High NZ dollar biggest risk to farm, forest exports

Forecasts for growth in forestry, farm and seafood exports are at risk from the kiwi dollar remaining higher than expected. Photo / NZH

The risk of the kiwi dollar remaining higher than expected over the next four years is the biggest risk to Government forecasts for growth in the nation's farm, forestry and seafood exports, a new Government report says.

The trade-weighted index is forecast to fall 8.4 per cent to 64.7 by March 2016, with weakness against the Australian dollar and yen offsetting gains versus the greenback, pound and euro, according to the Ministry for Primary Industries 2012 situation and outlook report. The TWI was recently at 70.43.

If the decline does not eventuate, revenue from dairy, meat, wool and forestry could be 20 per cent below the ministry's baseline assumptions, the report says.

"In the shorter term, weak European and US economic performance, and lower interest rates relative to New Zealand drive the assumed strength of the New Zealand dollar," the report says.

"Longer term, New Zealand's high and growing level of international indebtedness is expected to be constrained by limits to lenders' appetite for risk, eventually reducing the strength of the New Zealand dollar."

The ministry's baseline forecast is for the TWI to strengthen over the next nine months to reach 72.2 by March 2013. It would gradually ease back to 64.7 by March 2016. The kiwi dollar would be around 80 US cents by March next year, up from its current level of 77.69 cents, before easing back to 69 cents by 2016.

Among the nation's biggest primary exports, fruit is forecast to show the biggest gain in gross revenue between now and 2016, rising 33 per cent to $3.1 billion. Dairy, the biggest contribution to the nation's overseas shipments, is forecast to lift revenue by 27 per cent to $12.5 billion.

Cattle revenue would rise 13 per cent to $2.5 billion and sheepmeat by 9 per cent to $2.45 billion. Wool is the disappointment, with gross revenue forecast to decline 16 per cent to $513 million. Among other commodity items, revenue from vegetables would rise 10 per cent to $1.1 billion.

The forecasts show agriculture's contribution to gross domestic product would rise to $12.2 billion by 2016 from an estimated $9.78 billion in the year ended March 31.

For the current 12 months ending June 30, dairy export sales are expected to rise 5.6 per cent to $13.9 billion as strong production more than makes up for weaker global commodity prices.

"More than any other New Zealand primary industry, the dairy industry has been able to tap into strong economic growth in emerging market economies," the ministry says.

Meat and wool export sales would rise 5.8 per cent to $7.2 billion, reflecting higher meat volumes and increased wool prices.

New Zealand's primary industries have benefitted from increased trade ties with emerging Asia, most notably China, where "investment and private consumption remained strong because of China's solid corporate profits and rising household income," the ministry says.

"The outlook for New Zealand's dairy and forestry exports depends to a large extent on the Chinese economy maintaining its momentum," it says.

That contrasts with the European Union, where there is a risk of further economic deterioration, and the US, where a weak housing market is weighing on demand for forest products. South East Asian countries and Latin America are expected to continue to have stronger growth, it said.