By Allan Barber*
When I read the headline forecast in the December update of the Situation and Outlook for Primary Industries report, my initial reaction was “they must be joking, what planet are they on?” After a slightly more in depth study of their analysis, I am still baffled.
Their prediction for the 2016 year appears to be based on two main premises: firstly product prices will be roughly maintained at present levels due to strong overseas demand and secondly the exchange rate will be 15% lower than at the time of the June update.
These factors indicate an increase in export revenue of $1.9 billion, roughly half from red meat and the other half from forestry and horticulture. Now I am not qualified to judge whether or not the forestry and horticulture forecast is realistic or not, but I seriously question how the red meat sector will manage to increase its exports by this much.
There is a risk in basing hopes on a collapse in the NZ dollar which appears to be moving doggedly in the opposite direction against all major trading partners apart from the US dollar. But added to this, market prices in all main markets for beef and lamb have moved down throughout 2015 and show very little sign of improving in the first half of 2016.
The Ministry for Primary Industries (MPI) draws attention to the depressed state of the sheep meat market due to low prices, drought in the South Island, poor mating conditions leading to reduced lambing percentage and lower flock numbers. But hey presto! The effect of the falling dollar is enough to more than offset all these negatives. The confidence in a beef recovery is based on a substantially lower Australian cattle kill and reviving demand from China and other Asian markets. The dairy forecast is based on 7% lower production than last year, but a recovery in prices from a low point of $3.50 in the last quarter of 2015 to $5.60 12 months later.
The effect of this is predicted to be a 3% drop in export revenue for the 2015/16 year followed by a 32% increase in the following year. Global conditions such as higher EU production following the removal of quotas, increased Chinese domestic production and the effect of the trade ban on Russian imports are all positive indicators of an improvement in dairy revenues. But 32%? I’m sure dairy farmers and Fonterra’s management would be thrilled to think their recovery will be this good, but they won’t be willing to bet the farm on it.
We mustn’t ignore the effect of E-commerce which MPI touts as a great source of future growth. While I admit there is potential for export growth, New Zealand exporters are not the only ones seeking to take advantage of this trend. To gain disproportionately from the trend, we must do it better than our competitors.
So on balance I am sceptical of MPI’s rosy forecast of future export growth. They are still trying to paint an optimistic picture against a backdrop of some negative factors which, while not insurmountable, pose the danger of some substantial headwinds. The SOPI report mentions most of these factors, but I am not convinced they have fully taken them into account.
The improvement bears a strong resemblance to the ‘hockey stick’ forecasts contained in all strategic plans which are trying to convince readers that improvement is just round the corner after the present trough.
Potential downside risks to the optimistic forecast for 2016/17 are: our dollar may not fall as anticipated or hoped for, the dairy price may not recover as quickly, red meat prices and volumes may suffer more than forecast from drought and soft market demand, China or the global economy as a whole may not recover as hoped. None of these may occur or only a couple of them, but MPI’s optimism appears to be predicated on them all meeting their best case scenario.
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*Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.
12 Comments
Allan, MPI's civil servants say what they think ministers want to hear. Or, if they value their jobs and an occasional friendly wave from the minister, they certainly should do. When they don't, as with the Commissioners for the Environment and Children, and others, they'd better be thinking about retiring.
It's something we learned from our political and economic heroes, the Chinese - when the party wants growth, or anything else, the flunkeys dutifully produce the numbers. No arguments. It keeps things simple. Keeps everybody happy.
Have you seen those photographs of Kim Jong-un and all of those accompanying him anywhere, always with notepads open and pens at the ready? That's the ideal relationship with power. They just about managed this with the Christchurch rebuild. Agriculture isn't turning out so compliant.
If our leaders could find more civil servants and appointees of the calibre of Susan Devoy, they'd be happy. But people of this quality are not that common. Maybe, among the countless immigrants we receive each year, we can find more like her. It's worth keeping the door open. Others will turn up. And if they come from command economies, all the better, they'll know the ropes, fit right in. It speeds up training, and less risk of unusual ideas.
In the meantime, MPI's flunkeys know which side their bread is buttered. We're still on course, so I heard on National Radio this morning, to double our exports. Imagine that. They're not too sure about when, it may be a year or two later than planned (and, as the helpful chap said, the exact date, after all, is not that important) but at least MPI is on message.
And - as everyone in politics knows - it's being on message that counts. Hang the facts. The facts can take care of themselves. It's more important to look after yourself.
Happy Christmas!
