The year ahead in farming: Rising kiwi sapping rural sector's efforts

COMMENT - By LIAM DANN, primary industries editor

Once again the agricultural sector will largely determine how healthy the New Zealand economy will be this year.

Of course, ask most farmers, most years, about the immediate outlook and you'll probably get the same answer.

A pragmatic sense of pessimism and a scout-like need to be prepared are prerequisites of a primary producer's job.

But one factor - the dollar - gives the traditional sense of impending doom an empirical edge this year.

The dollar's continued rise guarantees that - regardless of their domestic performance - producers will become less competitive in the global market.

Thankfully, most parts of the sector are already operating efficiently.

The big meat companies have restructured, the wool industry has a new look and even the once-lumbering dairy giant Fonterra is slimming down and looking to add to its profits.

In international markets strong commodity prices for meat and wool have so far buffered producers from the worst effects of the dollar.

The dollar's rise last year exceeded nearly all predictions as debates about the prospects of it breaking the US50c barrier gave way to debates about US55c, US60c and then US65c. Suddenly, post-float highs of 72USc are being predicted.

The level of currency pressure on producers looks to be headed for uncharted territory.

At a time when New Zealand's primary producers are doing just about everything right, it seems unbearably cruel that profits look sure to go fall. But that is exactly what the experts are picking.

In December, the Ministry of Agriculture and Forestry's report Situation & Outlook for New Zealand Agriculture & Forestry predicted rising export values for agricultural and forestry products over the medium term, but a reduction in agriculture's contribution to New Zealand's GDP because of the high dollar.

On the stock market the warning signs are already there.

Meat company Richmond last week warned that it had traded below forecast in the first three months of the season and would not make its target profit of $13 million for the year, and in December Affco downgraded its profit forecast for the first quarter of the year.

On top of currency woes North Island meat companies face a shortage of lambs this season, which dates back to drought conditions in the lower North Island last year.

Excess killing capacity has played into farmers' hands in the short term, but meat industry executives say that situation cannot be maintained and farmers will soon bear the brunt of falling returns.

Commodity prices are unlikely to come to the rescue this year.

World beef prices were already dropping from record highs before the revelation of a US BSE scare.

There may be some upside for New Zealand exporters as Asian markets look to make up the shortfall following the ban they have imposed on US beef.

Lamb prices have also been at record highs, but are expected to fall as Britain - NZ's major market - continues its recovery from the Foot and Mouth outbreak of 2000.

The dollar aside, the outlook for dairy this year is more positive than for meat and wool.

Fonterra has already lifted its forecast payout for the 2003/04 season to $4.15/kg. Global prices are expected to continue strengthening from the lows they hit in July 2002.

MAF predicts that dairy farming's contribution to the agricultural sector's revenue is likely to rise by 20 per cent over the next three years from $4.71 billion in the year to March 2003 to $5.65 billion in 2007.

Fonterra chief executive Andrew Ferrier has committed the co-operative to a year of action with as-yet-unspecified plans for global expansion.

The early part of the year will be dominated by that final phase of restructuring for the company. That includes a reshuffle among senior management, the closure of the Wellington office and a move to new headquarters in central Auckland.

Fonterra will look to further increase the size of its branded products business NZ Milk through takeovers and acquisitions.

Small and medium-sized dairy companies throughout Australia, Asia and South America with strong brands in their local markets will all be potential targets.

The other way forward for Fonterra will be the development of new high-value dairy products.

Ultimately, only one thing will guarantee farmers are smiling at the end of this year - a falling New Zealand dollar.