Situation and outlook for New Zealand agriculture and forestry (August 2007)
2 Agriculture and forestry from 2007 to 2011
The New Zealand dollar reached a post-float high against the United States (US) dollar in 2007, adversely affecting returns for all exporters. Nevertheless, most New Zealand dollar commodity prices have increased in the past year. We have assumed the exchange rate will remain above 70 cents to the US dollar until the middle of 2008 before depreciating.1
The high international dairy prices have more than offset the effects of the exchange rate, but other parts of the forestry and agriculture sectors have not been so fortunate.
The upside
Prices for dairy products on international spot markets have rocketed into unprecedented territory since October 2006. This has lifted expectations for the farm-gate dairy payout in the coming 2007/08 season. MAF is forecasting dairy payouts of between $5 and $5.50 per kilogram of milk solids for the next four dairy seasons, based on the expectation that international dairy prices will remain higher than prices in recent years but not as high as prices at June 2007.
Log prices have risen in recent months, benefiting forestry owners who have suffered over recent years. This is expected to be the beginning of a sustained rise in log prices.
Farm-gate prices for beef are stronger this year and have benefited from strong returns in South Korea and Japan. While international prices for New Zealand beef are expected to soften over the forecast period, returns to farmers are expected to improve as the New Zealand dollar depreciates.
International prices for major horticulture crops have been strong enough to alleviate the effect of the exchange rate. New Zealand horticulture producers’ focus on maintaining and improving already high product quality is expected to sustain international prices for New Zealand produce over the next four years.
The downside
Several timber mills have closed in recent months, caught in the combined effects of the high exchange rate, a weak US timber market, and rising log prices. Recovery is expected to be slow, with the US housing market remaining depressed for some time.
A second slaughter season of poor lamb schedule prices has resulted from static international prices and a high dollar. The outlook for lamb may become more positive, with breeding ewe numbers declining in Europe.
Sustainable development and productivity
MAF is focused on the links between sustainable development and productivity, because these two themes represent the interface between profits and the environment. The issues chapters (chapters 3 to 6) in this year’s Situation and Outlook for New Zealand Agriculture and Forestry examine the concepts underpinning the primary sector.
Sustainable development fosters ongoing change and modification of the environment so that both immediate and future needs can be met. Profitability is essential for ensuring sustainable development, because it provides a positive force to maintain and improve the resources being used.
MAF is focusing on harmonising economic growth and environmental quality. Sustainable development does not have to be a stark “win–lose” trade-off between the economy and the environment. Per capita economic growth and the environment do not have to be in conflict; rather, economic growth is needed to “purchase” more environmental quality and a better quality of life.
Productivity gains generated from the reallocation and better use of resources can take New Zealand only so far. Once efficiency gains are realised, the primary sector needs innovation and new technology to continue driving productivity gains. Our growth in productivity has been dominated by the economic reforms of the mid-1980s. We are now facing many new challenges to improving our productivity.
Ultimately, the primary sector needs innovation to generate new knowledge to allow it to expand production and productivity. We need new technology that will allow us to produce more highly valued products, and allow intensification without many of the downsides of intensification such as environmental degradation. It is clear the competitive advantages the sector has today strongly reflect the accumulation of intellectual property developed over the decades of investment in research. The consequences of any underinvestment in primary industry research and development will become apparent only a decade or two after the underinvestment.
New Zealand is changing
New Zealand has a history of rapid land use changes to take advantage of changing economic conditions. Across eastern districts of New Zealand, in places like Marlborough, Central Otago, Waipara and Wairarapa, pastoral farms and orchards have been converted into vineyards. Returns from vineyards are high compared to sheep farming, and because of this, conversions are expected to continue into the future, although in Marlborough the most suitable land is already in grapes and new plantings are on land that is frost prone or difficult to irrigate.
A third of forests harvested in 2006 were not replanted; instead, the land was converted to other uses. In Canterbury, for example, many Selwyn Plantation Board forests have been converted to farms. This change was gradual up to 2004, but dramatically increased after 2004.
Returns for plantation forest owners have reduced compared with returns to dairy and intensive sheep and beef farmers. This can be clearly seen in the central North Island and Canterbury, where the land is more suitable for conversion.
Other factors driving the current surge in land conversion include a concern on the part of some that in future some or all of the emissions costs associated with deforestation will be passed back to those undertaking this activity.
In Southland and South Canterbury, large numbers of sheep farms have been converting to dairy. Again, with the strong outlook for dairy returns, conversions from sheep and beef to dairy are likely to continue over the forecast period.
