Agri Focus

Global economic conditions are challenging, but export returns are currently holding or improving. Tighter supply is helping balance the relatively lacklustre demand for products such as logs and dairy. Meat supply from competitors is high, but only small volumes of beef and lamb are being processed locally. There is still reasonable underlying demand for New Zealand’s products; it is just a challenge to get high prices, as consumers across the globe are cutting spending in response to tighter economic conditions. Interest rates are expected to remain high for some time, and many farm operating costs are up. Most farms are cutting costs where they can, to try to break even this season. The longer-term outlook is more positive, as global competitors are facing similar challenges and curbing production.  Discussion on pricing New Zealand Emissions Units (NZU) is expected to resume after the 14 October election. Once details are agreed the outlook will become clearer for many farm businesses.

Global economic conditions are challenging, and export returns have taken a turn for the worse. Demand has eased in many markets, but it is the muted level of demand from China that is having the biggest impact on farm incomes in New Zealand. Farmgate returns for most industries are dropping rapidly, while interest rates are rising and other farm costs are stubbornly high. Conditions on farms vary considerably. Many regions are wetter than normal, but the winter has generally also been milder. September weather tends to vary hugely year-to-year, and what we are dealt this year will have a major impact on lamb survival rates and spring pasture production. Farm cashflows will be severely impacted this season by soft farmgate prices. Keeping on top of cashflows will be imperative to managing through this downturn. This is not the first downturn our primary sectors have encountered, and it is unlikely to be the last. Working out what options are available and having a variety of plans to manage through this period will be vital for success.

Global demand for most of our export commodities has softened recently. China’s economy has not recovered as quickly as expected, putting downward pressure on prices. Farmgate returns for most industries are at or above a five-year average, but cost increases mean, in many cases, returns are barely covering costs. The rapid rise in interest rates is a major cost that is taking a toll on heavily indebted businesses. Autumn’s warm wet conditions mean most farms are entering winter with plenty of feed. Farmgate prices for milk and meat have softened, although procurement pressures have kept movements in meat schedule prices in check. For the horticultural sector autumn harvests are now almost in. The sector’s overriding theme is smaller harvests and slightly stronger prices, but overall returns are well down for many growers.

The Reserve Bank of New Zealand (RBNZ) has made it clear that their battle with inflation is far from over. Inflation is not yet under control despite strong efforts from the central bank to curb demand through deploying higher interest rates. Given it takes considerable time for OCR changes to work their way through the economy, the debate over “how much is too much” is only likely to get louder over the months ahead, as the impacts of past tightening become more evident beyond the housing market. Rural sector businesses are facing very tight margins as they juggle lower incomes, higher operating costs and increased interest rates. Autumn weather has generally been favourable for pastoral farms, with the exception of those regions still trying to get back on their feet following the massive February floods. The harvest of horticultural produce this autumn will be considerably lighter than usual for two of our major export crops, apples and kiwifruit. Reduced output is expected to be somewhat supportive of prices, but returns are not expected to be exceptional due to global economic challenges. Meat prices have benefited from China’s reopening but dairy prices are yet to bounce back as increased global milk supplies weigh on the market. Labour remains a challenge for the primary sector, and this is expected to result in a bottleneck in meat processing this autumn. A backlog of cattle is already building as processing weeks shorten due to the Easter and ANZAC holidays.

Both opportunities and challenges will be abundant in 2023. As we start the year, global economies are feeling the negative impacts of inflation, slower economic growth and tighter monetary policy. But forecasts of global growth are generally now being revised up rather than down, with more resilience than expected in European growth, in particular. And in terms of the impact of the pandemic, the worst of the health, labour and supply chain issues are now likely to be behind us. Prices for our main export commodities have eased, but the situation should improve later in the year when demand, primarily from China, is expected to lift. Fertiliser prices are now trending down; one of the few inputs where prices aren’t still rising. Operating margins have tightened considerably. The situation on farm varies considerably across the country. The recent heavy rains in northern regions have severely affected some properties. Meanwhile, most southern regions are rapidly drying out and would welcome some gentle rain.

This year has delivered its share of challenges and tested the resilience of many of our primary producers. Market returns have generally softened, operating costs have increased, and the weather has caused plenty of challenges for farmers and growers. But as the year draws to a close, signs of positivity are also emerging. The excessively wet spring now means soil moisture levels are in good shape heading into summer, with some regions still actually battling with excess moisture. Regulatory change is still occurring at pace, but the way forward is becoming clearer. Or at least, the destination is becoming apparent even though we may take various paths to get there and move at differing paces. Global economic conditions are deteriorating, with activity forecast to slow further in 2023. This slower growth is impacting demand for many of the goods we export. At the same time, we are seeing upward pressure on the cost of producing food as high fertiliser prices push up feed costs and impact production, which in turn is helping to keep prices higher than otherwise would be the case. Unfortunately, costs are also rising rapidly, and 2023 will therefore most likely favour those who have a sharp eye on costs and work to a budget. Imported goods are particularly pricey at present due to the low NZD so keep this in mind before asking Santa for a new tractor.

