SITUATION AND OUTLOOK FOR NEw ZEALAND AGRICULTURE AND FORESTRY

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MAF POLICY MINISTRY OF AGRICULTURE AND FORESTRY

SITUATION AND OUTLOOK FOR NEw ZEALAND

AGRICULTURE AND FORESTRY

AUGUST 2008

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FURThER COPIES

You can download this publication from www.maf.govt.nz You can request hardcopies of this publication from:

Policy Publications MAF Policy PO Box 2526 Wellington New Zealand Tel: +64 4 894 0252

Email: policy.publications@maf.govt.nz

ACKNOwLEDGEMENTS

Darran Austin, Rod Forbes, Elzet Grant-Fargie, Irene Parminter, Nick Dalgety, Kay Cao, Murray Doak, Loretta Dobbs, Annette Carey, David Allen, Trecia Smith, John Novis, Kelly Dustow and Mark Aspin of the Pastoral Greenhouse Gas Research Consortium. Thanks to Helen Matterson of Lindsay Consulting Ltd for project management and editorial services and to Claudia Riley and Janine Pollock for publication design and support.

Published by:

MAF Policy

Ministry of Agriculture and Forestry Pastoral House

25 The Terrace PO Box 2526 Wellington New Zealand Tel: +64 4 894 0100 Fax: +64 4 894 0742 Web: www.maf.govt.nz

ISBN 978-0-478-32147-0 (Print) ISBN 978-0-478-32148-7 (Online) ISSN 0113-2164

DISCLAIMER

While every effort has been made to ensure the information in this publication is accurate, the Ministry of Agriculture and Forestry does not accept any responsibility or liability for error of fact, omission, interpretation or opinion that may be present, nor for the consequences of any decisions based on this information.

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FOREwORD iii

FOREwORD

Welcome to Situation and Outlook for New Zealand Agriculture and Forestry (SONZAF) for 2008. In this publication, we look at some of the major issues affecting New Zealand’s primary sectors. We present our view of what’s happening in specific sectors and forecast trends over the next five years.

The agricultural, horticultural and forestry sectors provide the core of our economy. Being smart about how we use and develop our natural sectors is paramount to a successful future. The global environment is changing. Sustainability issues are increasingly to the fore. The

emergence of developing countries as key markets, but also as potential competitors, requires not only foresight but the ability to adapt quickly.

The Ministry of Agriculture and Forestry (MAF) is committed to leading the development of policy that will see New Zealand’s primary sectors reach their full potential and make the best possible contribution to the well-being of New Zealanders.

Feedback received on last year’s revamp of SONZAF has been very positive. This is the second year in which we present some of the bigger issues before exploring performance details and forecasts for individual sectors. The publication is supported by a plethora of statistical data available online.

I recommend SONZAF to anyone who has an interest in the primary sectors and the path ahead for New Zealand agriculture and forestry.

