Situation and Outlook for New Zealand Agriculture and Forestry (August 2008)
2 Agriculture and forestry from 2008 to 2012
From 2008 to 2012
Record international dairy prices have been a major source of economic growth for the New Zealand economy. In the year ended 31 March 2008, export earnings for agriculture and forestry grew by 8.4 percent to $23 billion.
Prices for most of our forestry and agricultural goods in overseas markets are buoyant. However, New Zealand producers are up against a strong New Zealand dollar, rising costs and the effects of the recent drought.
Price buoyancy
After booming in 2007, dairy prices hit their peak in early 2008. Meat prices were left behind but have improved this year. Log prices have been strong since the beginning of 2007.
Figure 2.1: Prices for New Zealand’s major forestry and agricultural commodities in international markets, 2003–2008
Notes
1. USD – United States dollars.
2. UKP – United Kingdom pound.
3. CIF – Cost, insurance and freight, or charged in full. The seller of the goods must pay the costs of carriage to the seaport of destination specified in the contract.
Sources US Department of Agriculture, Meat Industry Association, Meat & Wool New Zealand and Pacific Forest Products.
The upward shift in prices across these commodities is part of a wider rise in commodity prices. Oil, metals and grains have all gone up in price. A major driver, common to all of these, is strong demand from China, India and other rapidly developing economies. Because of the pace of change in these countries, and their sheer scale, the size of this new demand for commodities is unprecedented.
The drought
A significant drought affected many regions of New Zealand throughout the summer and autumn of 2008. The dry conditions spread around the country and can be attributed to the La Niña weather pattern (El Niño droughts tend to affect New Zealand’s eastern regions).
Rain throughout March in most of the South Island and throughout April in much of the North Island alleviated the situation somewhat. However, there wasn’t sufficient pasture cover over many parts of the country going into winter and this has exacerbated feed shortages.
Farmers had few management options when responding to the drought. Supplementary feed and fertiliser prices were high, transport costs had escalated and grazing in other regions was limited. Meat processing capacity was low and prices at the saleyards were uneconomic.
Significant flow-on effects are likely for the next two to three financial years due to animals in poorer condition going into the spring. Farmers have reduced capital stock numbers and, in 2008, lambing percentages will be lower and wool weights will be down.
Figure 2.2: New Zealand climatic conditions, comparing historical with year ended 31 May 2008
Source National Institute of Water and Atmospheric Research (NIWA).
Strong New Zealand dollar
In July 2007, the New Zealand dollar (trade weighted against a basket of currencies) hit its highest level since it was floated in 1985. Exporters with markets in Europe and Australia have been less affected than those selling into the US or Asia, as the US dollar and the Yen weakened considerably against the Euro and Australian dollar. The rise in the New Zealand dollar has been fuelled by New Zealand’s strong economic growth and higher interest rates.
The New Zealand dollar is assumed to depreciate gradually against other major currencies over the next four years. However, on this assumed track, significant relief for orchardists, farmers and forest owners does not arrive until well into 2009.
Rising costs
Increases in commodity prices have also pushed up costs for local producers. The farm expense price index rose by 5.5 percent over the year ended 31 March 2008. Fuel, freight, animal feed, fertiliser prices and interest rates all had rises of more than 7 percent. In forestry, high shipping rates eroded much of the gains from in-market prices for log exporters.
Higher grain prices affected the cost of animal feed at a time when the drought meant farmers had to use extra supplementary feed. Fertiliser prices ratcheted up, with farm-gate urea prices rising nearly 40 percent to $720 per tonne for the year ended 31 March 2008. Strong global demand is expected to increase fertiliser prices on international markets.
The strong New Zealand dollar has provided a buffer from high imported oil and fertiliser prices. However, an assumed depreciation in the currency may change this.
On top of higher prices, interest rates rose in 2007. Rates reached their highest level in a decade as the Reserve Bank of New Zealand reacted to inflation pressures in the economy.