Global economic conditions are as volatile as our weather at present, making the outlook murky. Purchasing power is deteriorating in many markets, impacting demand for the goods we export. But on the other hand, supply of these goods is relatively constrained, which is why prices are still high. The weak NZ dollar is also bolstering returns at the farmgate level, but increasing the price of imported goods such as fertiliser and fuel. The weather has been unsettled throughout the spring with several cold spells and most regions much wetter than normal. There have also been some really hot days and periods of high winds, meaning soils will dry rapidly once the rain slows. Regulatory change continues at a pace that is hard to keep up with. Methane emissions pricing is now a step closer with the Government pricing proposal recently revealed. The intent of all the new regulations is to push our primary industries in a positive direction that will set us up for the future, but the speed of the change is challenging to manage.

Wet conditions prevail across most of New Zealand, which has made it very difficult for wintering stock as soils are saturated. Some regions have received more rain in the past month than they have all year. Delays getting stock to processors also mean some farms are carrying more stock than normal for this time of the season. The labour shortages that meat processors have been faced with mean we may need to reconsider our heavy reliance on being able to get space at processors when desired with little notice. More forward planning, including supply contracts, could be beneficial for all parts of the supply chain. The upside of the recent heavy rains is that irrigation dams have filled up nicely, which will be beneficial later in the year. Commodity prices remain elevated, but the heat has come out of some markets recently as demand continues to be disrupted. Lockdowns in China have had an impact, as have tightening economic conditions in most markets. Within New Zealand, the flood of regulatory change shows no sign of letting up. While there is widespread support for the intent of many of these rules, the practicality of implementing rules and unintended consequences remain a key concern for many. Recently the Climate Change Commission has recommended sharp upward changes in pricing guidelines for carbon credits released in the quarterly government auctions, and have advised they don’t support including sequestration within the He Waka Eke Noa framework. What is very clear is that we still have some way to go in terms of regulatory change, and consents will be something most landowners will need to get used to.

Global food prices continue to strengthen as shortages loom for basic foods such as grains. This means there will also be a shortage of carbohydrates to feed livestock. This won’t directly impact New Zealand food production systems, but it will impact our competitors who rely on grain to produce beef and milk. At the same time, the price of growing pasture has also gone up, as global fertiliser costs have soared. The shortages of these basic feed stocks will underpin global production costs and keep production in check, but it will also erode the ability of poorer countries to import the higher-value foods that New Zealand exports.

Widespread autumn rain has devastated many arable and fruit crops, but has been welcomed by pastoral farmers. Food commodities are in short supply globally. New Zealand will also export less produce than normal this season as production of most of our export commodities is impacted for varying reasons including delays processing livestock and impacts of labour shortages.

Commodity prices for dairy produce and most meat cuts are currently very strong, which, combined with a slightly weaker NZ dollar, is delivering exceptionally strong prices at the farmgate level. Unfortunately production is constrained in many areas, as soils have dried out rapidly. On-farm costs are also rising exceptionally quickly, and labour – or rather the lack of it – is becoming a major constraint for most primary industries. The unemployment rate is now the lowest it has been since the early 1980s. This is making it exceptionally hard to find short-term labour. The labour shortage means it is very unlikely that all of the fruit will be harvested this autumn and there could be significant delays at meat processors. If labour availability falls further due to surge in COVID-19 cases then the situation will only worsen. Interest rates are on the rise here in NZ and globally. Central banks are now starting to tighten monetary policy in an attempt to rein in inflation.

Farmgate returns for beef, lamb and dairy produce are extremely strong at present, but unfortunately cost pressures are also rising rapidly. This is particularly tough on the sectors where returns are low, like venison, wool and logs. Inflation is evident in many parts of the economy, but a lot of our costs of production are increasing even more quickly than the general rate of inflation. Labour and fertiliser costs have risen dramatically and are affecting many producers. This is particularly the case for horticulture, which relies heavily on these two inputs. Our more extensive sheep and beef farms are less impacted, as these farms have become adept at running large numbers of livestock with very few labour units and fertiliser usage is low.

Rising global food prices bode well for export returns, but inflation is pushing up the cost of production. The supply of many commodities is very tight so we could see commodity prices reach new heights. We are forecasting average farmgate returns for beef and for sheep meat to be at record levels this season.

Warm winter days make it feel like spring is already here. The improved conditions for pasture growth are certainly welcome, particularly in the regions that were hit hard by drought in the autumn. Also running hotter than expected is New Zealand’s economy. Very strong measures for both inflation and employment mean it is time for the Reserve Bank to spring into action with tighter monetary policy.

