Latest SONZAF Reports

MAF's latest Situation and Outlook for NZ Agriculture and Forestry (SONZAF) report reveals a mixed outlook for international prices, with rising export values for agricultural and forestry products over the medium term, but a reduction in agriculture's farmgate contribution to NZ's GDP.

The overview report says that the high NZ dollar will continue to have an impact on commodity prices through the outlook period to March 2007. The past year saw many of NZ's agricultural and forestry products suffer from both lower international prices and the stronger NZ dollar. Drought also affected areas of the south-western North Island. This is in comparison with the 2001/02 season that experienced a weaker NZ dollar, generally favourable international prices for key products, and good climatic conditions.

Over the outlook period (2003/04 to 2006/07) dairy product, lumber and panel international prices are projected to rise while beef, pulp and paper prices are likely to rise to 2004/05 before falling. Lamb and mutton prices are projected to fall while log prices are projected to remain relatively static. However, the NZ dollar's persistent strength is projected to moderate the effects of any international price rises on the prices that NZ's producers and processors receive.

The main export trends over the outlook period from the March year 2003 to the March year 2007 are:

  • total export value for agriculture and forestry is projected to rise by 19 percent, from $18.1 billion to $21.6 billion, mainly as a result of increasing dairy and forestry export values;
  • dairy product export value is projected to increase by 35 percent, from $5.92 billion to $8.02 billion, resulting from rising volumes and prices;
  • forestry product export values are projected to rise by 18 percent, from $3.68 billion to $4.33 billion, owing mainly to increasing volumes;
  • export values for meat are projected to remain static at $4.32 billion, reflecting the net effect of falling prices and rising volumes; and
  • the export value of horticultural products is projected to increase by 32 percent, from $2.09 billion to $2.76 billion, mainly due to rising wine volumes.

Agriculture's farmgate contribution to GDP for the year to March 2003 has been provisionally estimated at $8.08 billion. MAF projects this will fall to $7.92 billion in the year to March 2007 as farmers respond to a five percent drop in total income by reducing their on-farm expenditure by eight percent.

The SONZAF report say that dairy farming's contribution to agricultural sector revenue is likely to rise by 20 percent over the outlook period - from $4.71 billion in the year to March 2003 to $5.65 billion in the year to March 2007. However, this will be offset by falling revenue from beef cattle, sheep meat and wool.

Dairy Production

Milksolids production in 2002/03 was 3.5 percent higher than in the previous dairy season, despite colder than normal temperatures in mid to late spring and the summer and autumn drought in the south-western North Island. This rise in milk production was due to a higher number of cows as well as an increase in average milksolids production per cow.

The report says dairy product export volumes were 20 percent higher than in the previous season, as Fonterra Co-operative Group Limited reduced its inventory. The volume of milk produced, and consequently the quantities of dairy products manufactured and exported, are projected by MAF to continue increasing over the outlook period (2003/04 to 2006/07), in line with the continued expansion of the national dairy herd.

Looking to the 2003/04 season, the number of dairy cows is expected to increase but at a lower rate than in previous seasons. This is mostly because farmgate payouts are expected to be lower than those received in the 2000/01 and 2001/02 seasons, making the expansion of existing farms and the conversion of new farms less profitable.

Export volumes for the 2003/04 season are estimated to rise by only one percent to 1.86 million tonnes, due to last season's export volumes being "inflated" by the run-down of Fonterra Co-operative Group's inventory. By the 2006/07 season export volumes are projected to have increased to 2.13 million tonnes, up 16 percent on the 2002/03 season, and to be valued at $7.98 million FOB, up 37 percent on the year to May 2003.

A key factor affecting wholemilk powder (WMP) prices is the question of Iraq. Over the past few years NZ dairy companies have supplied a large portion of the WMP imported into Iraq through the Oil-for-Food programme. This programme has now ceased, with control of food programmes in Iraq taken over by the US-led administration. Food deliveries to Iraq will continue through until at least June 2004. After then, it will be up to the Iraqis to decide what happens and this presents some uncertainty over that market.

Forestry Exports

Shipping costs and a rising NZ dollar point to a gloomy outlook in the short to medium term for forestry exports. But the situation should improve towards 2007. The SONZAF report says the average price of logs fell by five percent in NZ dollar terms in the March 2003 year, although prices in terms of US currency rose 13 percent. This demonstrates the effect that the strong NZ dollar has had on log exports. However, due to increased export volumes in the March 2003 year, the total value of log exports was up by four percent on the previous year.

