Wine and beef have been among the high performers for the primary sector.
Wine and beef have been among the high performers for the primary sector.
Agriculture editor Jamie Gray reviews the roller-coaster year in the primary sector where horticulture, beef and wine have been shining lights.
The beef and horticulture sectors are helping to offset some of the gloom surrounding dairy, highlighting the importance of diversification in the primary sector and the need for innovation.
An exporter-friendly Kiwi is helping to soften the blow imposed by poor dairy prices, as are lower domestic interest rates, but sluggish demand from New Zealand's biggest commodities customer, China -- in the key markets of dairy, sheepmeat and logs -- is making its presence felt.
There's no doubting that geopolitical ructions, overproduction, sharply lower oil prices, and -- in dairy's case -- unusually low feed costs, have changed the landscape.
"Dairy grabs the headlines but some of the other sectors are doing well," ASB Bank rural economist Nathan Penny said.
Beef prices -- supported by demand in the all-important US market -- are strong. In sheepmeat, prices are off the boil thanks to more supply coming on to the market in the United Kingdom and China.
Economists are bullish about the kiwifruit market, post the PSA virus. The apple trade has had a very strong year, building on strength in each of the previous two years.
Viticulture is having another good year, aided by New Zealand dollar weakness in against the currencies two important markets, the United States and Australia.
Ministry for Primary Industries director of sector policy, Jarred Mair, said the primary sector's ability to withstand extremes in the value of the currency was testimony to its ability to adapt.
In April, the NZ/Australian dollar cross rate hit A99.79c -- a post-float high. Last year, the currency came within a whisker of breaking its post float high against the US dollar of US88.40c. Mair said those levels would have been unthinkable for the primary sector just a few years back.
These days, he said, the emphasis in the primary sector was about doing things smarter. "It kind of gets lost in the story when people talk about the primary sector. People to think the primary sector hasn't changed over the last 150 years.
"If you actually looked at it, the change that has occurred in productivity and efficiency has been astronomical. The sector has managed to innovate better business management, investment in farms and better farm practices."
Mair and others point to the sheep meat trade as evidence of what can be done through innovation and better technology. Often quoted sheep population numbers belie what has been happening in that part of the primary sector.
Though the number of sheep has halved in the last 25 years, lamb production has only fallen by just 7 per cent, largely through improved genetics -- more ewes giving birth to twins, and higher carcass weights.
Mair acknowledged it was an "awkward" global commodities market. "But it's going to come right again."
Prices below production cost
In dairy, farmers at least have a better farmgate milk price to look forward to, with Fonterra forecasting $5.25 a kg farmgate milk price for the current year, up from $4.40 a kg for in the 2014/15 season. However, that forecast won't last long if whole milk powder prices continued to drop.
Current milk prices are well below the average cost of production, both here and abroad. That's led to optimism that world production growth will slow, allowing demand to catch up. The question facing dairy is whether the current supply/demand imbalance is part of the normal commodities cycle, or a sign that something more fundamental is afoot.
For the moment, the experts say its cyclical, but that the price trough will last longer than the norm.
Good growing conditions in most of the big dairy countries and lower feed prices have driven up production. At the last GlobalDairyTrade auction, whole milk powder prices -- responsible for about 75 per cent of Fonterra's farmgate milk price -- plunged by 10.8 per cent, reflecting oversupply and slack demand, particularly from China.
The auction led to ANZ Bank dropping its farmgate milk price forecast to $4.50 a kg from a previous forecast of $5 to $5.25 a kg. New Zealand, which has been described as the Saudi Arabia of the world's dairy trade, is not making matters any better.
Domestically, there's been a late flush, which means milk production is going to be up by 2 to 3 per cent for 2014/15 in the season to May 31 compared with last year's bumper season.
Supplementary feed
Latest DCANZ data showed New Zealand milk production jumped 11.7 in May, compared with May last year, bringing the 2014/15 season to a close with a record 1889m kg of milk solids, up another 3.6 per cent from last year's bumper season. The use of palm kernel expeller (PKE) -- which "turbo-charges" production -- has gone ahead in leaps and bounds over the last decade. PKE prices have fallen to about $198 a tonne from $270 this time last year, which has encouraged farmers to use more.
Zespri's Lain Jager is optimistic. Photo / John Borren
Supplementary feed is now a big part of dairying, with just 5 to 10 per cent of the national herd sustained by grass alone. Though farmers have their fixed costs, for many PKE is a viable solution to lower their average cost of production. For some, this can help offset low farmgate milk prices, but it clearly does little to help the oversupply problem.
Fonterra has been struggling to keep pace with the extra production and is in the middle of a large capital expenditure programme to build more plant to handle extra milk. ASB's Penny does not expect the weather to be quite so conducive for growth this year, and for dairy production to level out or decline slightly. Economists expect the impact of low prices to kick in, leading to a slowdown in production growth next year.
