Farmer patience to be tested in 2007

Good global prospects – but Farmer patience to be tested in 2007

The same challenges that dominated 2006 will continue to plague New Zealand agriculture in 2007 as high interest rates and input costs, along with a strong New Zealand dollar test the resilience of New Zealand’s agricultural and export sectors.

The annual New Zealand Agriculture in Focus report produced by Rabobank, the world’s leading food and agribusiness bank, says that while global market conditions are favourable for many key commodities, supporting high US dollar commodity prices, the strength of the New Zealand dollar has constrained growth in local farm gate prices.

And with interest rate and currency relief unlikely to materialise before the 2007/08 season, Senior Rabobank New Zealand analyst, Hayley Moynihan says that pressure has been placed on profitability for farmers, processors and exporters alike as input costs continue to rise.

“Cost increases accelerated sharply during 2006, compounding into three years of rising costs since 2003. The fastest growing costs have been fuel and electricity. Land related costs have also moved higher, reflecting the surge in property values during this period,” she says.

New Zealand’s agriculture sector may also face the prospect of higher average exchange rates over the longer term, with the Reserve Bank signalling that further OCR increases may be required in 2007 to keep a lid on inflation as the domestic economy appears robust and economic growth is expected to firm.

“The coming year is likely to test the stamina and hardiness of New Zealand farmers and exporters with little respite likely from domestic economic conditions,” Ms Moynihan says. “The ability to adapt to a changeable, and often harsh, environment is a cornerstone of New Zealand agricultural success and these skills will be required through 2007.”

“Despite these challenges, our view remains that the medium to long term prospects for New Zealand agriculture remain positive, underpinned by good demand and supply conditions in key sectors, efficient production systems together with the quality and safety of New Zealand’s food and agribusiness products.”

Export opportunities

On the supply side, the Rabobank report says that with trade volumes restricted in many markets New Zealand may benefit from disruptions to supply from key competitors during 2007.

The severe drought in Australia is expected to contribute to reduced dairy product availability globally in 2007, with beef, lamb, wool and wine export sectors also likely to be affected.

“With the EU reducing its export presence on the world stage across a number of commodities and the US grappling with restrictions on its beef exports to Asia and a drought of its own, New Zealand has the opportunity to further build its market position in key sectors over the coming years,” Ms Moynihan says.

High Value Consumer Markets

New Zealand’s positioning in higher value niche markets globally is likely to prove important in 2007, according to the report, with developed consumer markets continuing to prefer high quality agricultural products.

“The appeal of high quality agricultural products to the 21st century consumer is that they are traceable, disease free and produced in a sustainable manner. Modifications to portion size, convenient packaging and enhanced consumer information are also features the 21st century consumer demands.”

The ability to meet these stringent requirements will continue to differentiate New Zealand’s products and in many instances, according to the report, provide New Zealand with preferential access to higher value consumer markets that would otherwise be denied.

“The value of these factors cannot be underestimated. The ability of New Zealand to continue to differentiate itself will be crucial in ensuring New Zealand agricultural products retain their global reputation for excellence in 2007 and beyond,” Ms Moynihan says.

Trade

The optimism that followed the conclusion of the Doha Round of Ministerial meetings in Hong Kong at the end of 2005 didn’t linger long into 2006, with the April 30 deadline passing without an agreement being reached.

The Doha Round, that was set to reduce barriers and subsidies to promote more efficient world trade, would have brought increased agricultural trade opportunities to New Zealand if it had succeeded, the report says.

“With the possibility of failure for the Doha round, expect to see an even stronger emphasis on bilateral and regional trade deals with New Zealand trading partners in the future,” Ms Moynihan says.

For New Zealand, free trade negotiations continue with China, Malaysia and an economic partnership agreement with Hong Kong, with work continuing on an ASEAN - Australian – New Zealand free trade agreement. New Zealand’s trade minister had an initial meeting with trade representatives from the Gulf Cooperation Council in December to discuss a possible free trade agreement.

There is little chance of substantial change in 2007 for multilateral free trade, according to the report However, Ms Moynihan says that the emphasis and renewed commitment to bilateral and regional

agreements should mean that significant headway will be made, leading to improved agricultural trade outcomes beyond 2007.

Sustainable Agriculture

The image of New Zealand agriculture was challenged in key export markets during 2006, with the ‘Food Miles’ campaign in Europe highlighting the distance that food travels globally to reach consumers and the oil and energy cost associated with its transportation.

With New Zealand’s agricultural exports often travelling the greatest distance, they often incur the highest energy cost in distribution, according to the report.

“Although Lincoln University published a report showing that New Zealand had significantly lower total energy costs for food production, including transportation, compared to the United Kingdom, the potential of such campaigns to turn consumers away from New Zealand produce cannot be ignored.”

New Zealand will be faced with tough decisions over the coming year, the report says, as it strives to meet its first Kyoto commitment period from 2008-2012. And with agriculture contributing approximately 50 per cent of New Zealand’s greenhouse gas emissions, this sector will need to be at the forefront of reduction proposals, the report says.

The current government discussion paper on Sustainable Land Management calls for submissions by 31 March 2007. The document contains potential implications for land use, particularly any future change in land use, and this will have an associated impact on agricultural investment activities, Ms Moynihan says.

“The New Zealand farming sector will need to give priority to involvement in this consultation early in the year, as the policy decisions made in 2007 will have far-reaching effects on New Zealand’s agricultural production over the next decade.”

Rabobank New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and is ranked the world’s safest private bank by Global Finance magazine. Rabobank operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

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