The amount of credit extended to the agricultural sector grew at 15 percent per year between 2001 and 2007. The large sums of money needed to establish new dairy farms have contributed to the demand for more borrowing. Interest payments have increased as a result of both high interest rates and the volume of credit extended.
Climate change and the future
Later this century, climate change is likely to mean the west of the country will become wetter, the east drier and the whole of New Zealand will become warmer. A recent report commissioned by MAF (see chapter on A Changing Climate) suggests that effects on agricultural production, in average years, will be small when balanced across the country. However, there are differences between the regions. For instance, production (in average years) will increase in Southland and on the west coast of the South Island, but decrease in some east coast areas of the South Island and also in Northland.
Droughts are expected to occur more frequently. Land management practices will need to evolve to adapt to these changes. Seasonal changes may mean that pasture drying starts earlier and farmers might choose to send lambs to the works sooner.
Fuel prices
In 2007, inflation-adjusted New Zealand fuel prices reached levels not seen since 1985.
Rapid economic growth in developing economies, such as China and India, has pushed up demand for oil. This and political instability, which can disrupt the extraction of oil, have put pressure on the price.
Figure 2.3: Real New Zealand retail fuel prices, years ended 31 March 1976–2008
Notes
1. GST – Goods and Services Tax.
2. Data not available in some quarters.
Source Ministry of Economic Development.
Trade with China
China’s burgeoning economic growth is probably the most significant economic event of recent decades. In serving as the workshop of the world, China has helped reduce the prices of manufactured goods. However, Chinese demand is now a factor pushing up prices of commodities.
On 7 April 2008, New Zealand became the first developed country to sign a free trade agreement with China. China is New Zealand agriculture and forestry’s fourth largest export market and has been increasing in importance as the Chinese economy grows. Trade barriers on a range of New Zealand agricultural and forestry products will come down.
Trading partner growth
The turmoil created from the exposure of US financial institutions to sub-prime mortgages, and the subsequent risk of credit downgrades, has increased the need for banks to raise and hold higher amounts of capital. Large losses have also been announced by European financial institutions. This risk-adverse climate has tightened the availability of credit, and risk premiums have increased. In turn, growth forecasts for a number of the world’s economies have been downgraded. The annual average economic growth rate of New Zealand’s top 20 trading partners is expected to ease significantly from 4.0 percent in the year ended 31 December 2007 to 3.0 percent in 2008, before showing a modest improvement over 2009.
Table 2.1: Trading partner growth (annual average percentage change), 2005–2011
| Year to 31 December | Actual | Forecast | |||||
|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
| (Annual average % change) | (Annual average % change) | ||||||
| United States | 3.1 | 2.9 | 2.2 | 1.0 | 1.7 | 2.7 | 2.7 |
| Japan | 1.9 | 2.4 | 2.0 | 1.1 | 1.3 | 1.6 | 1.8 |
| Australia | 2.8 | 2.8 | 3.9 | 3.0 | 3.1 | 3.4 | 3.3 |
| United Kingdom | 1.8 | 2.9 | 3.0 | 1.5 | 1.6 | 2.6 | 2.6 |
| Euro area1 | 1.6 | 2.9 | 2.6 | 1.2 | 1.6 | 2.0 | 2.0 |
| New Zealand’s top 20 trading partners | 3.4 | 3.8 | 4.0 | 3.0 | 3.2 | 3.6 | 3.6 |
Note
1. Euro area refers to the 12 countries using the Euro currency.
Source The Treasury.
New Zealand’s economic position
Real gross domestic product (GDP) growth is expected to fall from 3.1 percent in the year ended 31 March 2008 to 1.5 percent the following year. This is due to the combined effect of the drought, high interest rates, falling house prices, and higher petrol and food prices. Tax cuts will provide some offset by increasing disposable incomes. In the year ending 31 March 2010, a post-drought recovery will contribute to 2.3 percent real GDP growth. Then, in 2011, real GDP growth is forecast to rebound to around 3 percent per year, with exports boosted by a falling exchange rate.