I agree workingman, a huge layer of bureacracy has been constructed in NZ in recent years based on the idea that primary industries is going to boom. The problem is the disconnect between town and country. We are finding more and more that we are having to deal with city people who are making rules for us without spending any time in gumboots trying to understand our industry. There are some excellent local people in the compliance side of farming who have years of experience but the trend has been to move jobs to the cities, and the people who are making the rules are out of touch with reality. I would say that this MPI report is wishful thinking.
Thanks, tim12. I'm not a farmer, but from the outside, I too think there is a substantial disconnect between those on the land and those in leadership. It seems to me that farmers are being led up the garden path, away from real available value, to their long-term detriment and that of the country. MPI isn't helping with its volume growth opportunity make-believe (my attempt at humour above). But, for now, I wish you a merry Christmas!
you can see the history here:
https://www.mpi.govt.nz/about-mpi/corporate-publications/
scroll down to the fourth heading
this time last year there seemed to be similar fx effect (83 v 76)
this half year it seems from the graph 75 v 59
full year reports have show a fx table.
> MD DA100 EUROPEAN DAIRY MARKET OVERVIEW
>
> MADISON, WI. December 23, 2015 (REPORT 51)
>
> WESTERN AND EASTERN EUROPE
>
> WESTERN OVERVIEW:
>
> Milk production in the E.U. has been stronger overall than previously
> expected during the final three months of the year. Countries noted as
> having particularly strong milk production include Ireland, The
> Netherlands, the United Kingdom, Germany and France. Production during
> the first 3 months of 2016 is expected to be ahead of the first 3
> months of 2015. Higher than expected milk production during the final
> quarter of the year, ahead of the same period the previous year, is
> considered indicative of the potential for higher production during
> the first part of 2016. Typically milk production increases from
> January into May in the E.U. Caution is being voiced that beginning
> 2016 with atypically higher milk volumes could lead to keeping
> processing facilities very busy. There is concern about potential
> production bottlenecks next year. This is viewed as keeping pressure
> on prices next year, particularly skim milk powder leading to
> continuing intervention purchases, as well as whole milk powder. This
> view of 2016 suggests a challenge for a market recovery. Some of the
> increased milk production this year has gone into cheese
> manufacturing, where pre-Christmas sales have been especially strong.
> This has somewhat drawn down cheese inventories immediately ready for
> sale but manufacturers are comfortable with inventories at this time.
> Cheese in aging programs overall remains early in the process and has
> some months to go before becoming sale ready. Cheese export sales are
> stable. Fluid milk sales are expected to be lower, as many businesses
> close over a 3 or 4 day period with people staying close to home.
> Markets for milk powders are mostly quiet, which is the typical
> situation at this time of year in the E.U. The European food industry
> is believed to be adequately stocked. This leaves potential buyers
> cautious and price sensitive. Particularly with skim milk powder being
> sold into intervention, for the first time since 2009, expectations
> are for pricing to remain near current levels for a while which
> lessens pressure to finalize transactions. Pricing for whole milk
> powder and skim milk powder have trended lower throughout 2015.
>
> EASTERN OVERVIEW: Poland is the fourth largest milk producer in the
> E.U. and a net exporter of dairy products. Production January-
> September 2015 is up 1.9% from the same period of 2014. September 2015
> farm gate milk prices were 11% below prices in September 2014. Lower
> prices are attributed to increasing production but slower export
> markets. Expectations are that lower milk prices will not lead to some
> dairy producers reducing milk production. Revenue dependency necessary
> to repay 2013 and 2014 credits used to enlarge and modernize farms
> necessitates certain levels of revenue.
I do not understand the fixation with commodity production, while the available value opportunity is resolutely ignored. If the dairy and meat industries are serious about value growth, they might consider that there is no population more enthused by premium value, luxury items, than China.
In this environment, among an expanding, educated, wealthy consumer class, a value proposition such as grass-fed product will command a significant premium. Grass-fed may have product benefits (various literature claims so, although I am no expert in this); it certainly has socially and financially competitive buyer-value (which is a big part of all premium product buying). It seems to me that if grass-fed farmers were appropriately rewarded, and these persuasive product propositions communicated, as with organics, it would not merely transform the fortunes of the industry, it would also radically improve our own environmental conditions.
Our government has tied itself in any number of international diplomatic knots in order to please China, and yet it and the industry appear content to look the other way when it comes to capturing value in this market. Is it that industrial, PKE, feed-lot, antibiotic-dependent agriculture is now so embedded here? Is it that our 'clean, green' environment is too far degraded? Shall we just leave the premium value opportunity to other countries?
Surely successful selling is based on the "point of difference" principle. But as you say workingman, we are just another horse in the race. We won't know what we had 'til it's gone. I think our primary sector jockeys have got blinkers on, the horses are doing their best. And best wishes to those folk in the ag sector...you cope with a lot more than comes out the end of the animal.
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