The extra $1.5 billion associated with the improved dairy outlook is extremely positive, but many issues need addressing. More dairying on the drier eastern side of the country will increase demands for water in an area where readily available water resources are already stretched. The intensification of animal numbers could decrease water quality as a result of the increased nutrient enrichment of ground waters (from increased fertiliser and animal urine) and increased bacterial loadings in waters (that is, faecal contamination). Extra dairy farming may increase New Zealand’s greenhouse gas liabilities.
Climatic conditions in New ZealandOver the summer and autumn of 2007, parts of the eastern North Island have experienced drought. Coastal areas of Gisborne and the Hawkes Bay and parts of the Wairarapa have received less than 50 percent of the average rainfall normally received from January to the end of April (see Figure 2.1). Extensive rain in June 2007 was accompanied by cooler temperatures, which limited pasture recovery. In response to the worsening conditions, farmers in these regions have de-stocked. Across the rest of New Zealand, this season’s climatic conditions have been benign. Grass growth has been good, except in the eastern North Island, helping dairy farmers produce record quantities of milk and keeping the large spring 2006 lamb crop well fed. Arable and horticultural harvests have generally gone smoothly with good yields and high-quality produce. Grape yields were an exception, being down in some areas. Figure 2.1: Climatic conditions, year ended 31 May 2007
Source National Institute of Water and Atmospheric Research and MAF. |
Dairy
Fonterra announced on 23 May 2007 that its provisional payout for the 2007/08 season will be $5.53 per kilogram of milk solids. This is a 27 percent increase on the previous season’s payout.
International prices of skim milk powder and whole milk powder have increased spectacularly in recent months. This has allowed farm-gate dairy payouts to increase. MAF is forecasting dairy payouts to remain above $5 per kilogram of milk solids over the forecast period.
Current international spot dairy prices are extraordinary and prices are expected to ease back from the current peaks. Dairy prices will ease back over the forecast period as major exporting countries increase supply and developing countries expand domestic production. New Zealand export prices in US dollars will, however, continue to increase in the longer term as rising middle-class incomes shift middle-class preferences from cereal-based foods to protein-based and higher-quality convenience foods. Demand is still growing for dairy products, and the Common Agricultural Policy reforms in the European Union mean the outlook for dairy products continues to be promising.
New Zealand dairy production is predicted to increase over the forecast period. The numbers of cows and heifers in milk are forecast to rise by an average 2.3 percent a year over the forecast period, faster than in the previous five years. Continually increasing yields per cow are expected to add to the increase in the production of milk solids.
Meat and wool
Sheep farmers have faced poor farm-gate returns for lamb and wool for the past few years. International prices for both commodities have been fairly static since the beginning of 2006. Prices for lamb pelts have declined, further decreasing lamb schedules.
International prices for New Zealand wool and lamb are expected to improve in 2007/08, but this is not expected to improve farm-gate prices significantly until the exchange rate begins to depreciate in 2008/09.
Returns for beef have been stronger than for lamb. International prices for New Zealand’s beef have been strong enough to deliver improved beef schedule prices despite the strong New Zealand dollar.
International prices for New Zealand beef are forecast to decline gradually from the current high levels over the forecast period.
The production of lamb and wool is forecast to decline as land is converted to dairy farming. Breeding ewe numbers are forecast to decline 2.3 percent a year over the forecast period. The numbers of beef cows and heifers in calf are also forecast to decline 2.1 percent a year over the forecast period.
Table 2.1: Summary of Export Prices1
Note
1. All prices are free on board.
Source Statistics New Zealand and MAF.
Forestry
International log prices have been improving since late 2006, in part because of the Russian Federation’s decision to progressively increase its log export taxes. This will contribute to a steady rise in international log prices over the forecast period and benefit the forestry sector.
Forest harvesting in New Zealand declined 16 percent between the years ended 31 March 2003 and 2006. Margins have been squeezed by relatively low international prices, a high exchange rate, and cost pressures from increasing transport and energy prices.
The increase in log prices is lifting the costs of raw materials for wood and paper manufacturers. Manufacturers are facing increasing competitive pressures, particularly from new investments in manufacturing plants in South America, Asia and the Russian Federation. The continuing weakness in the US and Australian residential markets is also hindering the industry.
The availability of wood for harvest will increase over the forecast period because of the age structure of New Zealand’s forestry estate. The increase in harvest is expected to be exported, mostly in the form of logs, because of low levels of investment in processing facilities.
