The differing outlooks for NZ agriculture

Notably, the operating environment still looks challenging for key livestock sectors despite some expected improvement for dairying.

"The operating environment still looks challenging for key livestock sectors."
Con Williams, Rural Economist, ANZ NZ

In the red meat and fibre sector knock-on impacts from the downturn in dairying will continue. Meat prices are mixed too and a key factor supporting venison and sheepmeat is lower New Zealand supply – not the ideal driver of better prices.

In contrast, the main horticultural crops are on track to post near-record export volumes and still achieve solid prices in most cases. This will support overall revenue and bottom-line returns.

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MILK, LAMB, BEEF

We continue to hold a high $NZ4/kg ms milk price view for 2016/17. If recent price gains can be held onto heading into October and November when China’s free-trade window closes (and the $NZ doesn’t rise significantly further), this will create even further upside, potentially toward the mid-$NZ5 a kilogram of milk-solid region.

Milk companies’ underlying returns from value-add strategies are also set to continue to provide additional earnings.

It’s a mixed outlook for lamb prices, with downside risks possible due to Brexit impacts. On the positive side, tradable supply is expected to tighten during New Zealand’s main production window.

Chinese and US demand is solid too.

The offset is Brexit and resulting higher $NZ/sterling, likely lower end-demand in the UK due to key consumption periods and increased competition within Europe and increased competition within Europe.

The beef market looks finely balanced. Australian and New Zealand supply is forecast to fall, but this will be offset by further increases in US supply.

Combined with solid demand indicators for beef consumption this points to a continuation of current prices in the US. That said, there are some headwinds in the US and other key secondary markets in Asia. Combined with an elevated $NZ/$US this is likely to see slightly lower farm-gate returns in the 2016/17 season.

WOOL, VENISON, GRAINS

At the finer end of the wool clip NZ prices are expected to be supported by lower Australian supply, a pickup in US demand and continued demand growth for luxury items within China.

At the coarser end demand looks fairly steady and supply constrained. As long as the NZD heads back toward 0.70 this should support farm-gate prices, albeit not quite at the levels achieved in 2015/16.

Tight New Zealand venison production is expected to support farm-gate returns at multi-year highs in 2016/17.

The industry has also had some success in growing demand in non-European markets and for products/channels outside the game season in more traditional markets. This provides plenty of inter-market competition and allows average returns to be optimised with tight supply.

Trading activity and prices for the domestic grain market are very depressed. Dairy demand could pick up with an improved outlook for the milk price.

Domestic supply could tighten quickly too with growers having planted less feed grain in the winter/autumn and low intentions for spring planting.

But while these indicators suggest an improvement at some point, international grain prices look biased even lower.

FRUITS & WINES

Green kiwifruit prices have come under pressure from higher New Zealand volumes and a bounce back in Chilean supply, as well as improving quality standards.

Long-term green volumes are expected to be steadier with an improved marketing mix more targeted to Asia.

Gold orchard-gate returns look like they will be still above $NZ8 a tray for 2016 but there is likely to be some moderation into 2020 from a changing market mix.

The pipfruit sector has had another very good export season, marking four years of very profitable returns. Asian markets continue to drive the growth in returns. European markets have been less of a priority due to lower earnings.

Despite a large 2016 crop across the viticulture sector, a supply imbalance is not expected. In fact an increase in supply was required after the small 2015 vintage and continued demand growth in

North American markets created a deficit situation over the last year.

Looking forward, the North American and domestic markets are expected to remain buoyant, while Australia and the UK are likely to be tougher.

Con Williams is a Rural Economist  at ANZ NZ