Second year of profitability forecast for NZ agriculture

Second consecutive year of profitability forecast for NZ agriculture in 2018 – industry report

Favourable market conditions are set to underpin a second consecutive year of broad-based profitability for New Zealand agriculture in 2018, according to a newly-released industry report.

In its flagship annual Agribusiness Outlook, agribusiness banking specialist Rabobank says 2018 should be a profitable year for “most New Zealand producers across an unusually broad base of subsectors”.

As the second consecutive good year after a run of tougher years, 2018 looks set to generate a sense of sustained recovery in New Zealand agriculture, the report says.

And this is important for long-term confidence and attracting investment into the sector.

However, the report cautions, where New Zealand’s agricultural industry chooses to direct improved cash flow and focus during this sustained positive run will have important ramifications for many years to come.

Releasing the report, Rabobank New Zealand Country Banking general manager Hayley Gourley (formerly Moynihan) said global market settings were currently firmly in the favour of Kiwi farmers.

“The world economy is enjoying a broad-based recovery and the prices of the key commodities produced in New Zealand are generally high, while prices for key farm inputs, especially fertiliser, are generally low,” she said.

“The bank retains a bearish outlook for the NZ dollar over the next 12 months, which further plays into the hands of the country’s export-focused agricultural producers, and we anticipate a strong performance from the New Zealand’s key agricultural sectors in 2018.”

Ms Gourley said an additional positive for the sector was the settled nature of New Zealand agriculture’s downstream processing and marketing industry.

“Fonterra is making money in its offshore businesses and has cleared overhanging litigation, while other dairy processors are performing well. In the meat sector, recent ownership changes have now been bedded down which have contributed towards increased profitability and reduced debt levels and there now appears to be far greater surety of industry structure and strategy than evident in recent years,” she said.

“The horticulture industry has also made great strides in its processing capability of late and the recent investment in post-harvest processing, storage and infrastructure looks set to continue this year.”

Curve balls

The report cautions that while the outlook for New Zealand agriculture is positive, there would be curve balls to be dealt with in 2018 and, unusually for New Zealand, these look likely to come from local developments.

“Dry conditions across the country at the back end of 2017 and in early 2018 will have flow-on impacts on production and costs across many of the key agricultural sectors and will constrain New Zealand’s capacity to capitalise on improved market conditions,” Ms Gourley said.

“Considerable uncertainty also remains about how policy decisions made by the new coalition government will impact the rural sector, while the outbreak of Mycoplasma Bovis is a further local industry development which must be addressed.”

Important decisions

The report says the “positive backdrop” to 2018 should not distract from the importance of decisions that need to be made during the year about where the industry should focus and where improved capital availability should be directed.

“The industry in New Zealand is very much deciding what it wants to be at the moment and there is ongoing discussion as to where the industry should place itself on the spectrum between low cost/nimble producer and the niche/high value/ sustainability-led positioning which is being encouraged by the new government,” Ms Gourley said.

“The direction of government policy will become clearer as the year progresses and we will learn a lot more about the how far the government is willing to push policy on wages, foreign direct investment, carbon emissions and water. To sustain the sense of momentum in New Zealand agriculture, a sensible regulatory approach will be required which has the buy-in of both farmers and consumers.”

In making these decisions, agricultural industry stakeholders have a number of important considerations to take into account, the report says, including:

• balancing the need for the industry to get its “house in order” at home while also positioning for market access and growth offshore
• appropriate debt levels • avoiding channelling all improved cash-flow into land purchases (thereby fuelling inflation in land values) unless achieving strategic goals
• exercising caution in moving too quickly beyond core competencies.

Ms Gourley said periods of sustained growth were hard earned in agriculture and the decisions made during these times often determined whether the next cycle would be as good. “At the very least, profitable conditions and strong industry confidence make 2018 a good year to make tough decisions,” she said.

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