Dan Bolger

Acting Deputy Director-General MAF Policy

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iv CONTENTS iv

FOREwORD iii

LIST OF FIGURES vii

LIST OF TAbLES viii

1 whAT’S bEhIND ThE FORECASTS 1

2 AGRICULTURE AND FORESTRY FROM 2008 TO 2012 3

From 2008 to 2012 3

Price buoyancy 3

Strong New Zealand dollar 5

Rising costs 5

Fuel prices 6

Trade with China 7

Trading partner growth 7

New Zealand’s economic position 8

Dairy 9

Meat and wool 9

Forestry 10

Horticulture 11

Arable 11

Domestic productivity 12

Gross agricultural revenue and expenditure 13

ISSUES FACING ThE PRIMARY SECTORS 15

3 NEw ZEALAND–ChINA FREE TRADE AGREEMENT 16

The trade agenda 16

The rise of China 16

So what’s in it for New Zealand? 18

Biosecurity 19

Agriculture fares well 19

Dairy 19

Wool 19

Other primary products 20

Wood products 21

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CONTENTS v

4 FAST FORwARD 22

5 A ChANGING CLIMATE 23

Implications for production 23

Frequency of future droughts 24

National averages, regional differences 25

Adapting to a changing climate 26

Just the beginning 27

6 SCIENCE AND ThE GREENhOUSE DILEMMA 28

Pastoral Greenhouse Gas Research Consortium 28

Other significant investments 28

7 FORESTRY – ThE NEXT 20 YEARS 30

Key drivers and opportunities 31

A forest is more than wood 31

Changing lifestyles 32

Energy supply and cost 32

The markets are overseas 32

The resource 32

Making the vision a reality 33

8 bIOSECURITY 34

Improving post-border interventions 34

Improving interventions at the border 34

Current projects 35

SITUATION AND OUTLOOK FOR ThE PRIMARY SECTORS 37

9 KIwIFRUIT 38

Expectations for 2008 and beyond 39

Exports 40

Production 40

10 wINE 41

Exports 42

Production 42

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vI CONTENTS vi CONTENTS vi

11 APPLES AND PEARS 44

Exports 45

Production 45

12 FRESh AND PROCESSED vEGETAbLES 47

13 ARAbLE 49

International price drivers 49

Exports 50

Production 51

14 FORESTRY 52

Bulk shipping rates 52

Logs 53

Timber and panels 53

Pulp and paper 54

Exports 54

Production 56

15 DEER 57

Exports 57

Production 58

16 LAMb 59

Exports 60

Production 61

17 wOOL 63

Crossbred wool 63

Fine and mid-micron wool 63

Exports 64

Production 65

18 bEEF 66

Exports 67

Production 68

19 DAIRY 69

Looking ahead 70

Exports 71

Production 72

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CONTENTS vii

LIST OF

FIGURES

2.1: Prices for New Zealand’s major forestry and agricultural

commodities in international markets 3

2.2: New Zealand climatic conditions 4

2.3: Real New Zealand retail fuel prices 6

2.4: Agriculture and food, beverage and tobacco manufacturing

productivity 12

2.5: Forestry and logging and wood and paper product processing 13 3.1: New Zealand agricultural and forestry exports to China 17 5.1: Projected average recurrence interval (years) in 2080s under (a) low medium and (b) medium high scenarios for driest annual conditions that currently occur on average once every 20 years 24

5.2: Growing degree day values 26

5.3: Difference in future growing degree day values 27 9.1: Kiwifruit export destinations, by value 39

10.1: Vineyard area, by variety 43

11.1: Pipfruit export volume, by variety 44

12.1: Vegetable export destinations, by value 47

13.1: Arable cropping area, hectares 51

14.1: Forestry shipping rates (Baltic Exchange Supramax Index) 52 15.1: Venison export destinations, by value 57

16.1: Lamb export destinations, by value 60

16.2: Adult sheep slaughter 61

17.1: Wool export destinations, by value 65

18.1: Beef export value, by destination 66

19.1: Skim milk powder export volumes, by major exporter 69 19.2: Dairy export prices in US dollar terms 70

19.3: Dairy export volumes, by product 71

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vIII CONTENTS viii

LIST OF

TAbLES

2.1: Trading partner growth (annual average percentage change) 8 2.2: Interest and exchange rate assumptions, March quarter average 9 2.3: Gross agricultural revenue and expenditure 14 5.1: Potential changes in high-producing pasture 25 9.1: Kiwifruit export prices, volumes and value 38 10.1: Wine export prices, volumes and value 41 11.1: Apple and pear export prices, volumes and value 45

12.1: Vegetable export volumes and value 48

13.1: Arable export value and prices 49

14.1: Forestry export prices, volumes and value 55 15.1: Velvet and venison export prices, volumes and value 58 16.1: Lamb prices, export volumes and value 61 17.1: Wool prices and export volumes and value 64 18.1: Beef prices and export volumes and value 68 19.1: Dairy production, payout and export value 73

ONLINE TAbLES

Statistical tables that support our forecasts are published in the electronic version of this document using the link:

http://www.maf.govt.nz/SONZAF-tables A.1: Livestock numbers in New Zealand

A.2: Land used for agriculture and forestry in New Zealand A.3: Freehold farm sales in New Zealand

A.4: Productivity indexes for New Zealand agriculture and forestry sectors and the wider economy

A.5: Livestock slaughter statistics in New Zealand

A.6: Roundwood removal estimates from forests in New Zealand A.7: Producer prices in New Zealand

A.8: Exports of agriculture and forestry from New Zealand

A.9: Gross domestic product contribution by selected industries in New Zealand (current prices)

A.10: Gross domestic product components by selected production group in New Zealand (current prices)

A.11: Employment in agriculture in New Zealand

A.12: Employment in forestry and logging, agriculture services, and first- stage processing in New Zealand

A.13: Support estimates to agriculture in New Zealand

A.14: Support estimates to agriculture – international comparisons

›

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bEhIND ThE FORECASTS 1

FORECASTS 1

Situation and Outlook for New Zealand Agriculture and Forestry (SONZAF) provides a picture of what the Ministry of Agriculture and Forestry (MAF) understands is happening across the various

agricultural and forestry sectors within New Zealand. We look at some of the fundamental issues they face, now and in the future. By examining each sector individually, we predict the likely economic and market conditions between 2008 and 2012.

This analysis forms the core of our policy advice to Government. It’s also designed to provide a platform for informed debate about the future of New Zealand’s primary sectors. Participating in this debate is a broad range of people, including industry (from farmers, to processors, to exporters), regional and local government, and the public.

SONZAF is divided into two parts. In the first (Chapters 3 to 8), we examine concepts that will underpin our success in the future. This year’s publication includes discussion of the recent New Zealand–China Free Trade Agreement and looks at our changing climate and why this could lead to more frequent droughts.

The forecasting chapters (9 to 19) provide a summary of the key measures used to form our view. The bulk of the goods produced by New Zealand’s primary sectors are sold offshore. SONZAF looks at the movement of international prices over recent years and what is likely to happen up to five years from now. Similarly, export volumes and values are analysed over these periods. Finally, production trends, such as an increase in herd size, provide context for the forecasts reached.

