New Zealand’s primary sector prospects enjoyed an upbeat march for the first half of the farming year and appear to be holding their own for what remains of the second half of the season. The latest Ministry for Primary Industries (MPI) situation and outlook report for primary industries (SOPI) that came out just before Christmas paints a positive picture for the sector. It will be very welcome, coming after a year that has left many farmers feeling under siege despite their more promising prospects.
While commodity prices across the board have trended upwards nicely, they have almost become a background topic as the farming sector was forced to get to grips with an almost overwhelming amount of government policy announcements around water quality and green-house gas emissions.
Regulations set new expectations
These are bringing an entirely new set of parameters for New Zealand farmers, with challenges around recording, auditing and compliance that fortunately the government has recognised. A funding package of almost a quarter of a billion is to assist farmers transitioning to higher environmental standards. This includes funding for farm environment planning through its sustainable land use package, that also provides funding to improve water quality in at risk catchments and wetlands, and improved scientific knowledge to aid regional plan development.
Meantime the sector has also bought itself some time to demonstrate it is capable of reducing its green-house gas emissions, with five years’ grace providing a tight timeline for the pastoral sector to reduce emissions by 10% in the ground breaking Zero Carbon Act. In announcing the industry He Waka Eke Noa agreement, Federated Farmers vice president and climate change spokesman Andrew Hoggard said the initiative is a better alternative to farming entering the Emissions Trading Scheme.
"We will adapt to climate change, while enhancing our reputation for safe and sustainable food production, and maintaining our competitiveness in international markets.”
“New Zealanders also need to realise that any reduction in emissions achieved here through reduced production, will likely only be replaced with production in countries that have higher emissions per unit of output, and usually by subsidised farming sectors.”
Primary sector looks positive
The strong upside in commodity prices captured in the SOPI report includes overall export revenue reaching $47.9 billion to the end of June this year, up 3.3% on last year. The heavy lifting has been provided by dairying, up 8.4% to almost $20 billion for the year while meat and wool exports have continued their good momentum up 2.5% to $10.4 billion.
Ray Smith, the MPI director general, also points to some of the other rising stars in the primary export sector, particularly horticulture experiencing a 4.7% rise, driven by the likes of kiwifruit, wine, apples and pear exports. Forestry has not quite managed to shrug off the jitters a slide in Chinese log prices caused earlier in the year, and is expected to end the June 2020 year down 12.8% at $6 billion of exports off the June 2019 record high. However that decline is less than first anticipated, with log prices now started to recover more quickly than expected from their earlier lower prices.
Strong dairy gains expected
Taking a closer look at each of the main sectors, the prospects for dairying will be particularly welcome as farmers continue to grapple with historically high debt levels and increasing pressure from banks to reduce the principal owed on loans. The Reserve Bank has raised its concerns repeatedly for the sector that collectively owes about $41 billion or two thirds of total rural debt. An anticipated payout of $7.00-plus a kg milk solids provides farmers with sufficient after tax profit to make further headway into their loan amount.
In its last Financial Stability report of the year, the Reserve Bank noted some progress has been made by some borrowers to reduce debt and restore sustainability to their balance sheets. It noted banks continue to closely monitor a significant number of loans and that the share of “non-performing” has increased somewhat. The fortnightly GDT dairy auctions are also proving a reassuring indicator that hopes for continuing strong prices are well founded, with the year’s first auction up 2.8% on the last one in 2019. Importantly the auction’s values lifted across all categories with smaller overall supply volumes available.
Farmer confidence in the dairy sector has also been boosted by Fonterra’s acknowledgement of its losses and a re-setting of co-operative strategy that has it down scaling its global ambitions to focus on its Kiwi source milk and the farmers who supply it. Putting the significant losses incurred in assorted overseas ventures behind it was acknowledged by CEO Miles Hurrell at the company’s new strategy announcement.
“Many of these calls were painful but they were needed to reset our business and achieve success in the future.”
He said the new strategy recognises Fonterra is a New Zealand co-operative, with a focus on healthy people, healthy environment and healthy business. A focus on New Zealand sourced milk will be matched with a focus on dairy ingredients and food service, playing the co-operative’s proven strengths around logistics, innovation and quality. Meantime dairy farmers face more choice than ever for supply options, as Synlait commissioned another plant in the North Island, and some smaller processing plants have also opened around the country. The preparedness to make the high capital investment required for such projects indicates continuing strong interest by overseas customers for a source of quality milk ingredients.