The Treasury’s 2008 Budget Economic and Fiscal Update forecasts assume the exchange rate will fall by around 20 percent over the next four years. The biggest falls are expected in 2009 and 2010. The Treasury bases this assumed decline on a projected fall in soft commodity prices and a slowing in the New Zealand economy and a return to longer-run average levels. Another factor is reducing interest rate differentials when compared with rates in the US and Japan (interest rates are likely to rise in these economies as they recover from weak economic growth, while rates in New Zealand are likely to be lowered).
Table 2.2 shows interest and exchange rate forecasts from the Treasury’s 2008 Budget Economic and Fiscal Update.
Table 2.2: Interest and exchange rate assumptions, March quarter average 2005–2012
| Average for year to 31 March | Actual | Assumed path | ||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
| NZ 90-day interest rate (%) | 6.9 | 7.6 | 7.8 | 8.8 | 8.5 | 7.9 | 7.9 | 7.2 |
| NZ 10-year interest rate (%) | 6.0 | 5.7 | 5.9 | 6.3 | 6.3 | 6.3 | 6.2 | 6.1 |
| Trade weighted index | 70 | 68 | 69 | 72 | 69 | 63 | 59 | 57 |
| One New Zealand dollar buys: | ||||||||
| US dollar (US$) | 0.72 | 0.67 | 0.70 | 0.79 | 0.75 | 0.69 | 0.65 | 0.62 |
| UK pound (UK₤) | 0.38 | 0.38 | 0.36 | 0.40 | 0.39 | 0.36 | 0.35 | 0.34 |
| Australian dollar (A$) | 0.92 | 0.90 | 0.89 | 0.87 | 0.85 | 0.80 | 0.76 | 0.74 |
| Yen (¥) | 75 | 78 | 83 | 83 | 78 | 71 | 66 | 62 |
| Euro (€) | 0.55 | 0.55 | 0.53 | 0.53 | 0.50 | 0.45 | 0.42 | 0.39 |
Source The Treasury.
Dairy
New Zealand’s dairy industry is prospering. In inflation-adjusted terms, payouts have reached a 43-year high and a portion of these gains is likely to persist into the future.
Milk solids production was down 3.2 percent for the year ended 31 May 2008 due to the drought. However, if growing conditions return to normal, this should prove a temporary setback. The number of cows and heifers in milk is increasing – up 0.4 percent at 30 June 2007. Steady growth in the number of dairy cows and the yield of milk per cow is expected over the next four years. After recovery from the drought, growth in milk solids production of 3 percent per year is expected.
Other trends include a southern shift. Growth is entirely in the South Island and at the expense of lamb finishing. In contrast, the number of dairy cattle in the North Island is falling due to competition for the land from other non-pastoral and lifestyle uses.
Meat and wool
Large scale de-stocking is underway in New Zealand’s sheep industry. The catalysts include the drought, but to a greater extent poor lamb and wool farm-gate prices are encouraging conversion to more profitable dairy farming. Lamb production is expected to decline in coming years. This is creating excess meat processing capacity and, as a consequence of this, the Oringi and Burnside meat processing plants closed down in May 2008. More closures may follow.
The outlook for red meat prices in overseas markets is positive. Lamb prices are rising from low levels in New Zealand’s European markets, while beef prices have been strong for several years.
Animal disease problems in the US and United Kingdom (UK) have created significant opportunities for New Zealand meat producers. This has been the case in Northeast Asian beef markets since 2003 and in European lamb markets briefly in late 2007.
Forestry
Export volumes and revenues of forestry products have been flat since the year ended 31 March 2003. With low returns, New Zealand’s forestry sector is not harvesting and processing all of the available resource. Some forests in the central North Island have been converted to farmland, although this has slowed, pending the passage of legislation on the Emissions Trading Scheme.
With the New Zealand dollar expected to depreciate in 2009 and beyond, harvest of New Zealand’s forest resource is forecast to increase.