The drivers used to determine what’s happening in the agricultural and forestry sectors include international demand and supply, weather conditions, non-economic incentives and patterns of rural life. We also take into account the effects of animal disease and international agricultural policies in important economies such as the European Union (EU) and the United States (US).

MAF’s forecasting is rigorous, but no forecasting is absolute. Our assumptions are for “normal” climatic conditions and don’t allow for natural disasters on a domestic or world scale nor major economic changes. The Treasury’s exchange rate assumptions from the 2008

whAT’S bEhIND ThE

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bEhIND ThE FORECASTS 2

Budget are used in this publication. However, it should be noted exchange rates are subject to change. Other variables that may affect the outlook are sudden shifts in policy by our international trading partners.

ThERE’S MORE ONLINE

SONZAF is available online at:

http://www.maf.govt.nz/SONZAF/2008

More detailed statistical tables are also accessible via:

http://www.maf.govt.nz/SONZAF-tables

For further information on topics such as livestock slaughter, forestry and trade, try:

http://www.maf.govt.nz/statistics/

FEEDbACK

This is the second year SONZAF has been published in this format and we’d like to find out what you think, what you find useful and how we could improve future editions.

Feedback can be submitted online by using the link:

http://www.maf.govt.nz/SONZAF/feedback.htm

›

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AGRICULTURE & FORESTRY 3

2

AGRICULTURE ^AND FORESTRY

FROM 2008 TO 2012 2

FROM 2008 TO 2012

Record international dairy prices have been a major source of economic growth for the New Zealand economy. In the year ended 31 March 2008, export earnings for agriculture and forestry grew by 8.4 percent to

$23 billion.

Prices for most of our forestry and agricultural goods in overseas markets are buoyant. However, New Zealand producers are up against a strong New Zealand dollar, rising costs and the effects of the recent drought.

PRICE bUOYANCY

After booming in 2007, dairy prices hit their peak in early 2008. Meat prices were left behind but have improved this year. Log prices have been strong since the beginning of 2007.

FIGURE 2.1: PRICES FOR NEw ZEALAND’S MAjOR FORESTRY AND AGRICULTURAL COMMODITIES IN INTERNATIONAL MARKETS, 2003–2008

Notes

1. USD – United States dollars.

2. UKP – United Kingdom pound.

3. CIF – Cost, insurance and freight, or charged in full. The seller of the goods must pay the costs of carriage to the seaport of destination specified in the contract.

Sources US Department of Agriculture, Meat Industry Association, Meat & Wool New Zealand and Pacific Forest Products.

The upward shift in prices across these commodities is part of a wider rise in commodity prices. Oil, metals and grains have all gone up in price. A major driver, common to all of these, is strong demand from China, India and other rapidly developing economies. Because of the pace of change in these countries, and their sheer scale, the size of this new demand for commodities is unprecedented.

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“ Prices for most of our forestry and agricultural goods in overseas markets are

buoyant. ”

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Source National Institute of Water and Atmospheric Research (NIWA).

ThE DROUGhT

A significant drought affected many regions of New Zealand throughout the summer and autumn of 2008. The dry conditions spread around the country and can be attributed to the La Niña weather pattern (El Niño droughts tend to affect New Zealand’s eastern regions).

Rain throughout March in most of the South Island and throughout April in much of the North Island alleviated the situation somewhat. However, there wasn’t sufficient pasture cover over many parts of the country going into winter and this has exacerbated feed shortages.

Farmers had few management options when responding to the drought.

Supplementary feed and fertiliser prices were high, transport costs had escalated and grazing in other regions was limited. Meat processing capacity was low and prices at the saleyards were uneconomic.

Significant flow-on effects are likely for the next two to three financial years due to animals in poorer condition going into the spring. Farmers have reduced capital stock numbers and, in 2008, lambing percentages will be lower and wool weights will be down.

FIGURE 2.2: NEw ZEALAND CLIMATIC CONDITIONS, COMPARING hISTORICAL wITh YEAR ENDED 31 MAY 2008

Annual average number of days with a soil moisture deficit 1971–2000

Number of days with a soil moisture deficit for year ended 31 May 2008

Average days of soil

moisture deficit Number of days of soil

moisture deficit Zero days of deficit

0–30 days 30–60 days 60–90 days 90–120 days 120–150 days

Zero days of deficit 0–30 days 30–60 days 60–90 days 90–120 days 120–150 days

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STRONG NEw ZEALAND DOLLAR

In July 2007, the New Zealand dollar (trade weighted against a basket of currencies) hit its highest level since it was floated in 1985. Exporters with markets in Europe and Australia have been less affected than those selling into the US or Asia, as the US dollar and the Yen weakened considerably against the Euro and Australian dollar. The rise in the New Zealand dollar has been fuelled by New Zealand’s strong economic growth and higher interest rates.

The New Zealand dollar is assumed to depreciate gradually against other major currencies over the next four years. However, on this assumed track, significant relief for orchardists, farmers and forest owners does not arrive until well into 2009.

