Introduction and overview
Introduction
New Zealand’s agriculture and forestry sectors1
Over the past 20 years New Zealand has arguably become the international benchmark for low cost, non-subsided agricultural production. Agriculture and forestry are the merchandise sectors in which New Zealand has world class technology, skills and market position. New Zealand is the world’s largest exporter of dairy products and sheep meat, has the world’s most profitable kiwifruit industry and is a significant player in other areas such as pipfruit.
The sectors are scientifically sophisticated, dynamic, market-oriented and have economies of both scale and scope. They are underpinned by rapidly advancing biological sciences that have the potential to accelerate productivity gains and lead to major transformations in markets and in industry performance.
Contribution of the sectors to New Zealand
The agriculture and forestry sectors, and their associated cluster industries, are at the heart of New Zealand’s economy, our land and resource use, and our society.
The agriculture sector is New Zealand’s largest export earner, earning 53 percent of New Zealand’s total merchandise export value in the year to June 2004. This sector contains New Zealand’s largest company, Fonterra Co-operative Group Limited, which has annual revenues more than twice that of Telecom, New Zealand’s second biggest company. When exports of services are included, the dairy industry alone (which is the single largest merchandise export industry) is not far behind tourism in its claim to be New Zealand’s largest total export earner.
Together, the agriculture and forestry sectors produce 64 percent of New Zealand’s total merchandise exports and 46 percent of New Zealand’s total foreign exchange earnings (June year, 2004). Of the remaining merchandise exports, around 15 percent are manufactured goods. Of this 15 percent it is estimated that around half are directly or indirectly related to the agricultural and forestry industries. Examples include exports of meat processing machinery, electric fences, animal identification equipment and horticultural sorting and grading equipment.
The sectors also directly contribute approximately 16 percent to New Zealand’s nominal Gross Domestic Product (GDP).
External and domestic influences over the past year
New Zealand’s agricultural, horticultural and forestry producers do not receive price or production subsidies from the government. Therefore, their incomes are strongly influenced by changes in international prices, exchange rates, market conditions, and other external and domestic factors.
Several factors that have impacted (either positively or adversely) on the agriculture and forestry sectors over the past year, and that are examined in this year’s SONZAF, include:
- a stronger New Zealand dollar
- rapidly rising oil prices
- the discovery of Bovine Spongiform Encephalopathy (BSE) in Canada and the United States
- continued drought in Australia
- snowfall and flooding disrupting production and rural communities
- a cold winter and spring hampering pasture growth.
Volatility in exchange rates in particular has a significant impact on the prices New Zealand’s producers receive. Because of this, in addition to our baseline (or main) projections based on future exchange rate assumptions provided by The Treasury, SONZAF also includes projections based on two alternative exchange rate tracks – a high and a low scenario (outlined in the Macroeconomics section). This enables readers to better understand the prices that could result should exchange rates differ from those used in the baseline projections.
Overview of projections
The macroeconomic assumptions (including exchange rates) used in the baseline projections were provided by The Treasury, and were current as at 19 October 2004. The key assumptions are detailed in Annex 1. The outlook period used for the projections is from 2004/05 to 2007/08.
Exchange rates
The exchange rate outlook continues to be dominated by the strength of the New Zealand dollar (NZD) against the currencies of our major trading partners. This is especially true against the United States dollar (USD), where the exchange rate assumptions over the outlook period are significantly higher (14 – 20 percent) than those assumed by The Treasury one year ago, and used in SONZAF 2003.
The value of the NZD against all of the major world currencies (the USD, the Euro, the yen, the Australian dollar (AUD) and the British pound (UKP)) is assumed to plateau in the first half of 2005, and then to slowly depreciate over the outlook period.
Exports
Over the outlook period from March years 2004 to 2008, the total export value of pastoral agriculture, horticulture and forestry products is projected to increase by 23 percent, from $17.0 billion to $20.8 billion. The largest contributors to this increase are dairy (up $1.57 billion) and forestry (up $1.33 billion). Meat export value is projected to decrease by $69.0 million, wool export value is projected to increase by $160 million and total horticultural export value is projected to rise by $804 million. By the end of the outlook period, dairy will continue to be the largest export earner of the land-based primary sectors (35 percent of land-based primary sector export value), followed by forestry (21 percent) and meat (20 percent).
Under the high exchange rate scenario, the total export value of pastoral agriculture, horticulture and forestry products rises from $17.0 billion to $20.1 billion in 2008, 3 percent lower than the baseline. Under the low exchange rate scenario, total export value rises from $17.0 billion to $21.2 billion, 2 percent higher than the baseline. The range in total export value between the low and high scenarios is $1.05 billion in 2008.