Meat
The season started with great expectations but lamb prices have fallen, trading at $5.25 a kg, down from $6 to $6.10 a kg this time last year. Conversely, beef prices have risen to around $5.55 a kg from $4.60 a year ago and are still going strong. In the United Kingdom, lamb prices are under pressure because the low euro has meant UK farmers have put more product on the domestic market. In China, sheep meat production is up, lessening demand for imports. Sheepmeat prices are expected remain weak over the next few months, particularly relative to a year ago. In beef, demand is strong in the all-important US market and is expected to remain that way. New Zealand producers also have the benefit of the Kiwi dollar's big devaluation against the US dollar. US demand for beef is such has that US authorities have allowed Brazil and Argentina back into the market after trade was suspended due to foot and mouth outbreaks in 2006 and 2001.
Beef and Lamb NZ economic service chief economist Andrew Burtt said US beef prices had improved substantially, thanks to the relative strength of the US economy. "The question is whether big falls in oil fuel prices will encourage the US consumer to spend more on eating out, or whether they will find beef too expensive and move to other proteins," he said.
Horticulture
New Zealand's horticultural industries have enjoyed highly favourable growing and market conditions over the past year. Now, they also stand to benefit from a weaker Kiwi dollar.
Kiwifruit has performed strongly as the sector continues to bounce back from the PSA virus, thanks largely to the advent of the PSA-tolerant Gold3 -- or Sungold -- variety.
The Trade Weighted Index, which measures the NZ dollar against the currencies of our main trading partners, has dropped by 6.7 per cent since the Reserve Bank surprised the market with a 25 basis point cut in its official cash rate on June 11.
Declines in the Kiwi against the euro and yen should prove particularly useful for Zespri, which markets outside Australasia. Chief executive Lain Jager said conditions had been highly favourable for kiwifruit, which took a big in the 2010 PSA outbreak.
Export volumes will be up from 92 million trays last year to 118 million this year, an increase of 28 per cent. "Obviously, that recovery from PSA is driving a recovery of confidence in the sector and we are seeing land values recover accordingly," he said.
PSA had a big impact on gold volumes when it Sungold's predecessor, Hort16A, proved to be particularly susceptible to the disease. Thanks largely to Sungold, Zespri's gold volumes have risen by 73 per cent from 18.7 million trays last year to 32.4 million this year.
Prices were unusually high last season because of the shortage of supply brought on both by PSA and a heavy frost at Zespri's biggest Southern Hemisphere competitor, Chile.
This year Zespri forecasts a payout to growers of $6.70 to $7.20 a tray for gold -- down from close to $10 last year. For green, the payout is steady at $5 to $5.50 a tray. By volume, green will be up by 14 per cent to 80 million trays this year. Production in Chile is still constrained -- running at 70 to 80 per cent of its normal capacity.
Jager said the decline in the NZ dollar's value against the US dollar and the euro was another big plus.
Gold is going to double in production volume over the next five and to reach 45 million trays next year. Jager declined to be drawn how long kiwifruit's strong run would last. "You just have to take every season as it comes," he said.
New Zealand apple growers have enjoyed another strong season and the industry looks set to hit the goal of $1 billion in export receipts earlier than the 10-year target of 2022.
In the season just passed the harvest is forecast to reach 551,000 tonnes, eclipsing the previous record, set in 2013, of about 550,000 tonnes.
The past three seasons have all been favourable. New plantings are growing at 5 per cent a year.
The wine industry continues to perform strongly. Exports last year reached a record high and now stand at $1.37 billion, up 8.2 per cent from the previous year, and propelling wine to New Zealand's sixth biggest export good. The warm, dry summer of 2015 was perfect for grape growing and ripening. Once again, the wine sector looks likely to gain from a weaker New Zealand dollar against a raft of currencies.
Forestry
MPI says lower log prices and volumes into the Chinese market resulted in an estimated decrease in export revenue of 10 per cent to $4.6 billion this year. However, the medium-term prospects for log and timber exports to China remain positive because of continuing urbanisation and economic growth.
Inventory buildup in China -- again NZ's biggest customer -- has played havoc with prices. A-grade logs hit US$99 per JAS (Japan Agriculture Standard) cubic metre in May, the lowest price since AgriHQ started collating data in 2012. Prices have improved a little, rising to US$101 per JAS metre in June, but they are a far cry from US$129 in January, and US$160 in March 2014. However, a weaker New Zealand dollar and lower shipping costs have benefited log exporters. "Prices are still pretty low, considering where they were last year, but we are in a state of recovery," Emma Dent, market analyst at AgriHQ, said. "We expect to see some more price increases, but again it is going to depend demand from China in the summer months."