CLIMATE ChANGE AND ThE FUTURE

Later this century, climate change is likely to mean the west of the country will become wetter, the east drier and the whole of

New Zealand will become warmer. A recent report commissioned by MAF (see page 27 for details) suggests that effects on agricultural production, in average years, will be small when balanced across the country. However, there are differences between the regions. For instance, production (in average years) will increase in Southland and on the west coast of the South Island, but decrease in some east coast areas of the South Island and also in Northland.

Droughts are expected to occur more frequently. Land management practices will need to evolve to adapt to these changes. Seasonal changes may mean that pasture drying starts earlier and farmers might choose to send lambs to the works sooner.

RISING COSTS

Increases in commodity prices have also pushed up costs for local producers. The farm expense price index rose by 5.5 percent over the year ended 31 March 2008. Fuel, freight, animal feed, fertiliser prices and interest rates all had rises of more than 7 percent. In forestry, high shipping rates eroded much of the gains from in-market prices for log exporters.

“ The rise in the

New Zealand

dollar has been

fuelled by

New Zealand’s

strong economic

growth and

higher interest

rates. ”

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Higher grain prices affected the cost of animal feed at a time when the drought meant farmers had to use extra supplementary feed. Fertiliser prices ratcheted up, with farm-gate urea prices rising nearly 40 percent to $720 per tonne for the year ended 31 March 2008. Strong global demand is expected to increase fertiliser prices on international markets.

The strong New Zealand dollar has provided a buffer from high imported oil and fertiliser prices. However, an assumed depreciation in the currency may change this.

On top of higher prices, interest rates rose in 2007. Rates reached their highest level in a decade as the Reserve Bank of New Zealand reacted to inflation pressures in the economy.

The amount of credit extended to the agricultural sector grew at 15 percent per year between 2001 and 2007. The large sums of money needed to establish new dairy farms have contributed to the demand for more borrowing. Interest payments have increased as a result of both high interest rates and the volume of credit extended.

FUEL PRICES

In 2007, inflation-adjusted New Zealand fuel prices reached levels not seen since 1985.

FIGURE 2.3: REAL NEw ZEALAND RETAIL FUEL PRICES, YEARS ENDED 31 MARCh 1976–2008

Notes

1. GST – Goods and Services Tax.

2. Data not available in some quarters.

Source Ministry of Economic Development.

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“ The strong New Zealand dollar has

provided a buffer from high

imported oil and

fertiliser prices. ”

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Rapid economic growth in developing economies, such as China and India, has pushed up demand for oil. This and political instability, which can disrupt the extraction of oil, have put pressure on the price.

TRADE wITh ChINA

China’s burgeoning economic growth is probably the most significant economic event of recent decades. In serving as the workshop of the world, China has helped reduce the prices of manufactured goods.

However, Chinese demand is now a factor pushing up prices of commodities.

On 7 April 2008, New Zealand became the first developed country to sign a free trade agreement with China. China is New Zealand agriculture and forestry’s fourth largest export market and has been increasing in importance as the Chinese economy grows. Trade barriers on a range of New Zealand agricultural and forestry products will come down.

TRADING PARTNER GROwTh

The turmoil created from the exposure of US financial institutions to sub-prime mortgages, and the subsequent risk of credit downgrades, has increased the need for banks to raise and hold higher amounts of capital.

Large losses have also been announced by European financial

institutions. This risk-adverse climate has tightened the availability of credit, and risk premiums have increased. In turn, growth forecasts for a number of the world’s economies have been downgraded. The annual average economic growth rate of New Zealand’s top 20 trading partners is expected to ease significantly from 4.0 percent in the year ended 31 December 2007 to 3.0 percent in 2008, before showing a modest improvement over 2009.

“ ^{China is}

New Zealand

agriculture and

forestry’s fourth

largest export

market and has

been increasing

in importance as

the Chinese

economy

grows. ”

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NEw ZEALAND’S ECONOMIC POSITION

Real gross domestic product (GDP) growth is expected to fall from 3.1 percent in the year ended 31 March 2008 to 1.5 percent the following year. This is due to the combined effect of the drought, high interest rates, falling house prices, and higher petrol and food prices.

Tax cuts will provide some offset by increasing disposable incomes. In the year ending 31 March 2010, a post-drought recovery will contribute to 2.3 percent real GDP growth. Then, in 2011, real GDP growth is forecast to rebound to around 3 percent per year, with exports boosted by a falling exchange rate.

The Treasury’s 2008 Budget Economic and Fiscal Update forecasts assume the exchange rate will fall by around 20 percent over the next four years. The biggest falls are expected in 2009 and 2010. The Treasury bases this assumed decline on a projected fall in soft commodity prices and a slowing in the New Zealand economy and a return to longer-run average levels. Another factor is reducing interest rate differentials when compared with rates in the US and Japan (interest rates are likely to rise in these economies as they recover from weak economic growth, while rates in New Zealand are likely to be lowered).

