An outlook for primary sectors
Charlotte Irving summarises the economic outlook for the New Zealand primary sectors over the next year, drawing from the ANZ Research Agri-Focus ‘Difficult Road Ahead’ and the MPI Economic Update of the Primary Industries.
Globally, we are currently in the eye of a pandemic storm. Almost every country in the world has been severely impacted from Covid-19, in some the cases are still rising exponentially. Global economic growth has been slashed and there is a fear of second wave infections.
Fortunately, lockdown has been eased in New Zealand and life is returning to normal. While the end to the severe disruption is very welcome, the economic damage from Covid-19 is beginning to come more evident. The lockdown was extremely expensive, and there are forecasts that the unemployment rate will exceed 10% as the year progresses, a level which we have not experienced since the 1990s. It is increasingly apparent that the recovery will take years, not months.
As mostly essential services, the primary industry coped relatively well over lockdown compared to other sectors of the New Zealand economy. It was a great time to be a farmer - farming life continuing as normal while the rest of the economy ground to a halt. There is something psychologically good about being classed as an essential service, and the sentiment I get from talking to farmers is that they are generally optimistic and feel valued again.
However, the outlook for the primary sectors is more uncertain than ever before. The vulnerabilities remain - as a trading nation we cannot escape the looming global recession. This blog post provides economic outlooks on the New Zealand primary sectors over the next year, drawing from the ANZ Research Agri-Focus ‘Difficult Road Ahead’ (June 2020) and the MPI Economic Update of the Primary Industries (June 2020).
Overall, we can expect lower demand and prices for exports, due to diminished global markets. The New Zealand Dollar is expected to soften further this year; ANZ predict that it will ease to US$ 0.55 before the end of the year (currently $0.65). This will play a buffering role against weaknesses in the overseas market, helping lift the prices received by farmers and growers for produce exported. However, for now, New Zealand’s success at beating Covid-19 is having an ill-fated side effect of making the currency favourable this month.
There are muddy signals for global consumer behaviour, as consumer habits have inevitably changed. A natural consequence of lockdown restrictions has been the increased preference to spend on groceries with more cooking, baking, and eating at home, shifting food spend to essentials, staples, and fresh food. There is less demand for restaurant-orientated food, such as butter, cream, cheese, high-value red meat cuts. As a result, it has been said our commodity products have saved us. This emphasises the importance of a mixed bag of commodity and value-add export products.
China and other parts of Asia are expected to recover faster than Europe and North America. This highlights that our exposure in developing countries markets is very valuable, as food demand in these countries may prove more resilient compared to developed countries which have a larger portion of discretionary food spending. Most meats and infant formula are benefiting from increased exposure to Asian markets.
Global dairy prices have held up well so far, however the outlook is unfavourable for dairy export commodity prices. It is anticipated that there will be a softening in price, which will put downward pressure on the farm gate (forecast 14% fall in upcoming season). ANZ forecast $5.75 / kgMS for the 20-21 season, while the Fonterra forecast has a wide range of $5.40-$6.90. This will be close to (and in several cases below) farms breakeven levels for profitability and has the potential to undermine the financial viability of highly indebted farm businesses. Dairy proteins are likely to outperform dairy fats, as they are strongly linked to developing market demand.
Global red meat prices have an uncertain outlook with several contradictory signals; however, it is expected that global demand will ease due to the looming recession. Higher prices may be maintained due to China’s healthy demand for beef and reduced global supply due to herd rebuilding in Australia following the drought. However, this may be offset by drought in New Zealand and the unknown demand outlook for restaurant-orientated beef cuts. Lamb returns have started to lift slightly as the backlog of lambs to be processed has been worked through. However, prices for next-season lamb are expected to be down ($5-6 kg CW forecast), largely as there is limited demand from Europe for restaurant-orientated lambs cuts. Future prices will depend on global economic conditions, and the ability of our exporters to recognise and predict market signals for various cuts. The venison market is still struggling, as it was before Covid-19 hit; farmgate prices for young stags is a third less than a year ago (currently $5.50 kg/CW). It is the worst hit meat due to it being a high-end product and its high market concentration in Europe and the United States, countries which have been severely impacted by lockdown and economic shock.
The pandemic highlighted our dependency on a small number of countries to meet supplementary feed requirements. Palm kernel extract (PKE) constitutes most New Zealand’s animal feed imports (68% of total volume). Almost all PKE (99.6%) is sourced from Indonesia and Malaysia. PKE prices shot up by 28% to $380/tonne in the last three weeks of March, highlighting our exposure to shortages and price volatility, partially when there were limited affordable substitutes.
Wool returns are dire (with strong wool prices at the lowest level recorded this decade), while shearing costs accelerate, hampering the profitability of sheep farming. The situation is unlikely to improve until existing stocks are cleared from wool stores and woolsheds. The sustainable values of wool will eventually drive improved demand, particularly as the environmentally friendly younger generation purchase carpet, but we need to find a way to tell the sustainable story to a wider audience.
The outlook for the horticulture and arable sector is positive. The autumn fruit harvest during Level 4 lockdown went surprisingly well with strong volumes. Global demand for fruit remains strong, as global consumers focus on healthy products and fruit relies more on retail and online sales (rather than food service). Kiwifruit is going full steam ahead. There are ongoing concerns about border restrictions placing pressure on seasonal migrant worker availability, however rising unemployment in the domestic market may offset this.
The wine industry is likely to face further pressure, with a large 2020 vintage and lower global demand. It is anticipated that small and medium wineries will be more impacted, due to lack of international tourists and lower food service activity in New Zealand.
Overall, seafood demand has been sharply reduced and prices have fallen for many species, particularly those which dominant the resultant industry. MPI has approved that rock lobster fishers can increase annual allocated catch this season by 10% (estimated 117.6 tonnes).
The forestry sector has been severely impacted by lockdowns; first China’s, then New Zealand’s. Log prices benefitted from the pause in exporting, the lower NZD and reduced shipping costs (cost of moving logs to China has fallen 40% over the past six months). However, these prices are not sustainable, as they are largely driven by the disruption in supply, rather than lift in consumer demand. Further, as a construction material, the demand for timber is likely to soften as the global economic crisis deepens. There is lack of clarity around Chinese construction activity.
The rural real estate market is very subdued; land is slow to sell and prices continue to ease across all sectors (excluding horticulture and forestry). Dairy land prices reduced to $30,000/ha in March (12-month rolling year average), the lowest seen since 2007, and it is taking longer to average to sell dairy farms than it has in the past 20 years (there are significant regional differences). It is anticipated that there will be more sales once the recent environmental regulation becomes more understood, and expectations of land capability and future returns become more evident. The situation may also be improved by the low interest rate.
Although the overall outlook is bleak, my strong belief is that New Zealand in a better place than anywhere else. Our response could create a bright future, partially if the primary sector makes a deliberate shift to address changing markets and the changing expectations from consumers and society. Covid-19 - A call for action. I am very excited about the future of New Zealand farming.
Author: Charlotte Irving