Feed supplies across New Zealand are becoming increasingly tight as we head into the colder winter months. The extensive flooding in Canterbury has caused massive damage to farms and wiped out a lot of winter feed. Store markets for lambs and cattle remain subdued due to the limited feed. Meanwhile it will be a record year for milk production as conditions for pasture. Log prices are at exceptionally high levels as global demand for timber skyrockets at a time when supply has tightened. Freight disruptions are unlikely to abate anytime soon, continuing to cause havoc for our exporters and importers. Freight prices aren’t the only prices on the rise, with inflationary pressures now showing up nearly everywhere in the economy.

Commodities are leading the global economic recovery. International demand for grains, dairy and forestry products is extremely strong – driven primarily by increased demand from China. Demand for products such as fruit is also robust, but finding sufficient labour to pick and pack the fruit is a major challenge. Container shortages and disrupted shipping schedules are also making it extremely challenging to deliver goods to market on time and in tip-top condition. It is particularly difficult for chilled products with a limited shelf life. Mother Nature has also been kinder to farmers this season than last. The east coast of NZ is still drier than normal, but this season’s drought is not as widespread as last season, which has provided more options to offload stock where necessary.

The year has started in a positive manner for most of our primary industries. The agreed upgrade of free trade agreement with China will help facilitate trade with our largest trading in the years ahead. Achieving this upgrade is particularly symbolic given China's relationships with many other trading partners have deteriorated. The dairy sector has started the year very strongly, which has resulted in milk price forecasts for the current season being revised up. The fortunes of the meat sector are mixed - returns certainly aren't as healthy as we have seen in recent years, but some sectors are improving. Demand for our produce generally remains strong in most markets. The biggest challenge is actually getting it there. Logistics are difficult at present as containers are difficult to source and ships are being delayed.

Global uncertainty remains heightened, making it difficult to forecast returns for the season ahead. Generally commodity prices are holding up better than expected in the current environment. Meat prices are expected to come under more pressure as larger volumes of stock are processed.

Disruption to normal supply patterns has now resulted in congestion in shipping as buyers panic about restocking shelves with consumer items. This is resulting in congestion at ports and reduced access to shipping containers due to longer turnaround times. Congestion at our local ports is not helping either.

Despite the uncertain times, demand for NZ export goods remains steady, but returns this season will not be exceptional for any industry.

Global economic trade is slowing but this has not impacted the volume of product being exported from New Zealand but attaining top prices is extremely challenging in the current economic climate. Rising shipping costs and the strong NZ dollar are also eroding returns at the farmgate level. But labour shortages are top of mind for primary producers. Border closures show just how reliant we have become on overseas labour to pick our fruit, shear our sheep, drive our tractors and milk our cows. This is particularly the case for the horticultural sector, which is not able to offer year-round employment and therefore has limited appeal to locals. Unsurprisingly, Kiwis have opted for more permanent and less physically demanding roles. As unemployment levels rise we will see some drift back to seasonal work, but this option will suit only a small number of people. Therefore, there will still be labour gaps to fill. Being able to work abroad for part of the year has become an economic lifeline for many Pacific Islanders. The economies of these islands have been hit hard by the lack of tourism. Getting the recognised seasonal employer (RSE) scheme back into action would be of mutual benefit from an economic and wellbeing perspective.

Global uncertainty is unprecedented. While much of the world continues to deal with the day-to-day health issues associated with battling COVID-19, those countries who have managed to contain it are now focusing on their economic recovery, while keeping a nervous eye out for second waves of infection. The kiwifruit industry continues to be a standout example of how to add value by restricting volume. At the moment we are not only seeing investors clamouring to invest in the security of gold; we are also seeing kiwifruit producers paying record high prices for the rights to grow SunGold kiwifruit.

We are currently in the eye of the COVID-19 storm. In New Zealand life is returning to normal as lockdown conditions ease much faster than was originally deemed feasible. While the end of the disruption is very welcome, the real economic damage this pandemic is causing is only beginning to become evident. New Zealand’s exports are highly dependent on economic conditions in the markets in which we sell our produce hence there will be plenty of challenges ahead.

Economic growth rates in New Zealand and globally have been slashed as we all hunker down to avoid the spread of COVID-19. Under lockdown rural New Zealand feels like a relatively safe place to be, and on our farms daily life is continuing in a much more normal manner than in the cities.

New Zealand is fortunate to produce enough food to feed ourselves eight times over so the supermarket shelves won't ever be bare, but we can't avoid the economic fallout of this horrid virus.

The sun is setting on the golden run for our food exports. While the global supply of dairy and meat products is expected to remain constrained, new global risks are now impacting demand.

The New Zealand dollar firmed over November and December but a large portion has since retraced, and volatility can be expected. A slightly higher NZD has resulted in a small downward revision to our milk price forecasts. Our current season forecast is now aligned with Fonterra’s at $7.15/kg MS (previously $7.45), while our 2020-21 forecast has been revised down to $7.10/kg MS (previously $7.60), on the back of lower dairy prices, with prices at the latest GDT auction falling 4.7%.