Table 2.2 shows interest and exchange rate forecasts from the Treasury’s 2008 Budget Economic and Fiscal Update.

TAbLE 2.1: TRADING PARTNER GROwTh (ANNUAL AvERAGE PERCENTAGE ChANGE), 2005–2011

ACTUAL FORECAST

2005 2006 2007 2008 2009 2010 2011

YEAR TO 31 DECEMbER (ANNUAL AvERAGE % ChANGE) (ANNUAL AvERAGE % ChANGE)

United States 3.1 2.9 2.2 1.0 1.7 2.7 2.7

Japan 1.9 2.4 2.0 1.1 1.3 1.6 1.8

Australia 2.8 2.8 3.9 3.0 3.1 3.4 3.3

United Kingdom 1.8 2.9 3.0 1.5 1.6 2.6 2.6

Euro area¹ 1.6 2.9 2.6 1.2 1.6 2.0 2.0

New Zealand’s top 20 3.4 3.8 4.0 3.0 3.2 3.6 3.6

trading partners Note

1. Euro area refers to the 12 countries using the Euro currency.

Source The Treasury.

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TAbLE 2.2: INTEREST AND EXChANGE RATE ASSUMPTIONS, MARCh qUARTER AvERAGE 2005–2012

ACTUAL ASSUMED PATh

AvERAGE FOR YEAR TO 31 MARCh 2005 2006 2007 2008 2009 2010 2011 2012

NZ 90-day interest rate (%) 6.9 7.6 7.8 8.8 8.5 7.9 7.9 7.2

NZ 10-year interest rate (%) 6.0 5.7 5.9 6.3 6.3 6.3 6.2 6.1

Trade weighted index 70 68 69 72 69 63 59 57

ONE NEw ZEALAND DOLLAR bUYS:

US dollar (US$) 0.72 0.67 0.70 0.79 0.75 0.69 0.65 0.62

UK pound (UK₤) 0.38 0.38 0.36 0.40 0.39 0.36 0.35 0.34

Australian dollar (A$) 0.92 0.90 0.89 0.87 0.85 0.80 0.76 0.74

Yen (¥) 75 78 83 83 78 71 66 62

Euro () 0.55 0.55 0.53 0.53 0.50 0.45 0.42 0.39

Source The Treasury.

DAIRY

New Zealand’s dairy industry is prospering. In inflation-adjusted terms, payouts have reached a 43-year high and a portion of these gains is likely to persist into the future.

Milk solids production was down 3.2 percent for the year ended 31 May 2008 due to the drought. However, if growing conditions return to normal, this should prove a temporary setback. The number of cows and heifers in milk is increasing – up 0.4 percent at 30 June 2007. Steady growth in the number of dairy cows and the yield of milk per cow is expected over the next four years. After recovery from the drought, growth in milk solids production of 3 percent per year is expected.

Other trends include a southern shift. Growth is entirely in the South Island and at the expense of lamb finishing. In contrast, the number of dairy cattle in the North Island is falling due to competition for the land from other non-pastoral and lifestyle uses.

MEAT AND wOOL

Large scale de-stocking is underway in New Zealand’s sheep industry.

The catalysts include the drought, but to a greater extent poor lamb and wool farm-gate prices are encouraging conversion to more profitable dairy farming. Lamb production is expected to decline in coming years.

This is creating excess meat processing capacity and, as a consequence of

“ ^{Growth is}

entirely in the

South Island and

at the expense of

lamb finishing. ”

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this, the Oringi and Burnside meat processing plants closed down in May 2008. More closures may follow.

The outlook for red meat prices in overseas markets is positive. Lamb prices are rising from low levels in New Zealand’s European markets, while beef prices have been strong for several years.

Animal disease problems in the US and United Kingdom (UK) have created significant opportunities for New Zealand meat producers. This has been the case in Northeast Asian beef markets since 2003 and in European lamb markets briefly in late 2007.

FORESTRY

Export volumes and revenues of forestry products have been flat since the year ended 31 March 2003. With low returns, New Zealand’s forestry sector is not harvesting and processing all of the available resource.

Some forests in the central North Island have been converted to farmland, although this has slowed, pending the passage of legislation on the Emissions Trading Scheme.

With the New Zealand dollar expected to depreciate in 2009 and beyond, harvest of New Zealand’s forest resource is forecast to increase.

High shipping rates and exchange rates are eroding good prices for logs in international markets. However, the outlook for log prices is positive.

Demand is increasing in China and India and supply from competitors is constricted somewhat.

Demand for timber and panel products is falling internationally as housing booms unwind in many countries. The high exchange rate has compounded sluggish demand, squeezing processors.

Longer term, New Zealand’s exotic forest resource is increasing, as New Zealand’s Pinus radiata plantations mature. Another feature of forestry is its more prominent role providing environmental services, for example, carbon sequestration, which will result in a more diverse forestry estate.

