Little change seen in agri-food crystal ball
Keith Woodford casts an eye over the year ahead for agri-food and sees no sudden improvements.
Among the bigger industries, only kiwifruit and beef have a positive outlook. The wine industry could go in either direction this year. Among the smaller industries, manuka honey could be the one to watch.
The year has started badly for dairy, with whole milk powder down 4.4 per cent at the early January auction. For me, this number came almost as a relief. It could have been a lot worse.
Fonterra’s current price estimate of $4.60 for the 2015/16 season is now looking increasingly optimistic. My own estimate is now down to $4.10 but still with plus or minus at least 50c.
To achieve $4.60 for the year, the auction prices for whole milk powder over the remainder of the season now need to average well over $US3000 per tonne. The more immediate issue for farmers is not the final payout, but the possible reduction in advance payments from February to May, and then beyond.
There is no doubt that dairy prices will rise again, but timing will be everything.
I always watch closely the Rabobank predictions because it has the best overall “on the ground” team across the world to assess what is happening in each market.
However, over the least 18 months it has been consistently pushing out the turning point. Quite simply, their people, and almost everyone else, have underestimated the depth of the downturn. I still see no quick turnaround.
In the meantime, all that most dairy farmers can do is focus on short-term survival. The role of the banks remains crucial in providing support through these troubling times. One way or another, the banks will always come out on top.
Sharemilkers are the dairy group whose plight is often unseen. They are too busy in the shed to be in the media. Whereas farm owners should this year see some increase in the share dividend, the share farmers rely totally on the milk cheque and, in some cases, livestock sales.
Whereas most farmers will emerge from this downturn with scarring, but still with considerable remaining equity, that is not the case for many of the sharemilkers. There are close to 4000 sharemilkers in New Zealand; I estimate that there are at least 1000 of them are at real risk of coming out of the downturn with nothing.
Sadly, the number of small family farms with less than 300 cows will further decline, and we will see the first signs of this in 2016. Many of these farmers have prospered over the last 10 years, until the current downturn. However, the existing farms cannot survive the transfer to the next generation. The challenge for those who now want to get out will be to hang in until prices rise.
This will also be the year that New Zealand gives serious debate as to long-term structures and systems within dairy, but there will be no quick consensus. There are too many people locked into old-style thinking for that to occur.
I see a great long-term future for New Zealand dairying, but only if we can recognise that the world is changing. The old model of seasonal milking, production of commodities, and on-paddock wintering is not going to get us through the 21st century.
China and other parts of Asia will continue to be our major markets, but in future there will be less reliance on whole milk powder. It is worth noting that, in 2015, Chinese consumption of dairy has increased 6 per cent, despite the decline in whole milk powder imports.
For many parts of New Zealand, the new model will involve off-paddock (housed) wintering of cows, non-seasonal production and a lot more branded products. It will require massive change of thinking. However, it will still be a pastoral-based model.
The biggest risk for New Zealand dairy is that by the time the changing opportunities are recognised they will have already been grasped by others. Indeed that is already happening.
Sheep and beef
In relation to sheep and beef, only time will tell whether it is another year of stagnation or whether the New Zealand industry grasps the future.
The key short-term decision is Government approval for Chinese investment in Silver Fern Farms (SFF). There is really only one way that decision can go, so the sooner approval is granted the better.
The domino effects from a rejection of the SFF proposal would be catastrophic. Without this investment, SFF faces a bleak future. And in a broader economic and political context, relationships between New Zealand and China would be seriously damaged. Any rejection of the proposal could only be because it was China.
The sheep industry faces serious over-capacity for processing, but that issue cannot be resolved until SFF ownership is secure.
I expect to see SFF take a lead role with some internal restructuring that will start a wider process of plant closures. But it could be 2017 before that happens.
Once the SFF deal goes through, New Zealand will still have a genuine co-operative in Alliance to compete with the investor-owned companies. There will still be no shortage of competition in meat processing. It will be a genuine contest.
Whereas dairy will eventually go non-seasonal, that will not happen with sheep. The biology of non-seasonal lamb production is very difficult, and apart from some niche operators, the economics will never stack up.
As for improving on-farm productivity with sheep, it is easier said than done. It is a case of quietly chipping away seeking new production efficiencies.
I expect another good year for beef, probably helped by some further softening of the New Zealand dollar. The biggest factor affecting the New Zealand dollar this year could well be international dairy prices. If dairy stays down, then the dollar will drop further and other export industries will benefit.
In the long term, the future for beef will be linked to better use being made of surplus calves from the dairy industry. But for that to happen we need to sort out the limitations with sexed semen. The technology is sufficiently up-to-speed for non-seasonal calving systems, but is not quite there for seasonal systems, where even a small reduction in conception rate cannot be tolerated. So that will not happen in any serious way in 2016.
The latest data is showing that the El Nino cycle has now peaked and over the next 12 months we will almost certainly slide into La Nina conditions. History tells us that in the past this has always happened after a big El Nino, but how that will play out in terms of New Zealand weather is far from clear.
Over most of New Zealand, the current El Nino has so far brought relatively benign conditions. Sea temperatures to the south and east of New Zealand remain cool, and anticyclones continue to extend well south in the Tasman Sea creating southerly flows.
One lesson for sure is that in our part of the world every El Nino pays out differently. Indeed NIWA says that only 25 per cent of between year rainfall variability can be attributed to the El Nino and La Nina cycles. With that important caveat, I see heavy rains in late autumn and winter as a possibility.
Finding the big movers
I predict that 2016 will be a big year for kiwifruit, led by increasing volumes of the new SunGold variety. The apple industry is also stepping up to new heights. Manuka honey could go either way, with exciting potential but commensurate risk. For the longer term, I see green-lipped mussels as the next heavy lifter in the export game, but that is on a 10-year horizon rather than for this year.
As always, a lot will depend on what happens on the international stage.
Surely oil cannot go much lower, but the big message is that currently there is a global oil surplus. There is no obvious reason why that will change in the short-term, but as with all commodity markets, volatility is the name of the game.
Russia could open its markets again to European dairy products but on balance that seems unlikely. What happens in China will be crucial. Should the Chinese economy falter – it is still growing at close to 7 per cent – then the whole world will get a bad cold. As for the Middle East, anything could happen.
Keith Woodford is an independent consultant and Honorary Professor of Agri-Food Systems at Lincoln University. His writings are archived at http://keithwoodford.wordpress.com