Long-term gains for New Zealand agriculture

Media Release February 26, 2009

Long-term gains for New Zealand agriculture as sector confronts difficult markets in 2009 – industry report

Action taken by New Zealand farmers to confront the challenges of the global financial crisis will strengthen the industry for the future and allow farmers to capitalise on an expected recovery in rural commodity markets from 2010, according to a recently-released industry report.

In its annual New Zealand Agriculture in Focus report, leading agribusiness lender Rabobank says many of the country’s primary producers – particularly those involved in dairy and wine – will focus on cost reductions and operating efficiencies in 2009 as they face unprecedented challenges and uncertainty in international markets and on the domestic front.

But it’s not all bad news for the agricultural sector, according to the report, with some impacts of the global financial and economic crisis working in the industry’s favour and expected to provide some buffer in the year ahead. Further, the outlook for New Zealand’s sheep and beef sector has improved significantly with tightening supply providing a much-needed boost to farm gate prices.

Action taken by producers in 2009 to control costs and improve efficiency and productivity – rather than just increase production and scale – will stand the sector in good stead to reap the rewards and prosper with economic recovery in future years, the report says. “This will present the perfect opportunity to re-establish the competitive advantages that have been the basis of New Zealand’s long-term agricultural success,” it says.

Grappling with challenges “New Zealand’s agricultural sector has entered 2009 grappling with the impact of the most turbulence ever seen in international markets and producers are undoubtedly faced with a very challenging outlook in the year ahead,” says report co-author, Rabobank senior analyst Hayley Moynihan. A dramatic drop in several agricultural commodity prices (after the boom levels of 2007/early 2008), along with reduced consumer spending and extremely tight credit availability, are three of the key factors hitting the sector hard, the report says. Dairy and wine are most impacted, facing a large drop in farm-gate prices and confidence levels, although beef and sheep farmers have a stronger outlook, with record peak-season payments. 1 Media Release February 26, 2009

“In response to these challenges, many New Zealand producers are expected to ‘batten down the hatches’ in 2009 and focus on cost reductions and operating efficiencies to ride out the storms in international markets,” Ms Moynihan says.

Impact of global market woes Undoubtedly the most important factor shaping the 2009 outlook for New Zealand agriculture is the global economic downturn, Rabobank’s report says, with the world economy to remain weak.

“Improvement is now not expected until at least 2010, when the flow-on benefits of expansionary monetary policy and reduced energy and commodity costs are expected to start being felt in the real economy, although this is by no means guaranteed,” Ms Moynihan says.

The report says the impact of the global financial and economic crisis on New Zealand agribusiness has already been significant.

“Most directly, the availability and cost of credit changed markedly,” it states. “Credit availability became extremely tight and shortage of credit had several major flowon

effects for agriculture, including pushing down commodity prices as there was an exodus of capital from futures markets and a shortage of credit for companies physically trading in agricultural commodities,” Ms Moynihan says.

Demand for New Zealand agricultural products was also impacted by the damage to consumer wealth, incomes and confidence wrought by the collapse of asset markets, rising unemployment and uncertainty regarding future economic prospects, the report says.

Upside benefits While many of the flow-on effects of the global market turmoil have been negative, there have been some upside benefits, Rabobank’s report finds.

“In particular, the significant decline in the New Zealand dollar and the collapse in global input prices – such as fertiliser, fuel, chemicals and international freight rates – alongside lower interest rates, will provide much-needed relief to New Zealand’s agricultural sector,” it states.

These factors have partly offset the effects of sharply lower global commodity prices for the New Zealand agricultural industry, Ms Moynihan says. Domestic issues The 2009 performance of New Zealand’s agricultural industry will not be determined by external factors alone though, the report says. 2 Media Release February 26, 2009 The trend towards business expansion – fuelled by factors including growing asset values, substantial changes in land use, structural shifts in the industry mix and significantly increased investment activity in the sector – is expected to abate, with an increased focus on consolidation and cash profitability.

“The 2009 year is expected to see producers prioritise cash profitability and return on assets above business growth and place greater focus on controlling costs than in previous years,” Ms Moynihan says. “Strong periods of growth and activity are typically followed by a slowing and consolidation phase and this part of the cycle for New Zealand agriculture will be exacerbated by the additional pressure of the economic downturn experienced by all our trading partners.” New Zealand producers will also face critical decisions impacting their future enterprise mix on-farm in 2009, she says, as better prospects for sheep and beef may make restocking expensive as climatic conditions improve.

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