Allan Barber: Weak dollar prospects cheer farmers as global commodity prices soften

The best news for the agricultural sector is that the long predicted fall in the exchange rate is looking more likely reasonably early in the New Year.

The overseas markets for New Zealand's commodities are all looking softer than for some time and, while there will be some that do better than others, the general prospects are not as exciting as before.

The report published last week by the New Zealand Institute highlighted that two-thirds of our exports are farm and forestry based compared with world trade being 75 per cent in manufactured goods and components. There has been little change in the composition of New Zealand's exports, which have remained static as a percentage of GDP, only 29 per cent compared with Ireland at 80 per cent.

It's time to lift the overall performance of an economy in which only 10 firms account for half our exports. Although this figure ignores the fact that the agricultural companies are supplied with produce by thousands of individual businesses - dairy, pastoral, horticultural and forestry producers - it indicates an unbalanced, if not one-dimensional, business environment.

This should not be taken as a criticism of commodity exports or the agricultural sector, without which the economy would have been in a much sorrier state than it is.

Nor does it suggest that agriculture should lose focus on improving its product specifications, food standards compliance and environmental performance.

The challenges for next year are not just about maximising market prices for the benefit of farmers, producers, processors and workers, in the face of a rampant dollar.

It appears that the structural imbalance within our economy, which has driven a boom in consumer expenditure for the last few years, will finally be redressed, which will put pressure on businesses and the Government to invest in improved productivity to stimulate employment.

Besides the concern of the market and the exchange rate, the agricultural sector also faces the challenges of water supply, extremes of climate, resistance to animal health remedies, soil sustainability and the supply of scientists and skilled workers.

Results of meat processors and exporters show that 2005 was a lot harder than 2004, although this had as much to do with the weather conditions and the flow of livestock, as with the market.

Fonterra succeeded in meeting member expectations for a payout above $4, but this depended on some stringent overhead cost reductions, more than any lift in the market price.

Kiwifruit has done well to hang onto good sales in the European and Asian markets, but the dollar has ravaged returns to growers by 20 per cent as against last year.

We are well aware of the sad state of the apple industry caused by oversupply of fruit in major markets.

The success of our wine industry only represents a drop in the bucket, depending as it does on premium prices for small volumes into the main markets.

The reality is that agricultural exports cannot continue to take the place of further processed, manufactured production.

The amount we export is seriously constrained by our productive capacity and how much the market is willing to absorb.

In fact the actual volumes of product grown and exported have decreased over 50 years - New Zealand no longer sends thousands of tonnes of frozen meat, unprocessed wool and milk powder overseas with little added value, but the product mix, quality and value have changed markedly.

But it needs more than a fair exchange rate and some high technology exports to supplement the efforts of the rural sector.

* Allan Barber is a freelance writer and business consultant and former chief operating officer at Affco.