“ Another feature

of forestry is its

more prominent

role providing

environmental

services, which

will result in a

more diverse

forestry estate. ”

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hORTICULTURE

Growing conditions were good for New Zealand’s main horticultural crops. In the year ended 31 March 2008, export volumes of wine, kiwifruit and apples each rose by more than 12 percent. For all crops, prices in foreign markets were relatively steady. However, the robust New Zealand dollar has curbed export earnings and grower returns.

Overall, our horticultural sector is projected to grow. Higher export earnings will be due mainly to more land being used for viticulture and rising export volumes of wine and kiwifruit.

ARAbLE

Grain prices have risen dramatically in 2007 and 2008. Over the year ended 31 May 2008, prices for internationally traded wheat rose by

FOOD CRISIS

In parts of the world where grains form a large part of the diet and overall expenditure, high grain prices are creating an acute

humanitarian problem. Estimates by the World Bank suggest that up to 100 million people may be pushed deeper into poverty.

Already, there have been changes to trade and agricultural policies in response to this situation. In the hope of reducing prices for

domestic consumers, some countries have reduced import tariffs on agricultural commodities, while others have imposed export taxes.

Tariff reductions reduce market distortions and encourage

investment in the world’s more productive agricultural systems. In contrast, export taxes have exacerbated the supply shortage on international markets.

Agricultural productivity is especially pertinent in 2008, in light of high prices and the projected rise in the world’s population from 6.6 billion to 8.3 billion by 2030. The Green Revolution of the 1950s, 1960s and 1970s – a package of new hybrid seeds, irrigation and chemical fertilisers – lifted agricultural productivity and yields in many parts of the world. Globally, this type of progress must continue if growth in agricultural productivity is to continue to outstrip population growth.

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��

56 percent. New Zealand’s arable sector is relatively small and price rises like this are a boon. Other internationally traded grain prices have increased too: corn by 51 percent, soybeans by 70 percent and rice by 219 percent.

DOMESTIC PRODUCTIvITY

In the longer term, productivity is what determines New Zealand’s economic growth and competitiveness internationally. Productivity improvements can help achieve a broad range of objectives. For example, more efficient use of nitrogen fertiliser increases agricultural productivity and reduces nitrate leaching and run-off.

Multi-factor productivity is a measure of how efficiently the inputs of a firm, sector or economy are being used to produce outputs. All inputs and outputs are included in the measure. Examples of inputs are labour, capital, energy, fertiliser and land. Multi-factor productivity is also more comprehensive than commonly used partial measures of productivity, such as lambs born per ewe or milk solids produced per tonne of greenhouse gas emitted.

Sources Statistics New Zealand and MAF.

FIGURE 2.4: AGRICULTURE AND FOOD, bEvERAGE AND TObACCO MANUFACTURING PRODUCTIvITY, YEARS ENDED 31 MARCh 1978–2005

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Over the last 10 years, agricultural sector multi-factor productivity has grown at a rate of 1.8 percent per year, forestry and logging by

0.7 percent, and food and beverage manufacturing by 1.1 percent, while wood and paper manufacturing productivity has contracted

–0.1 percent.

For the wider New Zealand economy, multi-factor productivity grew by 0.9 percent per year over the same period.

FIGURE 2.5: FORESTRY AND LOGGING AND wOOD AND PAPER PRODUCT PROCESSING, YEARS ENDED 31 MARCh 1978–2005

GROSS AGRICULTURAL REvENUE AND EXPENDITURE

The situation within individual sectors of New Zealand agriculture can differ markedly. Gross agricultural revenue at the farm gate is estimated to have risen by 6.4 percent during the year ended 31 March 2008. This is due to the increase in dairy revenue being greater than the decrease in meat and wool revenue.

However, the amount of interest paid by the agricultural sector rose by more than 30 percent in the year ended 31 March 2008. As a result, agricultural sector income – an aggregate measure equivalent to the overall agricultural sector’s farm-gate profitability – is estimated to have gone down.

“ ^Gross

agricultural revenue at the farm gate is

estimated to have risen by

6.4 percent... ”

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ESTIMATE FORECAST

2006 2007 2008 2009 2010 2011 2012

YEAR TO 31 MARCh ($ MIL) ($ MIL) ($ MIL) ($ MIL) ($ MIL) ($ MIL) ($ MIL)

Dairy 4 642 5 182 6 461 7 426 6 457 6 713 7 336

Cattle 2 078 2 184 1 879 2 037 2 303 2 565 2 722

Sheep meat 1 742 1 748 1 666 1 770 1 880 2 034 2 059

Wool 545 526 471 465 520 569 609

Deer 210 255 251 286 307 338 373

Poultry/eggs 135 143 148 150 152 154 156

Pigs 164 166 165 166 168 170 171

Other farming 171 208 189 202 222 244 253

Sales of live animals 1 006 1 162 1 054 1 131 1 240 1 361 1 411

Value of livestock change 85 91 –12 15 13 12 7

Fruit 1 449 1 452 1 592 1 841 2 016 2 206 2 364

Vegetables 715 715 740 697 763 823 868

Other horticulture 278 280 290 273 299 322 340

Crops and seeds 334 398 506 654 619 650 678

Agricultural services 2 879 3 055 3 304 3 554 3 803 4 052 4 302

Non-farm income 205 218 222 219 229 236 241

Total gross revenue 16 638 17 783 18 926 20 888 20 991 22 450 23 891 Intermediate consumption 9 690 10 348 10 696 11 886 12 032 12 817 13 574 Contribution to GDP¹ 6 948 7 435 8 230 9 002 8 959 9 633 10 317

