August 7, 2008

Agricultural Rebound Predicted; Forecasts Hinge on NZ Dollar Falling


AGRICULTURAL exports, the engine room of the economy, are expected to cruise to new heights in the next five years, according to the Agriculture and Forestry Ministry.

Dairying will lead the way, reaching a new peak this production year, then remain buoyant under strong international demand.

The ministry's economists say in their latest "situation and outlook" report that beef and lamb returns will bounce back from the lows of the past year, that wool prices will gradually climb out of a trough and that deer farmers are in for a much-needed lift in income.

However, the forecasts are dependent on the exchange rate falling from its current heights. The ministry is predicting a gradual easing in the Kiwi to US62c by 2012.

Director-general Murray Sherwin said sectors would all face their own challenges, but overall the combination of strong commodity prices, growing global food demand and new market developments, such as the China free trade agreement, presented positive opportunities.


The payout will average $6.90 across all dairy companies for the year ended 2009 and then drop back to $6 for the next few years. After a 25 per cent jump to $10 billion in the year just ended, export revenue will peak at just over $12 billion in the year to 2009.

Prices are expected to ease from recent record highs, but earnings are predicted to remain strong. This will come on the back of steady demand from rich oil-producing countries that will be matched by increased output from the dairy conversion boom.


Hit by drought and low returns, ewe numbers have dropped by at least 10 per cent. At the same time, the consumption of lamb in our main market, Europe, remains flat. However, other countries' production is also falling and leaving a gap bigger than the fall- off in demand. Assuming the dollar rate will ease, lamb earnings are expected to increase 25 per cent in the next four years.


The strength of the dollar has ensured that little of the gains in international beef prices have been felt by farmers. That will change as the exchange rate falls, particularly in the United States manufacturing beef market where prices are tipped to lift 25 per cent in the next five years.

Prime beef markets in Asia will feel pressure on prices under increased competition and higher supplies in 2009 and 2010. However, the assumed fall in the dollar means better returns.


The average farm-gate wool price is now at its lowest recorded level -- just 6.2 per cent of the price it was at the peak of the Korean War wool boom. However, the growing Chinese economy is expected to be the sector's saviour, lifting demand for wool for interior furnishings.

"Fairly modest" rises in international prices will become significant as the New Zealand dollar depreciates during the next four years, lifting average returns 40 per cent. Prices for fine and mid-micron wool are forecast to decline as the Australian sheep flock rebuilds and Australian fine and mid- micron wool production increases.


A second year of rising schedule prices for venison will result in deer farmers receiving their best returns in six years. Prices for New Zealand venison in Europe are forecast to remain strong as supply is constricted.

Velvet prices have slipped well below the favourable prices of 2007. This is due in part to a downturn in South Korea, our largest export market.


International prices for New Zealand kiwifruit are forecast to decline in the next few years because of increased supply. A bumper harvest of wine grapes this year looks set to push up export wine volumes by 30 per cent in the 2009 year, providing the industry with a tough market challenge.

Prices for New Zealand apples in international markets are forecast to decline with new competition but will be offset by higher sales of new varieties and assumed depreciation of the exchange rate.

Forestry The outlook for log prices in New Zealand's main markets is positive. The continued phase-in of Russian log export taxes will put upward pressure on log prices in all New Zealand's markets. However, housing timber will suffer under a drop in US imports.


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