KEY POINTS:
Shifting demand and supply, a roaring debate about sustainability and fears of a United States recession are creating a complex outlook for agriculture this year.
Rocketing dairy commodity prices caused the price of cheese and milk powder to double last year - which until recently had not filtered through to prices on supermarket shelves.
Manufacturers say they do not have excessive profit margins, which means that either consumer prices will have to rise further or mid-food chain processors will pay less.
"There's some indication that that is happening now for the dairy products," National Bank rural economist Kevin Wilson said.
"We haven't seen what the consumer reaction to that will be."
Depending on the country, consumers may just grin and bear any price rises, he said.
"We could probably put the price of milk up here by another 50 per cent and you would probably still pour the same amount on your Weet-bix in the morning."
But in countries such as China or India, an increase could turn people away from dairy products.
During the past year the demand for food commodities exceeded supply, but it would not take long for demand to fall and for the price to encourage greater supply, Wilson said.
New Zealand and the US were both expanding milk supply and in a year's time demand could have eased, supply levels risen and the heat come out of prices.
But a potentially cooler price was not a prediction of doom, Wilson added. "Prices are at such a very good level that they can take quite a fall and still be very good from the producer point of view."
Meanwhile challenges in the form of environmental, sustainability, traceability and biosecurity issues faced the sector.
"All [are] issues that are requiring more and more attention at the grower level and come with some costs," Wilson said. "The counter to some of them is that it would be an even bigger cost if we didn't deal with some of [them]."
There was greater general awareness of the environment, but "whether the large consumer mass concern is overplayed would be a mute question".
Westpac economist Doug Steel said increased biofuel production, driven either by higher oil prices or subsidies, would increase demand for feed stocks and therefore push up the costs of farming grain-fed animals.
The rising cost was good news for New Zealand's efficient grass-fed production, which could benefit from the higher market prices.
But Steel believed it might be a short-term fillip. "It feels like there's going to be a one-time shift in feed stock prices as a result of biofuels over the next two or three years, maybe a little bit longer. But it's unlikely to keep driving prices higher," he said.
He also expected demand from emerging markets and biofuels to support meat prices in the next five to 10 years. "The demand from the emerging markets is without doubt to my mind one of the major positive features of the outlook for agriculture in the next decade or two."
But economic drivers did not all travel in one direction.
"Rather than the demand for biofuels or transport driving up food prices it might well be the demand for food that's crimping the economics of biofuel production."
A potential recession in the US economy, following the sub-prime mortgage market crisis, was a big risk, the economists said.
"You see various opinions as to whether it is solved or whether it is still coming which is why it is a big unknown," the National Bank's Wilson said.
Meanwhile the Doha round of World Trade Organisation negotiations had gone quiet again, Wilson said, although it was understood work was still going on behind the scenes.
"If the Doha round was solved tomorrow you could reasonably expect it might be two or three years before any benefits from that came to light."
Here is how the main agriculture sectors are shaping up this year:
DAIRY
Fonterra is forecasting a record payout of $6.90 per kilogram of milk solids this season, up from $4.46 last season. The National Bank's Wilson said international prices appeared to be easing and had come back about 5 to 10 per cent during the last couple of months.
"They can come back a long way and still be very good."
Pressure would be on for more farm conversions to dairying and some farm supply companies might try to price products in order to gain a share of the benefits, he said.
The National Bank was predicting a correction to the farm-gate payout to about $5 to $5.20 per kilogram of milk-solids for the season ending May 2010.
SHEEP
Life down on the sheep farm is not looking quite so rosy.
Cost structures which had risen during better seasons three or four years ago had not come down by the same extent as the current price of lamb, Wilson said.
Lamb had not enjoyed good returns in the past two years and the current pricing didn't look much different.
The system of procurement was a major issue.
"The two major co-operatives in particular are making a lot of noise about procurement programmes and trying to get more order into the system," Wilson said.
"All very good objectives - I hope they're supported by the farmers."
Westpac said less product going forward was expected to put upward pressure on prices, which in combination with strong demand from emerging markets indicated a positive medium-term price outlook.
BEEF
The outlook for the beef sector was steady with prices at reasonable levels, Wilson said.
The US was still struggling to meet the required standards in Japan and Korea, although US consumer demand was steady.
But the thorn in the hoof for Kiwi beef, most of which was sold to America, was the ongoing strength of the New Zealand dollar against the US currency, he said.
VENISON
After a few tough years - during which some producers left the venison industry - the outlook is better, with fewer farmed deer, a return to reasonable prices and marketing systems bearing fruit.
The industry had matured, with serious producers keen to improve productivity and maintain value, Wilson said.
"Hopefully we've been through the cycles before, people understand what happens when you get too much and too little." WINE The viticulture industry has enjoyed huge expansion, with exports rising from a mere $75.9 million in 1997 to $698 million in the year ending in June last year.
In addition, a significant area that had been planted had yet to come to fruit, Wilson said.
Wineries and cellars were being squeezed by the exchange rate, but growers were expanding in anticipation of good future returns.
FRUIT
The kiwifruit and pipfruit industries have also been hit by the exchange rate.
Kiwifruit exporter Zespri expects payments for green fruit for the season ending March to drop to $6.23 a tray from $7.41 the previous year, with gold prices dropping from $9.42 to $8.75 a tray.
However, Wilson said the quantity of kiwifruit was not likely to fall, with new areas planted and management techniques continuing to improve yields.
Zespri chief executive Tony Nowell said it was critical for the industry to improve cost efficiency because the dollar was likely to stay high for the foreseeable future.
In its December rural report the National Bank said returns from the 2007 pipfruit harvest, although not finalised, were expected to be down between $3 and $5 per case - a return to break-even levels for the average operator.
Apple exports had been positive but a higher cross rate with the euro and a drop off in Braeburn prices had cut returns back to 2005 harvest levels.
