Future Water Allocation Issues

Appendix 1: Sector Situation and Outlook Report
Summary of New Zealand's Agricultural Sectors
Sheepmeats
Beef
Wool
Deer
Dairy
Forestry
Kiwifruit
Apples
Other fruit and vegetables
Viticulture

8 Appendices

The appendices to this document include the following and are contained in a separate document.

Appendix 1: Market prospects: Sector Situation and Outlook report
Appendix 2: Regional matrix
Appendix 3: Sector landuse change projections to 2010 by region

Appendix 1: Sector Situation and Outlook Report

Summary of New Zealand's Agricultural Sectors

The focus has been on providing an overview of the competitive position of each sector and the key production, market and price trends, along with comment on future prospects for the sector.

A summary of the key points for each sector highlights the following:

Sheepmeats

New Zealand exports account for 54 percent of world sheepmeat trade
A strong history and reputation are enjoyed in the market place
There are several areas of competitive advantage which place NZ in a strong position for the future
Global supply is declining
Farm gate prices have increased in real terms over the past 10 years and this trend is expected to continue.

Beef

NZ beef exports account for less than two percent of world trade - NZ beef exporters do not enjoy the same scale advantages as their sheepmeat counterparts.
Supply and market price are susceptible to seasonal fluctuations
NZ is dependant on limited markets (North America > 70 percent) for manufacturing beef
There are few opportunities to differentiate our product
Farm gate prices have trended downwards over the past 10 years, governed largely by the influence of the US cattle cycle. Prices will continue to fluctuate with a volatile industry and little influence over the markets
Short term prospects for beef are reasonable, however in the longer term there is considerable uncertainty. Mad cow disease could be a positive "wildcard" while the Foot & Mouth situation in the UK may also present opportunities for NZ. Added to this is the development of Lean Finely Textured Beef (LFTB) (a product derived from 50CL domestic trimmings in the USA) which is establishing itself in the US manufacturing beef market in competition with lean imported beef from NZ and Australia

Wool

NZ production has fallen considerably over recent years with the decline in sheep numbers and will continue to do so with a shift towards a greater focus on meat production
NZ wool makes up about 0.4 percent of the world fibre market and faces strong competition from synthetic fibres and cotton
Wool prices have declined by between 3 and 6 percent per annum in real terms over the past 20 years
Any increases in price are likely to be relatively small and dependant on niche marketing of product
Revenues from crossbred wool will continue to fluctuate however it is a co-product of sheepmeat and is still a significant income earner.

Deer

Despite some periods of market volatility the deer farming industry has seen considerable growth since the early 1980's
Prices for venison and velvet have trended downwards over the past 10 years, however are still at a level that sees deer farming as a very profitable option (relative to other livestock options) and at the upper end of Economic Farm Surplus (EFS) profit analyses.
NZ accounts for around one half of world farmed deer and enjoys scale efficiencies
The industry continues to be in a growth phase with the national herd increasing by an average of 11 percent per annum for the past three years
Venison markets are at the high value end and compete with high value lamb, beef and seafood on restaurant menus.
Both venison and velvet products have a heavy dependence on single markets (Germany and Korea respectively). Development of alternative markets is crucial for sustainable industry growth
Growth in the neutraceuticals markets and the use of velvet as a natural health product suggest the longer term prospects for velvet are good.

Dairy

NZ is a dominant player in world markets with exports accounting for around 35 percent of world trade. It is recognised as the world's most cost efficient producer supplying a wide range of products to multiple markets.
The NZ industry has an integrated value chain with recognised brands vying for market leader status in the majority of the markets it supplies
World demand is projected to increase at 2 percent annually (and Asian markets higher) over the next 5-6 years at least. The NZ industry is well placed to capitalise on this expected growth
Dairy is the most profitable of pastoral farming systems in terms of EFS.
Prices have been relatively stable over the past 8 years in real terms, with solid increases over the past 2 years
Large production increases have been evident over recent years. The strength of the market fundamentals is such that production increases are set to continue in the next few years

Forestry

NZ is a small player in global terms however has cost and quality advantages over other wood producers
US Douglas Fir prices ( a measure of world soft wood prices) have increased by 2 percent per annum over the past 30 years
World demand for wood products is set to continue to increase with world population growth and increasing pressure to conserve natural forest areas
To obtain maximum value there is a need for considerable investment in processing in NZ
Forestry as an investment shows returns of around 9 percent per annum however is a long term crop with negative cashflows for several years. There are taxation advantages associated with this.

Kiwifruit

New Zealand provides approximately 30 percent of world traded Kiwifruit and accordingly enjoys scale advantages
Recent industry restructuring, a new branding programme and product innovations have led to a revitalisation of the industry and improved grower returns which, with sound management, will auger well for the future
Plantings have been relatively constant for the past 5 years
Recent studies have shown Kiwifruit to be very nutrient dense and a high source of vitamins, minerals, dietry fibre and phytochemicals. These attributes provide significant marketing opportunities
The ZESPRI brand has become strong in a short period
Development of year round marketing using fruit grown in other countries should have positive benefits to NZ growers.

Apples

Apples account for 98 percent of NZ pipfruit supply and NZ is highly rated in terms of international competitiveness. Deregulation of the NZ industry will potentially lead to a more fragmented approach, however infrastructural cost savings may counter any loss of market strength.
The major challenge facing the industry is improving product quality consistency and devising ways to address the declining consumption in the wake of increased competition from alternative snack foods
A feature of the apple NZ industry of the future will be the growth in specialist exporters and grower supply groups. China will pose an increasing threat on world apple markets.

Other fruit and vegetables

New Zealand has a highly regarded international reputation for the production of healthy, safe food products. This will result in more opportunities in export markets for NZ horticultural produce and crops such as avocado's, cherries and process vegetables will be at the forefront of this export led growth.

Viticulture

The NZ viticulture sector is poised for further rapid growth driven by increased demand. New Zealand wines are positioned as high value niche products and the success of the Sauvignon Blanc and Pinot Noir varieties in international competitions will ensure demand for NZ wines remains strong.
The industry is set to consolidate in order to achieve scale efficiencies and this will involve overseas ownership of the leading NZ companies.
As the smallest of the 'New World' wine producing countries, New Zealand's future lies with its ability to niche market high quality branded product. Regional branding will become increasingly important in this.