Farm cash tipped to leap - if kiwi falls

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Farm income will jump more than half by 2015 according to a Ministry of Agriculture and Forestry report, but this is based on the New Zealand dollar dropping to a value not seen in two years.

The annual Situation and Outlook for New Zealand Agriculture and Forestry report said exporters were getting historically high prices in foreign currency terms for beef, dairy, lamb, logs, timber and wool products, with returns expected to continue into the medium term.

MAF director-general Wayne McNee said the steady pick-up in fortunes for primary sectors was notable for its breadth and consistency.

"Adverse climatic events in New Zealand and other producing areas have had an effect in driving up some prices," McNee said.

"But the majority of our primary sectors should be able to look forward to a period of sustained growth, which will enable recovery of balance sheets, reinvestment and some breathing space after a tough few years."

Agriculture sector income - an aggregate measure equivalent to the overall sector's farm-gate profitability - was forecast to rise more than 53 per cent from $4.5 billion this year to $6.9 billion by 2015.

"As with all forecasts [the report] is subject to unforeseeable factors such as extreme weather events and unexpected currency movements. But what it shows is that many of the sectors have their fundamentals in order and are well positioned to take advantage of strong international demand for our products." McNee said.

The relatively strong kiwi dollar reduced the gains passed through to New Zealand farmers, growers and foresters but also reduced the cost of imported inputs such as fertiliser.

The global economy was expected to grow strongly in the next few years, regaining ground lost during the 2008-2009 financial crisis, with the IMF expecting more than 4 per cent growth a year in 2011 and 2012, the report said.

Short-term supply disruptions such as droughts and floods in various parts of the world were a factor supporting recent agricultural price rises, the report said.

"At the same time, the strength of demand coming through from emerging markets, the recovery in many developed economies, and continuing demand for agricultural resources for biofuel production has led the Ministry of Agriculture and Forestry to revise upwards its view of medium-term international agricultural prices."

The kiwi dollar had stayed strong against a trade-weighted basket of currencies - up 3.2 per cent in the year to April this year.

Exchange rate assumptions used in the report were from the Treasury's 2011 Budget Economic and Fiscal Update, and were for the kiwi dollar to remain at historically high levels until the middle of next year and then to depreciate to about historic averages.

"This has the effect of lifting New Zealand dollar prices and returns in the last few years of the forecast period," the report said.

The exchange rate was forecast to drop from US76c in March this year to US58c in March 2015 - a level not seen since May 2009 - with the British pound down from 47p to 34p and the Australian dollar down from A75c to A71c.

BNZ economist Doug Steel said the report was a positive outlook for agriculture.

"There's always an issue around what assumptions you make on the currency going forward and certainly the rather strong decline in the kiwi dollar that's in behind these forecasts is certainly [propping] up the farm gate price outlook in the outer years.

"With the currency you certainly wouldn't rule it out, anything could happen," Steel said.