KEY POINTS:
While the outlook for agriculture is finely balanced, farmers have good reasons for optimism, according to a report by agricultural bank Rabobank.
"A lift in pricing is emerging for agricultural commodities globally based on fundamentally higher food demand, the emergence of new demand for agricultural products from the
energy sector, and a limited ability for production to increase sharply in the short-term," the bank's head of agribusiness research Bill Cordingley wrote.
Despite a high dollar, increasing input costs, high interest rates and a slowing domestic economy, there is optimism that an emerging soft commodity boom will create opportunities for New Zealand farmers, he said.
There was growing belief global demand would exceed supply for some time, keeping prices strong.
He noted last year was mixed for farmers with the dairy sector experiencing record prices, while wine exports enjoyed another record year, and the deer industry saw good signs in terms of higher prices on the back of sharply lower production and improving global demand.
However, other sectors including sheep, beef and horticulture languished under various pressures, including soft global demand, excess processing capacity and a continually high New Zealand dollar.
Mr Cordingley said the recent boom in global prices was a demand and supply story.
"Demand has been growing steadily for a number of years, based on strong population and income growth and new demand from the biofuels sector."
Growth around the world is again forecast to be strong in 2008 despite the increasingly serious problems in the US economy.
"The developing world is increasingly the engine for global growth and is expected to expand by 7.4 per cent this year," Mr Cordingley said.
In terms of supply, with attractive prices farmers will undoubtedly respond by increasing output and, if successful, this would soften prices somewhat.
However, he noted global stocks of most traded agricultural commodities had been run down to historical lows over a number of years.
"The world is unlikely to lift production sufficiently to meet demand and rebuild stocks within the coming year," he said.
Food price inflation was now an issue for many governments around the world as higher agricultural commodity prices combined with higher oil and energy prices pushing up costs.
In an effort to reduce inflation and avoid social unrest, various governments have intervened to try to cap food prices - reducing import tariffs for staple food items, increasing subsidies, or using export taxes and bans to increase domestic food supply.
Mr Cordingley said the new Emission Trading System (ETS) would create new challenges and opportunities for agriculture.
A growing link between agricultural commodities and the highly volatile energy sector, driven by biofuels, and an increase in speculative investor activity, was causing price volatility, he added.
Input prices for items such as chemicals and fertiliser will remain high and volatile in 2008. Oil has reached all-time record prices in real terms, and US dollar weakness is dampening export returns in the local currency.
"While difficult for New Zealand's farmers, many global competitors are struggling with the same challenges and also face additional limitations including restricted market access, irrational government intervention in their markets and inefficient infrastructure that make it more difficult for them to compete," Mr Cordingley added.
- NZPA