High shipping rates and exchange rates are eroding good prices for logs in international markets. However, the outlook for log prices is positive. Demand is increasing in China and India and supply from competitors is constricted somewhat.
Demand for timber and panel products is falling internationally as housing booms unwind in many countries. The high exchange rate has compounded sluggish demand, squeezing processors.
Longer term, New Zealand’s exotic forest resource is increasing, as New Zealand’s Pinus radiata plantations mature. Another feature of forestry is its more prominent role providing environmental services, for example, carbon sequestration, which will result in a more diverse forestry estate.
Horticulture
Growing conditions were good for New Zealand’s main horticultural crops. In the year ended 31 March 2008, export volumes of wine, kiwifruit and apples each rose by more than 12 percent. For all crops, prices in foreign markets were relatively steady. However, the robust New Zealand dollar has curbed export earnings and grower returns.
Overall, our horticultural sector is projected to grow. Higher export earnings will be due mainly to more land being used for viticulture and rising export volumes of wine and kiwifruit.
Food crisis
In parts of the world where grains form a large part of the diet and overall expenditure, high grain prices are creating an acute humanitarian problem. Estimates by the World Bank suggest that up to 100 million people may be pushed deeper into poverty.
Already, there have been changes to trade and agricultural policies in response to this situation. In the hope of reducing prices for domestic consumers, some countries have reduced import tariffs on agricultural commodities, while others have imposed export taxes. Tariff reductions reduce market distortions and encourage investment in the world’s more productive agricultural systems. In contrast, export taxes have exacerbated the supply shortage on international markets.
Agricultural productivity is especially pertinent in 2008, in light of high prices and the projected rise in the world’s population from 6.6 billion to 8.3 billion by 2030. The Green Revolution of the 1950s, 1960s and 1970s – a package of new hybrid seeds, irrigation and chemical fertilisers – lifted agricultural productivity and yields in many parts of the world. Globally, this type of progress must continue if growth in agricultural productivity is to continue to outstrip population growth.
Arable
Grain prices have risen dramatically in 2007 and 2008. Over the year ended 31 May 2008, prices for internationally traded wheat rose by 56 percent. New Zealand’s arable sector is relatively small and price rises like this are a boon. Other internationally traded grain prices have increased too: corn by 51 percent, soybeans by 70 percent and rice by 219 percent.
Domestic productivity
In the longer term, productivity is what determines New Zealand’s economic growth and competitiveness internationally. Productivity improvements can help achieve a broad range of objectives. For example, more efficient use of nitrogen fertiliser increases agricultural productivity and reduces nitrate leaching and run-off.
Multi-factor productivity is a measure of how efficiently the inputs of a firm, sector or economy are being used to produce outputs. All inputs and outputs are included in the measure. Examples of inputs are labour, capital, energy, fertiliser and land. Multi-factor productivity is also more comprehensive than commonly used partial measures of productivity, such as lambs born per ewe or milk solids produced per tonne of greenhouse gas emitted.
Over the last 10 years, agricultural sector multi-factor productivity has grown at a rate of 1.8 percent per year, forestry and logging by 0.7 percent, and food and beverage manufacturing by 1.1 percent, while wood and paper manufacturing productivity has contracted -0.1 percent.
For the wider New Zealand economy, multi-factor productivity grew by 0.9 percent per year over the same period.
Figure 2.4: Agriculture and food, beverage and tobacco manufacturing productivity, years ended 31 March 1978–2005
Sources Statistics New Zealand and MAF.
Figure 2.5: Forestry and logging and wood and paper product processing, years ended 31 March 1978–2005
Sources Statistics New Zealand and MAF.
Gross agricultural revenue and expenditure
The situation within individual sectors of New Zealand agriculture can differ markedly. Gross agricultural revenue at the farm gate is estimated to have risen by 6.4 percent during the year ended 31 March 2008. This is due to the increase in dairy revenue being greater than the decrease in meat and wool revenue.
