Record primary produce exports

Primary Industries Minister Nathan Guy says new figures show primary sector exports will reach record levels of $37.7b over the last year – around $1.3b more than previously forecast.

The Ministry for Primary Industries today released Situation and Outlook for Primary Industries 2014 (SOPI 2014) ­- an annual publication that provides a snapshot and forecast for our major primary sectors over the next four years.

“SOPI 2014 reveals export prices increased across most sectors for the year ending June 2014. Both dairy and forestry sectors stood out with good increases in both price and production,” says Mr Guy.

“Dairy now accounts for 46 percent of total primary industry export value and 35 percent of total New Zealand merchandise export value. High price levels for dairy were underpinned by robust demand from China, which remains an important market for dairy, meat and wool, seafood and logs.

“Meat and wool exports have broken $8 billion, which is fantastic considering last year’s drought. Exports are expected to increase by around 22 percent for the five years to 2018.  

“Demand for logs from China is driving the growth of the forestry sector, with export value reaching $5.1 billion at the end of June 2014. Domestic demand for sawn timber is expected to increase with the Auckland and Christchurch housing markets growing.

“SOPI also forecasts horticulture export revenues to surpass $4 billion in 2016, a major milestone for the sector. Last week’s National Horticulture Fieldays in Hawke’s Bay was a great showcase of the potential of this exciting industry.

“Export earnings for the New Zealand seafood industry are expected to increase to $1.64 billion in 2018, with prices likely to remain high due to strong demand from China, Australia, US and the EU.

“This results are helped by programmes such as the Primary Growth Partnership (PGP), Sustainable Farming Fund, and the Irrigation Acceleration Fund which all deliver long-term value to the sector, and the New Zealand economy. 

“This report makes great reading for New Zealand’s primary industries as it enters the 2014/15 year, and I’m anticipating positive vibes at this week’s Mystery Creek National Fieldays,” says Mr Guy.

The full report is here.

While the report is forecasting a bright future for primary produce, Liam Dann is arguing that the dip in the dairy boom is a warning to diversify:

How worried should we be about the slump in global dairy prices? After all these years, New Zealand is still a giant grass-processing factory and milk remains the lifeblood of our economy.

In fact, dairy products now account for nearly 30 per cent of the country’s merchandise exports, by value. That figure was closer to 20 per cent when I first started covering the sector more than a decade ago.

Dairy exports are on track to generate a record return in excess of $17 billion this year – about $4 billion more than they delivered on average across the previous three years.

That big return is due to a historically unprecedented spike in dairy prices that peaked in February.

So the 23 per cent fall in dairy prices since then is certainly significant. It has prompted Fonterra to lower its payout forecast for the 2014/15 season and is finally starting to put downward pressure on the dollar. . . .

Last season’s payout was a record, this season’s was expected to be lower but the forecast is still the fourth highest.

The lowering dollar in response is how it’s supposed to work.

Dairy may be ahead of the curve in terms of New Zealand commodity export prices. It seems likely that a boom in log prices will peak this year. Other commodities like beef and lamb are also contributing to a record balance of payments.

If they start to fall too, that will add to the downward pressure. But really, for the bloke on the Wall Street trading desk who keeps an eye on this part of the world, the New Zealand story is all about dairy.

To put the other sectors in perspective, the $4 billion fluctuation in dairy returns between 2013 and 2014 is likely to be in excess of the total return for all lamb, mutton and wool exports combined last year.

So much for New Zealand living off the sheep’s back.

Dairy prices are also where the attentions of the Reserve Bank are fixed.

The bank’s economists won’t be panicking just yet. They will be keeping the current prices firmly in context. The giddy heights that dairy prices reached early this year mean that even now they are sitting at historically high levels.

I can still recall the excitement in the dairy sector when Fonterra announced its first $7 payout – the figure Fonterra is picking for the 2014/15 season. That was a record and reflected the peak of the dairy price cycle in 2005.

If the price plateaus at that level then that would be a pretty sweet bottom end to the cycle.

There are good reasons – most of them to do with Chinese demand – why the global dairy price now has a much higher top and bottom than it had a decade ago.

But the trend will become concerning if it continues, and China is the great unknown.

Where the current slowdown in Chinese economic growth settles is anyone’s guess. If there were to be a more serious and uncontrolled financial economic crisis in China then things could get ugly fast.

Meanwhile, good grass growing conditions and continued expansion of dairying in the South Island are driving increased production volumes which will prop up overall export returns to New Zealand.

A major drought next summer would still have a greater impact on New Zealand’s economic outlook than the current dairy price.

That is why irrigation is so important. It doesn’t replace rain but it insures against too little.

What a slowdown in the dairy boom does do is remind us that we should maintain a firm focus on diversifying and expanding the economy into new and less commodity-focused areas.

Ironically, chief among those is the dairy sector itself. Fonterra is well aware that lower prices for milk powder will provide more opportunities to drive the brands side of the business.

Turning more New Zealand milk powder into yoghurt and baby formula before we export it suddenly makes even more sense.

Meanwhile, that $4 billion of extra dairy cash from the 2013/14 season still has to wash through the economy and should buoy domestic growth for a while yet.

Our “rock star” label won’t stack up if our growth is all pinned to dairy and the Christchurch rebuild. Both of these factors have been timely in getting New Zealand ahead of the recovery curve in comparison with other nations – notably Australia.

The trick is to have the rest of the economy firing efficiently when we come out the other side.

A diversified economy will be a stronger one.

But our climate and soils give us a natural advantage when it comes to producing protein for which there’s growing world demand.

I’m pleased to see that Dann isn’t downplaying that and isn’t suggest we do less farming, but that other parts of the economy step up to play their parts in New Zealand’s success.

 

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