Horticulture and arable
Quality is the biggest driver of success for the horticulture and arable industries. For this reason, international prices for New Zealand kiwifruit, apples, and grapes are expected to be steady, despite increasing New Zealand and world production volumes. Prices for New Zealand’s arable crops have risen and are expected to be strong because of the Australian drought, the increased demand for renewable fuel production, and the high quality of our vegetable, forage and pasture seeds.
Wine production is expected to increase strongly over the forecast period as recently established vineyards come into production and new vineyards are set up.
Kiwifruit production is expected to expand.
Apple orchardists are expected to focus on upgrading varieties.
Export values of wine are forecast to exceed kiwifruit earnings in the year ending 31 March 2008, and reach $1 billion New Zealand dollars by the end of the forecast period (see Figure 2.2).
Figure 2.2: Horticulture export values, years to 31 March, 1995–2011
New Zealand’s economic position
Several factors help to explain the recent strength in the New Zealand dollar. The weak US dollar and the large positive interest rate differential between New Zealand and some other countries, particularly Japan and the US, has encouraged the purchase of New Zealand dollar-denominated financial assets. Recent increases in commodity prices, particularly dairy, have also sustained the New Zealand dollar. The rebound in domestic demand in late 2006 and early 2007 is an additional factor supporting the New Zealand dollar.
These supportive factors are expected to persist over the short term, with the exchange rate expected to remain elevated over the year ahead. The exchange rate is expected to begin to depreciate in the quarter ending 30 June 2008.
The assumed depreciation of the exchange rate is associated with a forecast decline in the terms of trade, a narrowing of interest rate differentials (as 90-day interest rates ease in the year ending 31 March 2009, falling to an annual average of 6.3 percent in the year ending 31 March 2010), and a slowing in economic growth over the year ending 31 March 2009. (See Table 2.2.)
Table 2.2: Interest rate and exchange rate assumptions
| Actual | Forecast | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Average for year to 31 March | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| NZ 90-day interest rate (%) | 5.8 | 5.5 | 6.9 | 7.6 | 7.8 | 8.0 | 6.7 | 6.3 | 6.2 | |
| NZ 10-year interest rate (%) | 6.0 | 5.9 | 6.0 | 5.7 | 5.8 | 6.1 | 6.1 | 6.1 | 6.0 | |
| Trade weighted index | 61 | 67 | 70 | 68 | 69 | 69 | 62 | 57 | 55 | |
| One New Zealand dollar buys: | ||||||||||
| US dollar (US$) | 0.55 | 0.68 | 0.72 | 0.67 | 0.70 | 0.71 | 0.64 | 0.58 | 0.56 | |
| UK pound (UK£) | 0.34 | 0.37 | 0.38 | 0.38 | 0.36 | 0.35 | 0.32 | 0.30 | 0.30 | |
| Australian dollar (A$) | 0.93 | 0.88 | 0.92 | 0.90 | 0.89 | 0.86 | 0.79 | 0.74 | 0.72 | |
| Yen (¥) | 65 | 72 | 75 | 78 | 83 | 84 | 74 | 65 | 61 | |
| Euro (€) | 0.51 | 0.54 | 0.55 | 0.55 | 0.53 | 0.53 | 0.49 | 0.45 | 0.44 | |
Source The Treasury.
Growth in the US is forecast to slow in the next few years because of a weak housing sector and lower levels of business investment. In Australia, growth is expected to improve, despite the recent drought, because of increased consumer and business spending. The Australian mineral boom is also expected to continue. In the major European Union countries, economic prospects are steady, with Germany likely to excel. In Japan, increasing consumer spending is expected to drive modest economic growth. The rest of Asia has good prospects for growth. (See Table 2.3.)
Table 2.3: Trading partner growth
| Actual | Forecast | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||
| Year to 31 December | (Annual average % change) | (Annual average % change) | |||||||
| United States | 2.5 | 3.9 | 3.2 | 3.3 | 2.3 | 2.9 | 3.2 | 3.1 | |
| Japan | 1.5 | 2.7 | 1.9 | 2.2 | 2.2 | 2.2 | 1.2 | 1.9 | |
| Australia | 3.1 | 3.7 | 2.8 | 2.7 | 3.1 | 3.3 | 3.3 | 3.1 | |
| United Kingdom | 2.7 | 3.3 | 1.9 | 2.8 | 2.6 | 2.3 | 2.3 | 2.2 | |
| New Zealand’s top 20 trading partners |
2.9 | 4.1 | 3.5 | 3.8 | 3.6 | 3.7 | 3.5 | 3.6 | |
Source The Treasury.