Wages 2 062 2 156 2 219 2 314 2 424 2 533 2 637

Depreciation 1 320 1 421 1 469 1 649 1 654 1 762 1 881

Net indirect taxes² 472 521 562 617 614 661 709

Operating surplus 3 197 3 336 3 980 4 422 4 267 4 677 5 090

Interest paid 2 144 2 555 3 359 3 719 3 444 3 644 3 636

Interest received 189 197 223 226 210 207 193

Agricultural sector income 1 242 978 844 930 1 033 1 240 1 647 Notes

1. GDP – gross domestic product.

2. Net indirect taxes are indirect taxes less subsidies.

TAbLE 2.3: GROSS AGRICULTURAL REvENUE AND EXPENDITURE, YEAR TO 31 MARCh 2006–2012 In coming years, agricultural sector income is forecast to improve. This is due to dairy gross revenue remaining strong, a recovery in farm-gate meat prices, a depreciating exchange rate and falling interest rates keeping a lid on interest payments.

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ISSUES FACING ThE PRIMARY SECTORS 15

ISSUES FACING

ThE PRIMARY

SECTORS

(24)

NZ–ChINA FREE TRADE AGREEMENT 16

3

FREE TRADE AGREEMENT NEw ZEALAND–ChINA

New Zealand is the first developed country to negotiate a free trade agreement with China. The historic signing of this agreement on 7 April 2008 represents our biggest and most successful bilateral trade agreement since the Australia–New Zealand Closer Economic Relations Agreement (CER) was signed 25 years ago.

The significance of the New Zealand–China Free Trade Agreement is apparent when viewed against the line-up of other countries wanting to negotiate

preferential trade agreements with China. It gives New Zealand exporters the opportunity to be ahead of the pack and reinforces existing market share. This is particularly important in areas such as milk powder and wool, where China is already New Zealand’s largest international customer.

ThE TRADE AGENDA

The best way to avoid being disadvantaged, and protect our interests as a small, open and trade-dependent economy, is to vigorously pursue the path of multilateral trade negotiations. In addition, bilateral agreements provide preferential treatment and, if New Zealand is not party to these, then our exporters run the risk of being pushed out of the market of a country that has a bilateral agreement with someone else.

Right now, New Zealand has trade agreements with Australia, Singapore, Thailand, Brunei and Chile. New Zealand is also negotiating with the Gulf Cooperation Council (GCC) and together with Australia we’re negotiating with the Association of South East Asian Nations (ASEAN). Our ambition is to have free trade agreements with all our major trade partners.

ThE RISE OF ChINA

Reforms carried out since 1978 have transformed China’s economy into a relatively open market that is now significantly engaged in international trade and investment. China’s accession to the World Trade Organization in 2001 strengthened its course of reform and took it further along the path of global economic integration.

China has become an increasingly important market for New Zealand.

“ ^{It gives}

New Zealand

exporters the

opportunity to be

ahead of the pack

and reinforces

existing market

share. ”

(25)

FIGURE 3.1: NEw ZEALAND AGRICULTURAL AND FORESTRY EXPORTS TO ChINA, YEARS ENDED 31 MARCh 1996–2008

ChINA

Over the last 30 years, China’s GDP has increased more than tenfold and growth in real GDP averaged above 9 percent between 1990 and 2004. In 2007, China’s GDP was US$3.2 trillion and, measured on that basis, China was the world’s sixth largest economy. Measured on the basis of purchasing power parity, China was the world’s second largest economy. In terms of investment, China has direct investments in 172 countries and regions around the world, with annual flows of foreign direct investment of US$75 billion.

China is the most populated country in the world, with 1.3 billion inhabitants.

Economic growth has done much to improve living standards. The proportion of people living below the poverty line (a measure that assumes people have US$2 per day purchasing power parity) fell from more than 80 percent in 1980 to below 40 percent in 2004. Economic development has been rapid in the coastal provinces and China’s middle class is now estimated to be more than 100 million people and growing. This, coupled with arable land and water resources being relatively scarce, has increased demand for New Zealand’s agricultural products and made China one of our fastest growing markets.

Note

1. FOB – free on board: the value of the goods at the port of export and loaded onto a vessel for transportation out of the country of origin.

Source Statistics New Zealand.

��

(26)

Total New Zealand exports to China in the year ended 31 March 2008 were $2.0 billion, of which $1.6 billion was for agricultural and forestry products.

SO whAT’S IN IT FOR NEw ZEALAND?

