New Zealand Agribusiness Report Q3 2009

In the New Zealand Agribusiness Report for Q3 2009, we introduce the new Grain Outlook. The value of grain production in New Zealand is dwarfed by the country's vast dairy and livestock sectors. Output, however, has been growing in the past couple of years driven by good growing conditions and an expansion of the area planted to grain crops in response to high prices. With the livestock sector now struggling, particularly sheep farming which has seen falling profitability over the last few years, we see prospects for grain production to keep expanding as farmers replant pasture with grain crops.

The rapid retraction of agricultural commodity prices since last year has hit farm income hard. In April, industry body DairyNZ estimated that the average net income for dairy farmers will fall to NZD17,000 this year from NZD115,000 in 2008. This will come despite a rise in overall milk production, generated by increased herd size and improved pasture conditions. The price paid for milk solids by Fonterra, the country's largest dairy co-operative, fell to NZD5.10 per kilogram (/kg) this year, down from a high of NZD7.90/kg at the height of the dairy boom last year. The price was later revised up slightly to NZD5.20/kg.

Though the new payout is still high by historical standards, the rapid retraction has left many farmers facing a hefty debt burden with a much reduced income. In 2007 and 2008, as dairy and livestock prices were rising, farmers worked hard to expand their output and farm land sales increased rapidly, pushing up the price of agricultural land. With the price of inputs also very high last year, many farmers built up large debts.

Farm sales have now fallen sharply. In the three months to April 2009, the number of farms sold was around half the level seen in the same period of 2007 and a third of the level of 2008. Reflecting this, the price of agricultural land is now falling back. While some farms that have taken on too much debt in the drive to expand over the past years may struggle to survive in the new climate, we believe that most will manage to hold on. Once the world economy gets back on track, we expect demand for New Zealand's meat and dairy exports to see strong growth, particularly from the emerging markets of the Asia Pacific region.

To help New Zealand's dairy farmers prepare for the future, DairyNZ has prepared a strategy for the industry over the next ten years. The Strategy for New Zealand Dairy Farming, launched by Prime Minister John Key on May 5, outlines how the industry should aim to develop up to 2020. The main thrust of the plan is to ensure that New Zealand dairy production is able to maintain its cost competitiveness in the coming years and also to ensure that the sector is able to attract the managerial talent needed to run large, modern farms. The strategy is a positive sign that New Zealand's farmers are aware of the challenges that are ahead and should help them take maximum advantage of the expected growth in demand for dairy products.