Red meat boosted by pork disease
Thanks in part to the outbreak in China of the African Swine Fever (ASF), the red meat sector has enjoyed an added boost to already upbeat sales income.
A continuing slide in global sheepmeat supplies and static cow numbers have meant red meat has faced strong price tension, even without Chinese consumers having to default to another protein option as ASF wiped out over a third of that country’s pig population. This came on the back of what was already rising demand in China for both sheep meat and beef. New Zealand beef sales to China have gone ballistic in the past eight years, soaring from near non-existent in 2011 to be worth $1.29 billion last year, almost equal to the United States, traditionally our largest beef market.
Since September 2017, exports of red meat to China have soared from 21% of New Zealand’s total red meat exports to almost 40%. With China accounting for almost half the world’s pig population, the loss of 30% of its herd constitutes a major protein shortage that needed to be filled. Coupled with the on-going trade war with the United States, previously a source of imported pork, consumers’ appetites have been prompted to turn to other meats. Even as China works to eradicate the disease and breeding sow numbers start to rise again, the interest in New Zealand red meat due to the shortage will play strongly in New Zealand’s favour, even as ASF fades.
Industry analysts hope consumers’ introduction to our red-meat as a meal option will see it continue to be purchased out of choice, rather than necessity. Forecasts for the coming year are for that growth to continue, anticipated to be up 7% year to date by June. That lift is coming largely through price rises, rather than absolute increases in volume sales which have remained relatively flat, and reflecting the major surge in volumes already experienced over the past two years. Interestingly analysts are seeing a growing sophistication in the Chinese market developing with the chilled beef trade nearly doubling in the past 12 months to $60 million. Price premium across all red meat is anticipated to remain relatively high, thanks in part to New Zealand’s beef herds and sheep flocks remaining relatively steady in numbers, and in the case of beef, actually down slightly by .5% on the year before.
Overall, this optimistic market outlook is playing well for dry stock farmers, and estimates by Beef + Lamb New Zealand are for them to be close to last year’s net farm profit, with an average of $130,000 expected, well up on the historical lows experienced by farmers as recently as 2008-09. That average is based upon an average exchange rate of USD.66, but should the exchange rate fall to US.59, the expected profit could be as high as $180,000 per farm. Beef + Lamb economist Andrew Burtt has calculated the inflation adjusted profits of the past year were the highest since the early 70s hey days for sheep and beef farming.
Horticulture moves to No.3
By the end of the 2020 season horticulture will have also enjoyed a profitable year, and as a sector will have pushed itself into the number three spot for export earnings, edging out forestry and driven largely by the continuing success of kiwifruit, expected to rise by almost 9% this season. However wine, apples and pears are all expected to grow by about 7% in export revenue to be worth almost $1.0 billion.
Arable prospects strong
For Canterbury’s arable farmers the year has had a positive start, with a massive 40% increase in export revenue for the year’s first quarter. Export sales in all parts of the sector are up, with high value vegetable seeds being the main driver of those sales. As a sector, the export seeds market flies below the radar nationally, but is in fact a strong earner, generating $800 million of income last year, the majority of this grown in Canterbury. Ryegrass, fescue and clover pasture seeds along with carrot, radish and beet seeds are the largest seed crops by value.
An economic impact report out last year highlighted how this sector has one of the smallest footprints in the primary sector, accounting for only 37,000ha, employing 4320 people. Industry spokesman Thomas Chin said the sector is not only generating premium offshore sales in Europe, Asia and Australia, but also contributing to the success of New Zealand’s other primary exports in the red meat and fibre sectors that in turn generate $7 billion in GDP. Overall the sector is expected to increase its export revenue by 10% to the year ended June, and further albeit small increases expected out to 2024. Last year New Zealand prime minister Jacinda Adern told United Nations delegates New Zealand intended to be the most sustainable food producer in the world.
With global prices looking positive and the primary sector picking up on New Zealand’s leading green-house gas and freshwater reforms, it appears 2020 sees the country well on that journey.
Words by Richard Rennie