Primary export revenue set to fall

Revenue from forestry exports is predicted to remain steady at about $4.5 billion before rising to $5.3 billion a year by 2016. Photo / NZPA

Export revenues from the primary sector are expected to decline during the year ahead because of falling prices, the Ministry for Primary Industries says.

In its annual overview and forecasts, it says the impact of a high New Zealand dollar has been mitigated by strong product prices for most primary industries - horticulture and wood processing being the main exceptions.

But world prices for dairy products, meat and forest products have been falling for a year now and the exchange rate has provided only a limited offset.

The ministry's forecasts rely on the Treasury's assumptions for the exchange rate, which are that it will remain about where it is on a trade-weighted basis for the coming year then depreciate by about 12.5 per cent by 2016.

If it does not, and stays high, the ministry estimates that dairy export revenue would be 21 per cent lower than its baseline forecasts by 2012, meat and wool revenues 22 per cent lower and forestry exports 21 per cent lower.

In the latest season volumes have been boosted by exceptionally good growing conditions, horticulture again excepted, which by definition cannot be assumed to continue. Dairy production jumped 10 per cent in the year just ended, of which a quarter was through increased stock numbers and three-quarters because of higher productivity per cow.

Deputy director-general Paul Stocks said, assuming reasonably good growing conditions, production was forecast to rise about 2 per cent a year, with a similar 3:1 split between productivity and stock number gains.

However, the milk price is expected to drop 35c a kilogram of milk solids or 6 per cent in the season ahead before recovering to be 29 per cent or $1.75 a kilogram higher by 2016.

As a result of static production, a sticky exchange rate and lower prices, dairy export revenue is forecast to drop 9 per cent to $12.6 billion in the year ahead.

Beef demand is good, assisted by drought in the United States which reduced inventory levels to their lowest since 1952.

The ministry forecasts beef export prices will remain high in the year ahead - at least in US dollar terms - because of tight supply in the US market.

Beyond that it expects lower feed grain prices and increased exports from Australia and the US to take a toll of New Zealand export prices, though they would remain higher than before 2011, reflecting rising incomes and demand for protein in Asian markets.

A 22 per cent rise in lamb prices in the British market had spurred higher production elsewhere, including Australia.

Wool production has dropped slightly, reflecting lower sheep numbers, but the construction boom in China had boosted demand for strong wools for carpet, and though prices are easing it is from historic highs.

Forestry exports are expected to remain steady at around $4.5 billion. over the year ahead before rising to $5.3 billion by 2016.

DAIRY PRICES WELL DOWN FROM PEAK

Global dairy prices have fallen sharply from their peaks, under the weight of increased production. They have dropped 28 per cent since March last year, according to ANZ's commodity price index.

But in a research note on the sector, Goldman Sachs economist Philip Borkin points to evidence that demand in emerging markets remains firm, and to the fact that New Zealand dairy farmers are unlikely to immediately enjoy again the excellent growing conditions of last season, as factors that will eventually put a floor under international prices and contribute to a recovery.

"Nevertheless the damage to prices has been done and we forecast the milk price component of the dairy payout to be $5.40 a kilogram of milk solids for 2012/13, the lowest since 2008/09, before recovering to $6.70 for 2013/14."

The sharp fall in 2008/09 triggered a large retrenchment in spending by farmers, and a 19 per cent fall in rural land prices.

But while dairy farmers face a challenging year, Borkin does not expect the impact to be nearly as great as it was then. Largely because of lower interest costs, farm expenses are now considerably smaller as a percentage of income, in cash terms, at 59 per cent against 69 per cent in 2008/09.