reduced with news that Braeburn returns would only be $7 per carton this season, half that anticipated by growers. Results indicate that out of 35 orchards monitored by MAF, only 14 would make a cash surplus (gross revenue less orchard running costs) and only two would make a disposable profit (after tax, living and interest costs are deducted).

Impacts of drought

  1. The combined impact of the two droughts (1997/98 and 1998/99) has resulted in estimated reduction in farm gate income of nearly $1 billion over the last three years. Taking into account estimated multiplier impacts, the total opportunity costs of both droughts on GDP are estimated at 0.8 percent in 1997/98, 3 percent in 1998/99 and 1 percent in 1999/00.
  2. A number of farming families in drought affected areas of Otago are reliant on government support for household living.
  3. There is growing concern regarding changing weather patterns (i.e. the prospect of more droughts, more floods etc) as a result of global warming, and the implications of this for farm, orchard and forestry incomes. While the outlook is not entirely negative, the predicted future incidence of extreme weather events and climate related biosecurity risks foreshadow an increasingly adverse impact on land-based industries in future.
  4. Government and the Agricultural and Marketing Research and Development Trust each contributed $1 million for a contestable water studies fund to provide up to 67 percent of the costs for feasibility studies into new water supply developments in drought prone areas, and improved technology and information on water management.

Changes in industry structure

  1. The rationalisation of the sheep and beef processing industry continues due to more efficient use of slaughtering and processing facilities. Environmental concerns also continue to impact on the processing industry. There is also a slow but steady trend towards greater production to consumer specification.
  2. Confidence in the wool industry is low, and is fuelling grower demands for re-shaping wool distribution and marketing channels.
  3. The trend in the dairy sector is towards the merger of existing processing companies, of which there are currently eight. There is a current proposal in the industry for a "mega-merger" between the majority of the dairy companies, which could potentially process up to 97 percent of New Zealand's milk. There is division in the industry concerning the pace of change, and the industry restructuring proposals called for by Government. Generally there is poor understanding amongst dairy farmers of the restructuring proposals. Against proposals mooted by other commentators, many dairy farmers seek to retain the industry single-seller status and do not wish to see any opportunity for foreign shareholding in the ownership of dairy processing and marketing assets.
  4. The kiwifruit post harvest sector has rationalised into a small number of supply chain managers who take fruit from packhouse to ship's side.
  5. Over the past two years in particular, there has been a downsizing of the domestic pigmeat industry with a steady stream of producers exiting the industry. Low prices for alternative meats, and increasing levels of imports of pigmeat (some subsidised) from Canada and Australia have caused anger among local growers.
  6. Falling international prices have led to declining interest in grain production in New Zealand. Increased imports of cheap baking and animal feed grains have pressured local grower prices, and resulted in forced diversification into other enterprises.

Increasing forestry harvest levels

  1. Based on the existing planted forests, New Zealand's available wood supply is forecast to increase from 20 million cubic metres in the year ended 31 March 1999 to 33 million cubic metres by 2010, an increase of 65 percent.
  2. Harvesting levels are currently below the levels of available wood supply. When this is combined with increasing volumes coming on stream between 1999 and 2005 from the maturing forest estate, the cumulative effect is a considerable wood reserve in the forest.
  3. Harvesting is forecast to increase from 16.3 million cubic metres in the June 1999 year to nearly 20 million cubic metres in 2003. If this rate of increase were maintained there could be a wood surplus of five to ten million cubic metres per year over the next ten to 12 years, but then wood supply would be a constraint for the following eight to ten years.

Forestry investment

  1. The industry faces a significant challenge to process the future harvest expansion. If all of New Zealand's wood harvest were processed on shore it has been estimated that over the 10 years 1996-2006, the forestry sector would require over $4 billion of investment in extra wood processing capacity.
  2. Logs are around 25 to 30 percent of exports, and forecast to stay around that percentage level, which means the $4 billion can be reduced by at least 25 percent to $3 billion. Between 1995 and 2002 the value of announced wood processing investments was $1 billion. So there is still $2 billion worth of investment required in wood processing over the next five to six years if processing targets are to be met.
  3. Most of the wood available for processing over that period is owned or managed by seven companies (Carter Holt Harvey Forests, Fletcher Challenge Forests, Rayonier, Weyerhaeuser, Juken Nissho, Ernslaw, Wenita), all of whom have wood processing divisions.
  4. In the short to medium term this may limit opportunities for the establishment of new, large and independent wood processing companies. The large forestry companies are likely to invest in new processing plants while smaller independent sawmillers are more likely to expand existing plants.

Farm and orchard cashflow monitoring

  1. MAF Policy's farm and orchard monitoring represents a comprehensive overview of the situation and outlook of New Zealand's primary production sector. Key points from the 1999 monitoring round are as follows:
  • In the North of the North Island, the 1998/99 season proved difficult with a frustrating climate, which involved intense rainfalls in between long dry spells. The very warm moist weather in autumn resulted in one of the worst and most widespread outbreaks of facial eczema, which is continuing to impact on livestock production.
  • Otago and Southland farmers experienced a serious drought, which impacted significantly on their bottom line and resulted in some needing Rural Sector Assistance. Drought relief committees were active in South Canterbury, Otago, and Southland.
  • Most pastoral farmers are budgeting on an increase in revenue for the 1999/00 year, due to increasing production for dairy farms and increased prices for sheep, beef and deer products.
  1. A table setting out typical farm and orchard cash flow budgets for 1999/00, together with the 1998/99 outcomes, is attached as Appendix 2. The published budgets, based on expectations in May and June 1999, have been adjusted in the light of more recent information.
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