Gross agricultural revenue and contribution to Gross Domestic Product
The agriculture sector’s contribution to GDP (at farmgate) is calculated as total gross revenue from 16 sub-sectors, less total intermediate consumption (farm/orchard expenditure on inputs, such as fertiliser).
Over the outlook period, total gross revenue is projected to increase from $15.3 billion in the year to March 2004 to $17.7 billion in 2008, a 16 percent increase. Over the same period intermediate consumption is projected to increase by 16 percent, from $7.34 billion to $8.52 billion. Consequently, agriculture’s contribution to GDP is also expected to increase 16 percent, from $7.95 billion to $9.23 billion by 2008.
Comparing the March 2004 year to 2008, significant increases in gross revenue are projected for dairy (milk production), agricultural services, fruit, nuts and oil seeds, and sheep meats.
Under the high exchange rate scenario, contribution to GDP rises from $7.95 billion to $8.71 billion in 2008, 6 percent lower than the baseline. Under the low scenario, contribution to GDP rises from $7.95 billion to $9.69 billion in 2008, 5 percent higher than the baseline. The range in contribution to GDP between the low and high scenarios is $0.98 billion in 2008.
Situation and outlook for the major industries
The dairy industry had another record season in May year 2004, with milksolids production rising by 5 percent, and the industry average payout increasing by 16 percent. The outlook for production is good, although the growing gap between Fonterra’s share price and payouts is reportedly constraining growth in milk production. The payout is projected to fall in the 2005/06 season, but recover thereafter.
Beef and veal production rose in September year 2004. However, over the outlook period to 2008, production is projected to decline. New Zealand cow beef prices in the US (New Zealand’s main market) reached a record high for the September quarter 2004. However, New Zealand schedule prices remained relatively static because of a higher NZD. Beef schedule prices are projected to fall out to 2006, and then rise out to 2008.
Lamb and mutton production fell in the year to September 2004. Record high international prices were achieved in the UK market. However, due to the higher NZD the schedule price remained relatively static. Over the outlook period to 2008, sheep meat production is projected to rise. Lamb schedule prices are also projected to rise out to 2008.
Total wool production fell slightly in June year 2004. Over the outlook period, wool production mirrors total sheep numbers, which rise initially and then slowly fall. The average auction price for wool fell significantly in 2004 due to the strength of the NZD. Over the outlook period, average auction prices for wool are projected to rise steadily.
The deer industry is looking forward to somewhat better returns for venison and velvet over the outlook period to 2008. This contrasts to the five-year-low returns in June year 2004, along with relatively high annual kill numbers. Production is expected to fall over the next two years and then rise slowly out to 2008.
Poultry production has grown significantly over time, underpinned by competitive pricing of chicken meat and strong consumer demand. Continued growth in production is projected over the outlook period, but demand is expected to stabilise in 2008.
Pig meat production rose 10 percent for the year ended September 2004. Consumer demand for pork is expected to grow steadily over the outlook period, with domestic production projected to increase at a rate that will maintain the current ratio of domestic to imported pig meat.
Arable crop production for June year 2004 was down across the industry due to inclement weather. The outlook through to 2008 is for a gradual reduction in cropping areas, but an increase in productivity and quality across the industry, set against a backdrop of low world cereal stocks and declining real prices.
Kiwifruit production rose in the year ended March 2004, despite a series of spring frosts. Prices rose in 2004, only to fall dramatically in 2005. Over the outlook period, more moderate yields and a stabilising NZD are projected, which should result in a recovery in export and grower returns per tray.
The year ended June 2004 produced a record wine grape vintage. Production continues to expand as new plantings mature, and is projected to continue increasing over the outlook period. Export sales outperformed expectations in 2004. Over the outlook period, as production increases, the industry will be reliant on growth in export sales matching growth in production volumes.
The quantity of apples exported is estimated to reach record levels in the year to December 2004. This, together with increased competition in New Zealand’s major markets and unfavourable exchange rates, has resulted in poor returns to growers. Based on current and projected plantings, export quantities are forecast to decrease in 2005 before steadily increasing to 2008. Despite this projected increase, both export and grower returns are forecast to increase only marginally over the outlook period.
Some major forestry growers have drastically reduced their levels of harvest in order to increase the age profiles of their tree crops. This, in turn, has reduced volumes of export logs in March year 2004, but other products increased. Volumes of all forestry export products are projected to increase over the outlook period, with the exception of pulp and paper products which face a cyclical downturn in 2008. Pulp and paper prices are projected to increase out to 2007 and then fall in 2008, while all other forestry product prices are projected to increase over the outlook period.
1The agriculture and forestry sectors include both on farm/in forest production, and first stage processing of food and fibre. Horticulture is a sub-sector within agriculture.
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Monitoring and Evaluation
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