Lumber, or sawn timber, export volumes for the 2002/03 year grew by a healthy 14 percent. The short-term outlook for export volumes of logs and lumber is, however, not very bright. The log export sector is in the midst of a harsh market downturn, with sales plummeting. Also a number of sawmills are in financial difficulties. In both cases market difficulties are made even worse on by a combination of the high NZ dollar, high energy prices and rising shipping costs. Restructuring and reasonable market demand should see the situation improve through the middle of the outlook period.

Sheep and Lamb Production

For the year ended June 2003, export returns from this sector were $2.2 billion. Sheep numbers are expected to continue to fall but productivity per animal is expected to continue to rise over the next three years, according to the latest report. The downward trend in the size of the country's breeding flock is due to more land being converted into deer, forestry and dairy cattle production. However, sheep meat production will be sustained by increasing productivity in terms of lambs tailed per ewe and rising lamb carcass weights.

To September 2004, inspected lamb production is expected to fall to 408,000 tonnes carcass weight, reflecting poorer mating conditions in autumn 2003 and localised adverse lambing conditions in spring 2003. By the year ending September 2007, however, both lamb and mutton production will increase. This reflects rising productivity in terms of lambs born per ewe, hogget mating and lamb carcass weights, partially offset by a continuing fall in the sheep breeding flock.

Exports of lamb during this time mirror production trends, and out to 2007 also reflect the rising productivity from a declining national sheep flock. For the year ended September 2003 the mean London wholesale price for PM grade lamb carcasses was at an historic high of 215 pence per kg. That's up four percent on the previous year. Prices are expected to fall in the year ending September 2004 as UK sheep meat production continues to recover in the aftermath of the foot and mouth outbreak.

The upward trend in the export of higher value chilled products is expected to continue as they compete effectively with fresh domestic lamb products. In the longer term, the sheep industry will continue to benefit from increasing meat consumption in developing countries. However, the bulk of NZ's lamb and mutton exports will remain in the higher value markets of the developed countries and in particular the EU and US.

Wool

Wool exports are expected to increase in the current season, but from there are forecast to decline to 2006/07, reflecting both the expected fall in production and the growth of further processing in NZ. However, the longer term outlook for wool exports is generally encouraging.

NZ's total wool sales for the 2002/03 season, at 173,000 tonnes (clean), were similar to the previous season's levels but exports fell by 9 percent to 137 000 tonnes (clean) for the year ended June 2003 (worth $936 million). This fall was offset in part by a 16 percent rise in domestic processing of NZ wool.

Total sheep numbers fell by one percent from their estimated level of 40 million the previous year but production per head rose from 5.71 kilograms during the 2001/02 season to 5.81 kilograms in the 2002/03 season. This reflected favourable weather for most of the season.

Looking to the 2003/04 season, lower sheep numbers and a likely fall in per-head production following the poor weather over much of the country during late winter and early spring is predicted to lower production by three percent. The forecasted decline in sheep numbers through to 2006/07 will result in lower total wool production and exports.

The SONZAF report says the longer term outlook for strong wool producers is encouraging. Wool is expected to maintain its market share for carpets as well as niche markets in the fashion industry. Trade liberalisation is expected to lower the cost barriers to trade in textiles and garments. The resulting lower prices will increase demand for wool-based products compared to synthetic-based products.

Beef Production

In the year ended September 2003, provisional beef and veal exports were down 15 percent on the previous year to $1.59 billion. In dollar terms, this was a nine percent drop from the previous year, because of weaker international prices and a stronger NZ dollar.

Beef production is expected to decline by two percent (to 618,000 tonnes) to the year ending September 2004 in line with falling beef cattle numbers. Total beef cattle numbers are expected to fall from 4.34 million in June 2003 to 3.91 million at June 2006 as some land is diverted from beef to dairy, deer and forestry. In line with this, exports of beef and veal will fall but the US market quota is expected to remain fully used over the outlook period.

Trade figures for the year show that the US took 58 percent of NZ's total beef and veal exports by volume and 54 percent by value. It also took 77 percent of manufacturing beef export volumes. (Manufacturing beef, which largely comes from the slaughter of cows and bulls of dairy cattle breeds, accounted for just over half (52 percent) of total beef and veal exports.)