However, the amount of interest paid by the agricultural sector rose by more than 30 percent in the year ended 31 March 2008. As a result, agricultural sector income – an aggregate measure equivalent to the overall agricultural sector’s farm-gate profitability – is estimated to have gone down.
In coming years, agricultural sector income is forecast to improve. This is due to dairy gross revenue remaining strong, a recovery in farm-gate meat prices, a depreciating exchange rate and falling interest rates keeping a lid on interest payments.
Table 2.3: Gross agricultural revenue and expenditure, year to 31 March 2006–2012
| Year to 31 March | Estimate | Forecast | |||||
|---|---|---|---|---|---|---|---|
| 2006 ($ mil) |
2007 ($ mil) |
2008 ($ mil) |
2009 ($ mil) |
2010 ($ mil) |
2011 ($ mil) |
2012 ($ mil) | |
| Dairy | 4 642 | 5 182 | 6 461 | 7 426 | 6 457 | 6 713 | 7 336 |
| Cattle | 2 078 | 2 184 | 1 879 | 2 037 | 2 303 | 2 565 | 2 722 |
| Sheep meat | 1 742 | 1 748 | 1 666 | 1 770 | 1 880 | 2 034 | 2 059 |
| Wool | 545 | 526 | 471 | 465 | 520 | 569 | 609 |
| Deer | 210 | 255 | 251 | 286 | 307 | 338 | 373 |
| Poultry/eggs | 135 | 143 | 148 | 150 | 152 | 154 | 156 |
| Pigs | 164 | 166 | 165 | 166 | 168 | 170 | 171 |
| Other farming | 171 | 208 | 189 | 202 | 222 | 244 | 253 |
| Sales of live animals | 1 006 | 1 162 | 1 054 | 1 131 | 1 240 | 1 361 | 1 411 |
| Value of livestock change | 85 | 91 | –12 | 15 | 13 | 12 | 7 |
| Fruit | 1 449 | 1 452 | 1 592 | 1 841 | 2 016 | 2 206 | 2 364 |
| Vegetables | 715 | 715 | 740 | 697 | 763 | 823 | 868 |
| Other horticulture | 278 | 280 | 290 | 273 | 299 | 322 | 340 |
| Crops and seeds | 334 | 398 | 506 | 654 | 619 | 650 | 678 |
| Agricultural services | 2 879 | 3 055 | 3 304 | 3 554 | 3 803 | 4 052 | 4 302 |
| Non-farm income | 205 | 218 | 222 | 219 | 229 | 236 | 241 |
| Total gross revenue | 16 638 | 17 783 | 18 926 | 20 888 | 20 991 | 22 450 | 23 891 |
| Intermediate consumption | 9 690 | 10 348 | 10 696 | 11 886 | 12 032 | 12 817 | 13 574 |
| Contribution to GDP1 | 6 948 | 7 435 | 8 230 | 9 002 | 8 959 | 9 633 | 10 317 |
| Wages | 2 062 | 2 156 | 2 219 | 2 314 | 2 424 | 2 533 | 2 637 |
| Depreciation | 1 320 | 1 421 | 1 469 | 1 649 | 1 654 | 1 762 | 1 881 |
| Net indirect taxes2 | 472 | 521 | 562 | 617 | 614 | 661 | 709 |
| Operating surplus | 3 197 | 3 336 | 3 980 | 4 422 | 4 267 | 4 677 | 5 090 |
| Interest paid | 2 144 | 2 555 | 3 359 | 3 719 | 3 444 | 3 644 | 3 636 |
| Interest received | 189 | 197 | 223 | 226 | 210 | 207 | 193 |
| Agricultural sector income | 1 242 | 978 | 844 | 930 | 1 033 | 1 240 | 1 647 |
Notes
1. GDP – gross domestic product.
2. Net indirect taxes are indirect taxes less subsidies.
Sources Statistics New Zealand and MAF.
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