Bright outlook tipped for farming

Fonterra are on track for record farmgate milk price for 2013/14. Photo / Brett Phibbs

Dairying can expect bumper year and China will help drive positive results in other sectors, say economists

The dairy sector has a bumper year to look forward to in 2014 while New Zealand's other main commodities face a mildly positive outlook - driven mostly by demand from China, say economists.

Fonterra has maintained its forecast payout farmgate milk price at $8.30 per kg of milk solids for 2013/14, which would surpass the previous record of $7.60 per kg in 2010/11.

Production-wise, economists expect the year's volume to be well up. ANZ rural economist Con Williams has predicted a 7 per cent improvement in dairy production over last year's, and for it to be well ahead of the previous record set in 2011/12.

Williams said the main factors driving dairy were the elevated level of demand in China and an expected upsurge in supply in the northern hemisphere as producers rush in to take advantage of high prices.

The northern hemisphere season peaks around April and May, which should see more product come on to the market, thereby putting downward pressure on prices.

But running counter to the effects of increased supply will be ongoing demand from China, which over the past 12 months has not shown any signs of slowing.

"We see world dairy prices remaining high into 2014," says ASB Bank economist Nathan Penny.

Beef and Lamb NZ said farmers could expect lamb prices of about $100 a head this 2013/14 season, which would be firm but still short of the 2010-11 average record of $117 and the monthly peak of $160.

Demand for lamb is expected to be driven out of the Middle East and China. Improved economic prospects in the traditional export destinations of Europe and the UK could also add to the generally improved outlook.

In China's case, meat exports are flowing more freely after a bureaucratic bungle held up tonnes of product this year. Beef prices have been stagnant, but much will depend on the North American market in 2014.

Rural lending specialist Rabobank said beef faced brighter prospects next year thanks to strong international demand combined with tight local supply. A decline in beef production in the United States means New Zealand product will be in demand, the bank said.

However, supply from the less traditional markets, such as India, could increase to fill the void.

New Zealand beef production is expected to be lower in 2014 compared to the drought-affected production of 2013.

Williams agrees post-drought conditions in the US could create some import demand for beef but said the sector in the US faced increased competition from pork and poultry. North America is New Zealand's biggest customer for beef, accounting for about half of total production. North Asia, which last year accounted for 31 per cent, up from 26 per cent a year earlier, is catching up.

In the forestry sector, log prices are improving. As with many other commodities groups, China has emerged as a key driver. Data from the Ministry for Primary Industries showed prices firmed towards the end of 2013, reflecting a better outlook for construction in some Pacific countries.

"There is no expectation of a let-up," said David Rhodes, chief executive of the NZ Forest Owners' Association.

"The appetite in China has not diminished, despite the ... New Zealand dollar being where it is," he said. "Prices are holding up and volumes are expected to increase next year," he said.

Currency movements are expected to play a big part in the profitability of all the commodities groups.

A fall in the historically high NZ/US dollar rate would favour most commodities exporters.

The high NZ/Australian dollar cross rate, which currently sits at about five-year highs, will hurt some export groups such as winegrowers, whose biggest market is across the Tasman. APNZ