Although beef was exported to 83 countries, the top seven destinations accounted for 90 percent of exports by volume and 83 percent by value. Of these countries, total export values to South Korea, Taiwan, Japan and Indonesia showed a rise over the previous year reflecting rising volumes dampened by price falls. In the longer term, it is expected that the bulk of NZ's beef and veal export trade will remain solidly in the higher value markets of the developed countries, and in particular will rely on North Americans to continue to consume large amounts of burgers and other processed meats.

Organic beef production, is likely to grow in significance but will probably remain a niche market opportunity in NZ and the wealthier developed countries such as in Europe.

Kiwifruit Production

Kiwifruit grower returns jumped 27 percent per tray last year and early season estimates indicate that orchard gate returns will rise again in the year ending March 2004. However, the rises in the value of the NZ dollar have whittled away much of the overall gain in prices on export markets.

Overall kiwifruit production fell in the year ended March 2003 because of bad weather conditions (this is reflected in export earnings: in 2002 kiwifruit earned NZ $528 million; in the year ended June 2003 that had dropped to $477 million). Production did recover, however, in the current season and is expected to continue to rise slightly over the next three to four years.

The volume of kiwifruit exported to NZ's key market, Japan, jumped from 14 percent of total exports in 2001/02 to nearly 20 percent in 2002/03. Together, Japan and Europe have generated around 75 percent of kiwifruit export earnings over the past three years while Korea and Taiwan have been emerging as important countries in the growing East Asian market.

The volume of gold kiwifruit grew last year to 14 percent of the total - up from nine the previous year, while organic kiwifruit remained the single most important organic product exported from NZ.

In the long term, a big increase in production from countries such as China could have a significant influence on the world market. China is expected to be the world's largest kiwifruit grower by 2006. Other key influences in the long term will be the increasing power of the retail chains along with income growth in purchasing countries and consumer tastes and perceptions.

Apple Production

Returns to apple growers are expected to fall for the second successive year in 2003/04 but then gradually rise over the medium term as the NZ dollar depreciates. However, this fall in export carton returns could be offset this year by increased production. Apple exports to the end of June 2003 were $391 million.

NZ's apple production is forecast to continue to increase in future due to orchard expansion, new development and increased production. Apple export volumes for the 2003/04 season are forecast to increase by seven percent to 19.2 million cartons. Further on, provided that there are no long-term adverse climatic events, export volumes are due to steadily increase to 19.6 million cartons by 2006/07.

In the longer term, the report says that the NZ pipfruit industry is at a crossroads. It says there is a danger that relaxed grade standards, combined with an increased world supply of Braeburn and Royal Gala apples, and the large number of NZ exporters, could erode the premiums that NZ currently receives for its apples.

Wine

To the end of the June 2003 year, wine exports were worth $283 million to NZ, up from $252 million in the previous year. However, NZ wine producers face big challenges in the next few years as the industry becomes characterised by a doubling of export volumes combined with static consumption and world-wide oversupply. The industry is, however, well placed to capitalise on future trends towards premium and super-premium quality wine with its Pinot Noir and Sauvignon Blanc varieties.

By 2006/07 it is expected that 20,000 hectares will be under producing grape vines - that's up from 15,400 in 2003. The report says considerable investment in processing capacity and market development will be needed over the next four years to handle the increase in production.

Export volumes are forecast to increase by over 160 percent in the years to 2006/7 reaching 60 million litres. In a global market characterised by static consumption and oversupply, the challenge for NZ producers will be to maintain both their wine's reputation for quality and the high prices they currently receive.

The UK is NZ's largest market but competition from other New World wine producers has allowed UK importers to reduce prices for NZ wines. This is likely to be the first sign that global competition is a real threat to NZ exporters in their premium-priced markets.

The report says the way the industry works together to generically brand its wine along with the "clean-green" image will be an important aspect of its ability to compete successfully. It says the industry's future will be determined by how successful it is in investments in marketing, branding and promotional strategies.

SONZAF can be downloaded from the MAF website at http://www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/sonzaf/index.htm, or a hard copy can be obtained from the MAF Information Bureau (MAF's main number is 04 894 0100)

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PO Box 2526, Wellington

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