Global Consumption Gives Leg-Up To NZ Agriculture

Cautious Optimism As Recovering Global Consumption Provides Leg-Up For New Zealand Agriculture

2010 looks set be a more positive year for New Zealand agriculture as global economic recovery continues to gain momentum, creating a positive impact on food commodity prices and strengthening household consumption against a backdrop of restricted world supply.

However, while prices for a number of New Zealand commodities are improving, it will take some time for agriculture to fully recover from the „walloping it received over the past 18 months, and downside risks remain real and present.

In its annual New Zealand Agriculture in Focus report, leading food and agribusiness bank Rabobank says that, while improved economic conditions are seeing increasing global demand for some agricultural commodities – such as dairy and sheepmeat – much uncertainty remains.

Rabobanks general manager New Zealand Ben Russell said that although global and domestic economic conditions seem to have turned a corner and are expected to gather momentum in 2010, the recovery remains fragile.

“While conditions have definitely been improving there remain a number of downside risks,” he said.

“The New Zealand dollar remains high, inflicting serious head-winds on exporters, there are continuing tighter credit conditions and economic recovery remains subdued in key export markets, such as Japan and the United States.”

The Rabobank report says that while the outlook for agricultural commodities in 2010 is increasingly positive with most fundamentals pointing towards rising food commodity prices, food and agri businesses should also build in contingencies for downside risks in 2010.

Dairy prices improve

After a roller-coaster 12 months, fortunes were again smiling on the New Zealand dairy industry as 2009 drew to a close.

“A combination of improved global dairy prices and more subdued input costs meant that dairy producers entered 2010 feeling much more confident about their industry,” Mr Russell said.

“Global market conditions improved significantly from the first half of 2009 and buying picked up as consumers responded to falling retail prices and wholesalers moved to refill their dairy pipelines, with Chinese import buying particularly rigorous.” Media Release February 8, 2010 2

Improving fundamentals should help sustain most of the gains in global prices achieved in late 2009, which already appear to have factored in a substantial tightening of the market, the Rabobank report says.

However the pace of the recent rise in world dairy prices does raise some concern that these increases may overshoot in their bid to adjust to the new market dynamics, this may lead to some correction in the near term, with evidence of this in the January and February Global Dairy Trade auction results.

Mixed outlook for different sectors

While the outlook for New Zealand agriculture in 2010 is looking more positive, some commodities will be better placed than others to capitalise on the improved global conditions, the New Zealand Agriculture in Focus report says.

“Along with dairy, sheepmeat is also well placed to capitalise on the positive outlook,” Mr Russell said.

“Different to dairy though, is the fact that New Zealand lamb actually seemed to defy the global downturn, with farmgate prices reaching record levels during the 2008/09 season.”

The success of sheepmeat has largely been a story of tightening supply following a number of years of tough operating conditions. Drier-than-average weather in 2007 and 2008, relatively low prices for lambs and the prospect of better prices for other commodities (particularly dairy) saw many producers exit the industry or reduce their flock size.

A return to positive economic growth in key export markets in 2010 should support a general increase in global meat demand, including for lamb. However this is expected to be a slow and steady improvement, rather than a surge, and the high dollar has led to disappointing farm gate prices in the first half of the new season.

The outlook for the beef, grains, deer and horticulture sectors is not yet as positive.

“There is some potential for beef and grains to have a brighter second half of 2010,” Mr Russell said. “Beef is being held back by subdued demand, in particular in the United States, and the high currency. Global stocks of most grains are high, as a result of the back-to-back bumper harvests, limiting price moves in the grain sector.”

For horticulture and deer the story again is one of consumption, with both industries waiting for their key export markets to fully recover from the economic downturn. There is potential for the second half of 2010 to be more positive, however, this will be contingent on an improving demand outlook. Media Release February 8, 2010 3

The New Zealand wine sector continues to grapple with oversupply, and while there are some positive signs in terms of demand and export growth, this sector faces a period of adjustment to a more competitive business outlook after a stellar decade of growth.

Global food demand continues

Mr Russell said the structural and cyclical factors that drove global food commodity prices higher in 2007 appear to have been tempered, but not resolved, during 2008 and 2009.

“At the start of 2010, these factors are reappearing and, as a result, food commodity prices look set to rise again in coming years,” he said.

After rapidly rising to lofty levels in late 2007 and early 2008, global food commodity prices plummeted during the world economic downturn. However, with the Food and Agricultural Organisation (FAO) Food Price Index showing global food commodity prices again on the rise, the conclusion is that the GFC only temporarily, albeit sharply, arrested the trend to rising world food commodity prices, the Rabobank report says.

Factors driving food commodity price increases

Mr Russell said the main factors driving the trend back to higher food commodity prices include a return to world economic growth – with global GDP forecast to expand by 3 per cent in 2010 – along with increasing population levels, particularly in the developing Asian countries which are important markets for New Zealands food and agribusiness sector. Other major drivers include rising energy prices and investor activities in commodity markets.

“Rising energy prices affect food prices by increasing the demand for agricultural commodities for the production of biofuels and also because oil and natural gas are used in manufacturing farm inputs, such as fertilisers and chemicals, making farm production costs more expensive,” he said.

“Investor activity on commodity markets contributed to price rises in 2007 and we are seeing investors starting to return to commodities now, which may push up prices again.”

In addition, the report says, there is the potential for supply constraints on international markets if developing countries restrict trade in order to promote food security and reduce domestic food price inflation. A return to these policies could place upward pressure on global food commodity prices by dislocating trade.

Downside risks remain

Mr Russell says that while the fundamentals for New Zealand food and agribusiness are moving positively, one of the key lessons from the events of the past 18 months should be to “expect the unexpected”. Media Release February 8, 2010 4

“All markets – financial, commodities, currency, inputs and even fixed assets such as land, have a greater tendency to volatility and risk than in the years leading up to the financial crisis. Ensuring that businesses are financially robust enough to withstand this volatility in the short term to take advantage of the longer term opportunities and generally favourable outlook for food will be a key focus for many in agriculture in 2010 and beyond,” Mr Russell said.

“Rabobank remains confident about the long-term future for New Zealand agriculture and is committed to working with clients to ensure they are positioned to cope with the inevitable ups and downs that come with the territory in the sector”

ENDS

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