1.0 Introduction
Forecast timing and assumptions
MAF Policy provided forecasts and projections for major pastoral, horticultural and forestry export products to the Treasury on 28 March 2003 as input into their Budget Economic and Fiscal Update. The outlook period is out to 2008. Some adjustments have been made to the original forecasts including provisional export data and production data for March quarter 2003.
The forecasts are based on macroeconomic assumptions as at 18 March 2003. (See appendix for selected macroeconomic variables.) An environment of exchange rates above those of recent years, and moderate inflation rates and interest rates is assumed for the New Zealand economy. International assumptions for growth, interest and inflation rates are those compiled by Consensus Forecasts of the United Kingdom (UK) in their March 2003 edition.
Deriving exchange rate assumptions is always a difficult task. To the extent that these assumptions understate the actual outcome (a possible downside risk) export and producer prices will be lower than forecast. Indicative effects of a 10% movement in product-related exchange rate assumptions are set out in the appendix.
Statistics New Zealand (SNZ) released their provisional results from the June 2002 Agricultural Production Census in late February 2003. These results ensured a better base for the projection of livestock numbers over the outlook period.
International shocks
On the international scene, the key influences and shocks have been:
- the flow on effects on demand and growth in the US and Asia of the terrorist attack on the World Trade Centre September 11th 2001
- market uncertainty in the lead up to the Iraqi war
- a slower recovery than expected in world economic growth
- the NZD appreciation against the major trading currencies.
While not explicitly considered in these forecasts, severe acute respiratory syndrome (SARS) outbreak is currently impacting tourist and travel industries, with short term flow on effects to the demand for New Zealand's exports of agricultural products. The discovery of bovine spongiform encephalopathy (BSE) in one cow in Canada in late May 2003 will cause some North American beef market uncertainty in the short term.
Climate
For the year ending June 2003, there have been two very significant climate impacts after a winter and early spring period that was reasonably favourable for livestock farming. These events were a widespread cold-wet/cold-dry spring and a summer/autumn drought in some regions.
In October and November average temperatures dropped 1.2 degrees and 0.7 degrees, respectively, from the average of the last 30 years. Pasture growth was adversely impacted just when feed demand was rising, particularly for dairy cows in milk and ewes with lambs at foot. Fruit crops also suffered significant hail damage from two separate events in October 2002. As a consequence, export volumes are estimated to be down 6% for apples and 8% for kiwifruit, and the grape harvest fell by 50%.
The National Institute of Water and Atmospheric Research (NIWA) predicted a mild to moderate El Nino climate event. MAF Policy's own assessment supported this. In a typical El Nino event drier-than-average conditions can be expected in eastern and northern regions of both Islands, particularly in the summer/autumn period. Conversely, wetter than average conditions can be expected in western and southern regions. However this year, while eastern regions were moderately drier-than-average, western North Island regions from Taranaki to Wellington experienced severe drought conditions. Historical records show a similar occurrence in the year ended June 1970.
The lower North Island drought has had a major impact on milksolids production, with national production expected to be only 2.5% up on last year despite a 3% increase in the national milking herd. Average slaughter weights per head were down on last year for adult cattle in February and March 2002, for adult sheep in March and April and for lambs in March. There will be some carry over impacts to next season. Lamb births are expected to be down. Given the current conditions of female breeding livestock in drought areas, a warmer than average winter will be a critical factor in defining next season's production potential.
Climate has little effect on forestry production. Overseas demand drives export production.
The following two graphs (Figures 2 and 3) show the monthly days of soil moisture deficit (DSMD) for New Zealand and the drought areas from Wellington to Taranaki, for years ended June. DSMD occur predominantly between October and May. The monthly series are for June years 2002, 2003 (October to April), and long run averages. DSMD is a measure of drought. A day of soil moisture deficit occurs when pasture growth is restricted due to insufficient availability of soil moisture.
It is impossible to forecast climate for the year ended June 2004 year and beyond, and the normal practice is to assume average climate conditions over the forecast period. Global climate models are projecting a weakening of the El Nino climate pattern over the next few months. Early indications of next year's climate may be gauged from the Southern Oscillation Index (SOI) values over the coming winter. The SOI is a measure based on the pressure gradient between Darwin and Tahiti.
Forecasting process
The forecasting process used for the majority of products from the agriculture and forestry sectors involves:
- forecasting international product price trends using econometric and spreadsheet based models along with some industry consultation
- translating international product prices to the FOB/farm/orchard level
- forecasting the supply (production) response
- deriving export volumes and values from total production and price forecasts
- deriving gross agricultural revenue and expenditure, and taxable income.
Contact for further information:
Rod Forbes
Phone: (04) 474 4222
Email: rod.forbes@maf.govt.nz
