Owen Hembry

Business news editor of the New Zealand Herald

The lousy summer that saved NZ

Good rain for many areas and high prices are sucking in billions in export earnings for New Zealand. Photo / APN
Good rain for many areas and high prices are sucking in billions in export earnings for New Zealand. Photo / APN

It put a dampener on the holidays but all this rain is pumping much-needed millions into the economy.

From his office window, Bruce Wills sees the ears of sheep poking above a paddock of grass growing faster than it can be eaten. It's a sight to put a smile on the Napier farmer's face.

For most New Zealanders the holidays this year were a sodden affair but don't tell Wills this has been a bad summer.

A few years ago the view was very different - a landscape strangled by a drought that was ravaging much of the agriculture sector and helping to tip the country into recession.

"For me here, it was six months without rain," Wills says. "It turned a pastoral farm into a dust bowl, an absolute catastrophe ... I still haven't recovered from 07/08."

Wills couldn't find grazing, it was hard to buy feed and one morning he loaded 1000 lambs on trucks to sell.

"I remember one pen there was only one bidder there ... and he started at $15."

The lambs had cost $60 a head to produce and that season Wills took an $180,000 hit - before adding in results for his wool, mutton and cattle.

A drought from the spring of 2007 to the autumn of 2008 was estimated to have cost the economy $2.8 billion, more than 3 times the forecast benefit from the Rugby World Cup.

"It really puts it into perspective how important green grass is to this economy," Wills says.

This year has seen good rain for many areas and generally good prices, sucking in billions in export earnings at a time when the global economy continues to stumble.

Beef and Lamb New Zealand says that rarely are such good pastoral conditions and international prices seen at the same time. Export receipts for meat and wool products for the year to September 30 are forecast to be $6.6 billion.

The prediction for average sheep and beef farm profit before tax for this season is $133,800 a farm - up 17 per cent on last year and the highest since 2002.

In the past the industry had been reliant on Europe and British supermarkets but now there are good options coming out of Asia and particularly China, Wills says.

"The bottom line is if you're not doing well farming at the moment you probably need to reassess some of your farming systems because it hasn't been much better than this in the last 10 years."

Wills, who is also president of Federated Farmers, says it has been one of the best growing season for much of the country in decades.

"All New Zealanders should smile when we have a growth season like this because with well over 50 per cent of our total export receipts coming from agriculture, when we've got a year when we can fully feed most of our stock, that feeds right through the system and helps the economy as a whole," Wills says.

"At a time when the world population is growing by two people per second and we've just come through the seven billion [mark], what a lucky position New Zealand is to be a producer of high-quality food that the world wants."

New Zealand is one of the most indebted of countries, only a few margins below Greece, Wills says. "Add to that [the] Christchurch rebuild [and] we've got some big hurdles to face."

He says the dollar is at record heights because the rest of the world recognises the country is in a good space, although that eats into returns when converted into local currency.

"Good, strong commodity prices like we've got at the moment help redistribute those better times throughout the economy ... we're talking cheaper petrol, cheaper imports."

Dairy products alone account for about 30 per cent of all merchandise exports and production at dominant player Fonterra is 10 per cent up on last year.

Fonterra's managing director for trade and operations, Gary Romano, says that at the peak the company gets close to 82 million litres in a day and reasonable growing conditions are expected for the rest of the season.

"It's always hard to predict with some accuracy what might happen in autumn but ... our expectation is this will be a record year in total for us," Romano says.

If by season's end production overall is up 7 per cent, based on the forecast payout to farmers this could be worth about $660 million, taking the total payout to about $10.1 billion.

In 10 years Romano has not seen a consecutive autumn, winter and spring of ideal conditions, as has now happened.

But it hasn't been all plain sailing, with challenges including a snowstorm, the Maui gas pipeline failure and at least two floods.

"Having to get that product to 140 countries isn't as simple as putting it on a ship and waiting for the money to come in."

Demand for dairy is strong and prices are very good by historical standards, with Southeast Asia and the Middle East among the biggest markets by volume, he says.

"Certainly we're on a watching brief to the extent Europe slows, internal consumption might in fact drop and more exports might actually happen out of the EU so I wouldn't say we're divorced from what's happening in Europe at all because of the interconnectedness [of the global economy]."

BNZ economist Doug Steel says agriculture drives the economic cycle in New Zealand. "Whether that comes from prices international consumers are willing to pay and/or production at home, it does drive how much we get in export revenues which flows through directly to [gross domestic product]."

If production and exports are good, then the dollar tends to rise and consumers typically see lower prices for imported goods and services.

The consumers price index for the year to December shows clothes were down 0.6 per cent on the previous year; furniture, floor coverings and furnishing were down 2.8 per cent; and audiovisual and computing equipment was down 13.1 per cent, Steel says.

And for those searching overseas for the missing sun, package holidays were down 5.3 per cent.

Food prices held up better than some industrial commodities, which were bouncing back on hope of a solution to Europe's economic woes.

"[Agriculture] certainly drives the changes in all New Zealanders' standard of living," Steel says. "Maybe we don't all realise it and moan about the price of milk but if the price of milk is high, the currency tends to be high and that means we get cheaper goods elsewhere."

A survey in January showed a net 33.5 per cent of dairy, meat and fibre and grain farmers intended to spend more money over the next 12 months, while a net 44.3 per cent of farmers expected to pay off debt.

"If you think of it from a nation's balance sheet point of view, if you're paying down debt you might havea better debt-to-equity ratio."

The net international investment position was the type of indicator examined by rating agencies.

"So if we're paying down debt via the banking system, to the rest of the world that we've borrowed off that will make the New Zealand economy look - at least at the margin - a little bit more attractive," Steel says.

"That can translate into lower long-term interest rates."

In theory, a bumper year for farmers could see them pay off debt, improving the appearance of the nation's accounts, underpinning the country's ability to borrow money and thereby helping ease pressure on the mortgage rates of city dwellers.

However, NZIER principal economist Shamubeel Eaqub says the impact of favourable farming weather is really only visible for agriculture.

"There isn't a very strong link with the economy per se. Just because dairy production is good doesn't mean economic activity in Auckland is going to be great."

The household labour force survey for the December quarter showed there were 156,000 people employed in agriculture, compared with 2.1 million people in all other sectors, Eaqub says.

For Wills at least this season is shaping up as a good one - and potentially only the second in eight years since he left behind a career in banking to return to the family farm.

Niwa's outlook through to April says seasonal rainfalls and temperatures are likely to be near normal for almost all regions.

But as sure and night follows day, drought will eventually return and both farmers and New Zealand will once again count the cost of using nature as a factory floor.

When that day comes Wills will do whatever it takes to appease the rain gods.

"You get to the stage where you'd almost do anything to make it rain and if that means running naked around the front lawn I'm sure you'd find a lot of farmers who would happily do that even if they had neighbours near."

- NZ Herald

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