New Zealand agriculture faces a "moment of truth" this year as concerns mount about rising trade barriers and changes to local environmental regulations, rural lending specialist Rabobank said.
In its latest Agricultural Outlook, Rabobank said New Zealand had been a key beneficiary of the decades-long shift towards freer trade, but that agriculture faced a period of heightened regulatory uncertainty and change on both fronts.
Rabobank's country banking general manager, Hayley Moynihan, said 2017 would usher in a period of considerable change and uncertainty for New Zealand agriculture with developments throughout the year likely to have a significant impact on the sector's prospects.
"The industry will be keeping a close watch on global trade developments in 2017 following Donald Trump's election in the US and the resulting breakdown of the Trans Pacific Partnership (TPP) agreement," she said.
"The breakdown of this agreement brings with it increased risk of an escalation to rising protectionism already evident through the last few years in many parts of the world, as well as increasing the importance of this year's trade negotiations with China - on an improved Free Trade Agreement (FTA) - and with the United Kingdom and the European Union on FTAs," she said.
Last week, Fonterra chief executive Theo Spierings said a resurgence of nationalism around the world would bring uncertainty and a threat to free trade.
Rabobank's Moynihan said New Zealand's tightening environmental regulations and this year's general election could also have a major impact on the outlook for the sector.
"Tightening environmental regulations, particularly in the Waikato and in Southland where significant plan changes are taking place, have the potential to increase costs and restrict intensification or change land use in 2017 and beyond," she said.
"Environmental regulation could also become an election issue, as could other topics relevant to the sector such as greenhouse gas liabilities and rules around foreign investment."
Policy relating to these areas may be subject to change, especially if a coalition government including Labour, NZ First and the Green party were to be voted in, she said.
"The importance to the New Zealand agricultural sector of the coming year should not be underestimated. How the industry navigates through this period will fundamentally shape its prospects in the years to come," she said.
Despite the uncertainty, Rabobank said the outlook was still positive for many of New Zealand's key agricultural sectors.
In the dairy sector, market fundamentals appeared to support farmgate milk prices, restoring profit margins and allowing dairy farmers to move on from two difficult seasons.
The bank expects to see a slower rate of growth in New Zealand milk production emerge in the 2017-18 season and beyond, due to increasing environmental regulation, resource constraints and social pressures.
Another thing that may inhibit production levels is the investment appetite of dairy farmers and whether they invest profit in further expansion or prioritise debt repayment. Rabobank said the outlook for New Zealand's key horticultural sectors was also positive.
Another strong year of production and export growth was expected for New Zealand's leading horticulture sectors with bumper crops expected for avocados, apples and kiwifruit and demand from Asian markets for these products continuing to rise.
The prospects for the wine sector were also strong, the reports said, with the good prices achieved in 2016 likely to carry through to 2017.
However, sheep and beef producers could expect a more challenging year, with beef and sheepmeat price improvement looking unlikely over the next 12 months.
Record global beef production will see downward pressure on New Zealand cattle prices while the strong New Zealand dollar is the major headwind for greater sheepmeat returns during 2017, the bank said.