Arable

Outlook for 2003/04 to 2006/07

Production

Latest situation and outlook

Cereal area is expected to continue to slowly decrease over the outlook period. However, total production is likely to be maintained due to improved productivity. Demand for feed grains is likely to remain strong.

The small seeds industry will continue to produce high quality seeds for the New Zealand pastoral industry and for export markets. New Zealand has a comparative advantage in high value vegetable seed production that will continue to steadily increase in significance. Dairy farms and cropping farms have developed an integrated relationship that will continue to strengthen.

The sector is essentially forecast to hold its current output of crops from a decreasing area of crops grown. The exchange rate has an influence on prices and output over time, but is likely to be a smaller impact than the sometimes wild fluctuations in global supply and demand that occur in the arable industry from year to year or within a growing season. The factors that influence this are the weather, political involvement, the ease of substitution of annual crops and the generally tight supply situation.

Significant changes from SONZAF 2003, and reasons for the changes

The production of wheat and barley is lower for the 2003/04 year than estimated in SONZAF 2003. However, production over the forecast period will remain as estimated in SONZAF 2003.

Cereal production was badly affected by hot dry weather in late December and early January, followed by a wet February. Yield and quality were both down, resulting in 60 percent of milling wheat being downgraded to feed uses. Other crops were affected to a lesser but still significant degree. Together, these climatic events along with some less significant exchange rate effects, wiped approximately $30 million from the total output of the arable industry. Had these climatic events occurred in reverse order, the harvest may have been one of the best on record!

The New Zealand market, imports, exports and product prices

Latest situation and outlook

Despite the downgrade of much of the milling wheat to feed grade following the 2003/04 harvest, the feed market is steady as barley is in relatively short supply. The overhang of feed wheat will act to steady feed prices over the next six to nine months. In the outlook period, the industry will continue to adjust between grain and seed crops, pastoral and vegetable production depending on the relative returns for these land-uses. The strength of the pastoral industry in New Zealand continues to underpin much of the arable industry via seed and feed purchases.

Imports of milling wheat to replace the downgraded crop during 2004 will need to be 30,000-60,000t greater than was initially planned. Due to Australia's good harvest in 2003, there is not expected to be any difficulty in importing milling wheat at prices comparable to previous years.

Exports of small seeds are likely to be back on what they would have been if the weather had been more kind. However, compared with the rest of the world, New Zealand fared relatively better than some of its competitors in 2003 and therefore remains a preferred producer of these crops. France, for example, suffered several months of extremely hot weather during its last summer that severely impacted on its vegetable seed production.

The medium term outlook for world wheat prices has been revised downward between March 2003 and March 2004, but the reasons for this are not clear as there remains a very low stocks to use ratio. The volatility in response to supply variations is therefore likely to remain a feature of the world cereal markets.

Significant changes from SONZAF 2003, and reasons for the changes

Cereal prices have fallen but not by as much as was expected in November 2003. An overhang of cereal on the New Zealand market from the 2002/03 harvest was absorbed quickly as the dry conditions in early summer began to bite. Dairy farmers had been noticeably absent from this market until then.

Producer prices

Latest situation and outlook

Wheat contracts recently released show about a 5 percent drop in contract prices compared to 2003/04. Recent volatility in the world cereal futures prices and the competition for land in New Zealand has helped to keep this fall in prices modest, although still disappointing to growers. Small seed prices are variable, with some prices holding or even rising, while for others there is some oversupply.

For the outlook period, prices are expected to be volatile around a falling real price trend. This is a continuation of the historic trend.

Table 13: Arable situation and outlook

June year Units 2002 2003 2004e 2005f 2006z 2007z
Wheat              
Production 000t 301 321 287 313 310 307
World Prices USD/t 128 160 155 145 137 131
NZ contract price NZD/t 295 340 310 295 285 280
Barley              
Production 000t 441 378 342 314 288 287
World Prices AUD/t 106 126 112 110 111 113
NZ contract price NZD/t 280 250 230 220 220 210
Maize              
Production 000t 149 187 170 172 173 175
World Prices USD/t 92.5 110 99.0 99.0 100 103
NZ contract price NZD/t 293 309 280 265 292 308
NZD/USD baseline scenario USD 0.431 0.522 0.639 0.659 0.621 0.578

Sources: Statistics New Zealand, FAPRI, ABARE, and MAF

Figures may not add or reconcile due to rounding.

Significant changes from SONZAF 2003, and reasons for the changes

Specific changes from SONZAF 2003 include falling real wheat prices over the outlook period, and generally lower prices for maize and barley.

As reported in SONZAF 2003, contract prices for the 2003/04 crop were down on the previous year, due to a higher NZD and a declining world price outlook. Since then, the USD has risen somewhat more than anticipated, and there has been some short term volatility on the world market. The latter appears to be related to uncertainty about the size and quality of Chinese cereal production, emerging dry conditions in North America and general rises in the cost of protein feeds.

Alternative exchange rate scenario analysis

Over time, the New Zealand contract milling wheat price closely follows the average price of US Hard Red Winter wheat from the previous year. So by obtaining the world wheat price outlook and varying the NZD/USD exchange rate, a range of New Zealand grower prices in the medium term can be estimated.

Using the high exchange rate scenario, the world wheat price would be $6-$15 lower than the baseline forecast during the forecast period. Conversely, using the low exchange rate scenario, it would be $4-$17 higher. For this analysis it is assumed the relationship of world wheat prices to New Zealand prices for all crops is the same as for wheat and there are no other influences from the different exchange rate scenarios.

Table 14: Arable contract prices: baseline and alternative exchange rate scenarios

June year Units 2002 2003 2004e 2005f 2006z 2007z
NZ contract prices - baseline exchange rate scenario              
NZD/USD USD 0.431 0.522 0.639 0.659 0.621 0.578
Wheat NZD/t 295 340 310 295 285 280
Barley NZD/t 280 250 230 220 220 210
Maize NZD/t 293 309 280 265 292 308
NZ contract prices - higher exchange rate scenario              
NZD/USD USD 0.431 0.522 0.643 0.679 0.631 0.592
Wheat NZD/t 295 340 310 295 270 275
Barley NZD/t 280 250 230 210 200 200
Maize NZD/t 293 309 280 252 273 300
NZ contract prices - lower exchange rate scenario              
NZD/USD USD 0.431 0.522 0.636 0.623 0.555 0.538
Wheat NZD/t 295 340 310 295 295 297
Barley NZD/t 280 250 230 230 230 230
Maize NZD/t 293 309 280 269 305 332

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