Farmers on long road to recovery

The effect of the recession on the agricultural sector is not all bad news, according to Rabobank's annual New Zealand Agriculture in Focus report.

Rabobank senior analyst Hayley Moynihan said the "sector started the year grappling with the impact of the most turbulence ever seen in international markets".

"In response to these challenges, many New Zealand producers are expected to batten down the hatches in 2009 and focus on cost reductions and operating efficiencies to ride out the storms in international markets," Ms Moynihan said.

The actions taken by farmers would allow them to capitalise on an expected recovery in rural commodity markets in 2010, while a decline in the dollar, lower interest rates and a collapse in global input prices, including fertiliser, fuel, chemicals and freight, would provide some relief.

"There's still some room for efficiency gains but the lower New Zealand dollar assists in increasing income for those export-oriented sectors and the easing in input costs means the opportunity for increased bottom-line profitability will come through, perhaps not so much in 2009 but more into 2010," Ms Moynihan said.

In its Agribusiness Review for February Rabobank said bull and steer prices were 5 to 20 per cent higher than the same time last year, depending on location, while lamb prices were 40 to 50 per cent higher.

And there was a flow-on effect from the agricultural sector, she said.

"I think we see that in rural towns around New Zealand ... the resilience during a downturn that those towns often have because the rural sector still does need to continue producing," she said.

"The agricultural cycles don't stop because there's a recession, cows still calve and sheep still have lambs.

"Even most of the major centres are still reliant in the agricultural service sector in one way or another."

This season's forecast payout by dairy farmer co-operative Fonterra has dropped from $7 to $5.10 per kg of milksolids.

The payout is well down on last season's record available payout of $7.90 per kg, 24c of which was retained to protect the balance sheet, but would still be the third best this decade.

State-owned enterprise Landcorp Farming employs about 590 people, with 108 properties and 1.6 million stock units including dairy, sheep, beef and venison.

Landcorp chief executive Chris Kelly said he was cautiously optimistic.

The dairy sector had been most affected with a cost structure related to Fonterra's initial forecast for this season of $7, Mr Kelly said.

"I think there will be not a lot of discretionary income this year. I think for next year farmers will adjust their costs structures."

Mr Kelly expected next year's Fonterra payout to drop but prices for sheep to rise.

"Whereas last year dairying was the star, this year sheepmeat looks like it's going to be the star."

Venison had been an unsung hero, he said. "We had a clean-out of producers a couple of years ago and we're getting historically high and sustainable levels for prices."

Federated Farmers president Don Nicolson said the sheep meat sector had had so many poor years he doubted whether farmers would be doing anything other than bank some gains this year.

However, there was a potential shortage of breeding animals, especially in the sheep meat industry, Mr Nicolson said.

Drought and conversion to dairying helped reduce the national sheep flock, estimated to be 33.9 million in June last year - a drop of 12 per cent on the previous year and less than half the 70 million peak in 1982.

"I imagine that the space that those sheepmeat farmers are finding themselves in is a whole lot better but the problem for New Zealand Incorporated is have we enough capital stock on our farms or are we way under-stocked as a country to take advantage of better trading conditions that the lower dollar has given us?"

The scariest proposition facing the country was the rising spectre of protectionism among major trading partners, Mr Nicolson said.

The European Union in January reintroduced export refunds for butter, cheese, whole and skimmed milk powder suspended in June 2007.

"We do know the history books show that's the worst thing you should do in a recession that's global is to put up barriers to trade."

PRIMARY SECTOR FORECASTS

DAIRY
* Demand is expected to remain weak at least through the first half of the year.
* Improvement in the global economy, lower retail prices and improved credit conditions should bring buyers back in the second half of the year, with prices likely to rise before 2010.

BEEF
* Intensified export competition is forecast in the US, EU and North Asia, as competitors increase supply back into these markets.
* Producers can expect to benefit from a relatively more robust international market for beef in 2009.

SHEEP MEAT
* Lower supply is expected to support international prices at or near current levels in most markets, despite a weaker global demand.
* Lamb prices in 2009 are expected to be higher than for the past three years.

Source: Rabobank New Zealand Agriculture in Focus