Gross agricultural revenue and expenditure
Gross agricultural revenue is estimated to have risen 12 percent to $19 billion for the year ended 31 March 2007. This has been driven primarily by rises in dairy prices and volumes, with smaller increases in revenue from horticulture and meat. (See Table 2.4.)
Prices of farm inputs have increased 6 percent over the past two years. Despite farmers reducing the overall quantity of farm inputs, the value of expenditure on inputs (as measured by intermediate consumption) has continued to rise. Recent data show farm expense inflation slowing. Therefore, with the high New Zealand dollar, prices for imported farm inputs should fall.
Increases in interest paid have been driven by rapid increases in the amount of credit extended to agriculture and in the interest rate.
Forecasts for the coming years are positive, with growth in agricultural income of 5 percent from the year ended 31 March 2007 to the year ending 31 March 2008, and 24 percent to the year ending 31 March 2009. This growth is the result of the assumed falling exchange rate, firm international prices, and increases in volume, particularly from the dairy industry.
Table 2.4: Gross agricultural revenue and expenditure
| Estimate | Forecast | |||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | ||
| Year to 31 March | ($ mil) | ($ mil) | ($ mil) | ($ mil) | ($ mil) | ($ mil) | ($ mil) | |
| Dairy | 5 518 | 5 101 | 6 298 | 7 704 | 8 310 | 8 110 | 8 748 | |
| Cattle | 2 209 | 2 160 | 2 270 | 2 116 | 2 218 | 2 431 | 2 568 | |
| Sheepmeat | 1 821 | 1 868 | 2 120 | 1 912 | 2 156 | 2 329 | 2 406 | |
| Wool | 586 | 544 | 560 | 562 | 609 | 647 | 681 | |
| Deer | 187 | 210 | 256 | 249 | 295 | 341 | 358 | |
| Poultry/eggs | 137 | 135 | 144 | 148 | 150 | 153 | 156 | |
| Pigs | 157 | 164 | 170 | 174 | 178 | 178 | 177 | |
| Other farming | 230 | 221 | 244 | 239 | 258 | 284 | 300 | |
| Sales of live animals | 789 | 849 | 928 | 851 | 926 | 1 007 | 1 052 | |
| Value of livestock change | – 77 | 254 | 8 | – 7 | 13 | 15 | 8 | |
| Fruit | 1 336 | 1 304 | 1 473 | 1 616 | 1 732 | 1 940 | 2 090 | |
| Vegetables | 739 | 715 | 829 | 850 | 848 | 829 | 804 | |
| Other horticulture | 276 | 278 | 322 | 330 | 330 | 322 | 313 | |
| Crops and seeds | 74 | 364 | 392 | 406 | 437 | 473 | 503 | |
| Agricultural services | 2 433 | 2 622 | 2 807 | 2 991 | 3 176 | 3 361 | 3 545 | |
| Non-farm income | 221 | 210 | 224 | 247 | 262 | 267 | 278 | |
| Total gross revenue | 16 936 | 16 999 | 19 047 | 20 388 | 21 897 | 22 686 | 23 987 | |
| Intermediate consumption | 9 218 | 9 313 | 10 386 | 11 111 | 11 947 | 12 385 | 13 084 | |
| Contribution to gross domestic product |
7 718 | 7 686 | 8 661 | 9 277 | 9 950 | 10 301 | 10 903 | |
| Wages | 1 949 | 1 975 | 2 001 | 2 023 | 2 048 | 2 071 | 2 092 | |
| Depreciation | 1 222 | 1 298 | 1 383 | 1 502 | 1 623 | 1 668 | 1 770 | |
| Net indirect taxes | 438 | 485 | 546 | 586 | 630 | 653 | 692 | |
| Operating surplus | 4 109 | 3 928 | 4 730 | 5 166 | 5 648 | 5 909 | 6 349 | |
| Interest paid | 1 730 | 2 108 | 2 479 | 2 795 | 2 645 | 2 495 | 2 566 | |
| Interest received | 165 | 174 | 181 | 191 | 168 | 153 | 149 | |
| Agriculture sector income | 2 544 | 1 994 | 2 433 | 2 562 | 3 172 | 3 568 | 3 933 | |
Source Statistics New Zealand and MAF.
1 Exchange rate assumptions were prepared by Treasury for their 2007 budget forecasts.
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