Rabobank says this year looks set to generate a sense of sustained recovery in New Zealand agriculture. Picture / Getty Images
Favourable market conditions are set to underpin a second consecutive year of broad-based profitability for New Zealand agriculture, says rural lending specialist Rabobank.
In its annual Agribusiness Outlook Rabobank said 2018 should be a profitable year for "most New Zealand producers across an unusually broad base of subsectors".
As the second consecutive good year after a run of tougher years, 2018 looks set to generate a sense of sustained recovery in New Zealand agriculture, the report says.
However, where New Zealand's agricultural industry chooses to direct improved cash flow and focus during this sustained positive run will have important ramifications for many years to come, it says.
"The world economy is enjoying a broad-based recovery and the prices of the key commodities produced in New Zealand are generally high, while prices for key farm inputs, especially fertiliser, are generally low," said the bank's New Zealand country banking general manager Hayley Gourley.
Dairy: A difficult, dry start to the year, but firm world pricing should ensure a second season of profitability in 2017/18.
Beef: May be some price easing, but farmgate cattle prices should remain above long-term average returns, supported by demand in the US and China.
Sheep meat: Low levels of global lamb inventory, combined with flat New Zealand production and strong prices, will continue to support farmgate returns through 2018.
Wool: Subdued market conditions will prevail, before some improvement in the second half.
Wine: 2018 is shaping up as another profitable year for New Zealand grape growers, as the global market tightens.
Horticulture: In multi-year expansion phase, with market opportunity attracting investment that will likely see another solid growth year in 2018.
Fertiliser: Prices expected to remain low.
NZ dollar: Bearish - kiwi expected to fall towards US65c on a 12-month view.
Wellington-based Rabobank New Zealand is on track to post a much-improved profit for 2017 after the dairy downturn put a dent in its earnings the previous year, said new chief executive Todd Charteris.
Rabobank suffered a 14 per cent decline in its annual profit to $89.5 million for 2016 after the rural lending specialist boosted its provisioning for bad debt in the face of what was then a sharp downturn in the dairy sector.
Farm balance sheets came under severe pressure when prices slumped to $3.90/kg of milksolids in the 2014/15 season and to $4.40 kg in 2015/16 - well below most farmers' break even points.
Prices rebounded in 2016/17 to $6.12/kg and the current forecast from Fonterra for the 2017/18 season sits at $6.40/kg.
Charteris, who started in his new role this week, said the 2017 year would show a big improvement.
"Our numbers will be released in March for the December year end and we expect to see a significant uplift from those 2016 results," he said.
"The portfolio has certainly improved and dairy has picked up," he said.
"The [milk price] forecast looks reasonable for another year, so it's brought profitability back to that sector."
Charteris, who grew up in Otago, has been with Rabobank since 2000 – most recently as national manager Country Banking Australia, a role he has held since 2015.
Looking back over the last year, Charteris said there was an air of confidence in New Zealand agriculture, despite volatile dairy prices, unseasonable weather - wet and dry - over the last 12 months.
"I think globally the markets are pretty well in favour of what New Zealand produces, and from a commodities point of view that's a positive.
"What's weighing on that is some of the climatic challenges we've seen," he said.
Fonterra has already signalled that it expects dairy production to be down this season, so producers will not be able to take full advantage of those strong market fundamentals.
The New Zealand dollar has strengthened to US73.5c from US68c last December , late last year but the bank's view is that the currency will ease over the coming 12 months.
I think globally the markets are pretty well in favour of what New Zealand produces, and from a commodities point of view that's a positive.
Charteris said there was uncertainty on the back of the new coalition government, and the effect its policies might have on wages, investment and water.
"That's just keeping a check on people's confidence levels I think."
Charteris said dairy, which is coming up against environmental constraints after two decades of strong growth, is likely to enter a period of consolidation.
"I certainly think there are growth opportunities and let's face it, the dairy industry is such an important contributor to the New Zealand economy and I would expect to see that continue."
Looking ahead, Charteris said there would be potential for further intensification within current dairy systems.
Farmers were faced with deciding on whether to focus on low-cost models or opt for slightly higher-cost, higher-production type models, he said.
"There are different models within dairy as an example and there is a lot of intensification that could further occur I think."
Charteris said rural lending was a very competitive marketplace.
"We have certainly got ambition to grow and we look forward to the challenge of that," he said.
There was a healthy appetite for capital in horticulture, where there was a lot of ambition to grow.
"I think that we will continue to see investment in pretty much all of our farming systems as we chase these export markets where the potential is."
Charteris replaces Daryl Johnson, who left the bank last year.