While major New Zealand exporters to China pay tariffs on average of around 15 percent, the average tariff on goods from China into New Zealand is significantly lower than that. So the key breakthrough for New Zealand in the New Zealand–China Free Trade Agreement is getting reciprocal access. Right now, China is our fourth largest trading partner, purchasing more than $2.0 billion of merchandise exports and more than $1 billion of services. It is also New Zealand’s second largest source of imports, after our trans-Tasman free trade partner, Australia.

To give the free trade agreement full effect in domestic law, legislation enabling its implementation must be passed by Parliament. The Government’s objective is for the New Zealand–China Free Trade

ThE GAINS

Securing preferential access to China’s economy has the potential to deliver significant gains to our exporters. Estimates of the expected benefits to

New Zealanders through additional annual exports (above the value of annual exports that would otherwise take place) are between $225 million and

$350 million every year for the next 20 years. The benefits are expected to fall in three main areas of the New Zealand economy:

1. ^GOODS – the free trade agreement will result in an annual tariff saving to our exporters of merchandise of $116 million based on current trade.

2. ^SERvICES – the free trade agreement gives New Zealand service suppliers the ability to operate in China generally on the same basis as Chinese domestic suppliers.

3. ^INvESTMENT – New Zealand investments in China will get the same treatment and protection that Chinese nationals receive investing in China.

Removal of tariffs, liberalised trade in services and greater protections and provisions for investment will ensure our businesses remain competitive with those from other countries. It will help New Zealanders develop business opportunities in China, giving sound reasons for greater confidence to engage and invest.

(27)

Agreement to come into effect on 1 October 2008. The final step in the ratification process (of exchanging notes with China confirming all domestic procedures) should be completed in time to allow the first year’s tariff cuts by the last quarter of 2008.

bIOSECURITY

A key issue affecting imports from China of farm and horticultural produce is the ability of Chinese exporters to meet our biosecurity and food safety requirements. The free trade agreement includes a chapter on sanitary and phytosanitary measures that will provide a good framework to progressively address, in an objective and scientific manner, the technical market access requests each party has of the other.

AGRICULTURE FARES wELL

Agriculture is one of the sectors in our economy that benefit the most, as approximately 75 percent of our exports to China are in our primary sectors. A large proportion of this trade is in agricultural products, including dairy, meat, fruit, vegetables, skins and hides, and wool.

DAIRY

In the year ended 30 June 2007, dairy exports were valued at more than

$320 million, more than one-sixth of New Zealand’s total exports to China. Tariffs on all dairy products will be reduced to zero over terms ranging from 5 to 12 years, depending on the specific product. Infant formula and casein with tariffs between 6 and 12 percent will go to zero over five years. Whole milk powder and skim milk powder with tariffs of between 10 and 12 percent will go to zero over 12 years – these powders currently represent the bulk of the trade. There is also a mechanism called a special safeguard and a mid-term review that are in place for these more sensitive dairy products. However, in practical terms, the effect of these additional measures is expected to be limited, as they will apply only if triggered and for a finite period.

wOOL

China is our second largest market for wool, taking more than 25 percent of New Zealand’s total wool exports by value, with exports valued at around $170 million (the EU is our largest market, comprising 40 percent of exports by value). China currently provides for access via a tariff quota for all countries, where the tariff rate inside the quota is

“ Agriculture is one of the sectors in our economy that benefit the most, as

approximately

75 percent of our

exports to China

are in our primary

sectors. ”

(28)

1 percent or 3 percent (depending on the product) and the tariff rate outside the quota is 38 percent. China has maintained its global quota for wool but in addition will open up a tariff-free country-specific allocation for New Zealand of 25 000 tonnes, which covers

approximately 75 percent of New Zealand’s current exports. This quota exclusively for New Zealand wool will grow at 5 percent per year for eight years, to a maximum of 36 936 tonnes by 2017.

Wool tops will be treated similarly but on a smaller scale. (A wool top consists of similar-length wool strands that are laid parallel to each other and is a step in the process of converting raw wool into woollen yarn.) China has maintained its global quota for wool tops, but in addition will open up a tariff-free country-specific allocation for New Zealand of 450 tonnes, which is equivalent to approximately 120 percent of New Zealand’s current exports. This quota exclusively for New Zealand wool tops will grow at 5 percent for eight years, to a maximum of 665 tonnes by 2017.

OThER PRIMARY PRODUCTS

Tariffs on fish and other seafood products will be eliminated over five years. Fish and other seafood products have an export value of $90 million and amount to 4 percent of our total exports to China.

Deer velvet, apples, vegetables and wine (beer already enters duty-free) all have tariffs in the range of 6 to 20 percent and these will be phased out over five years.

Tariffs on beef and sheep meat and edible offal, which are all in the range of 12 to 20 percent, and on sheepskins (14 percent), will be phased out over nine years. Raw hides and skins with a tariff of 5 percent or less will become duty-free when the free trade agreement takes effect, and tariffs between 5 and 14 percent for raw hides and skins will be phased out over five years. Most raw hide and skin products are in the category of elimination over five years.

There’s a 20 percent tariff on kiwifruit headed for China, but under the free trade agreement this will be phased out in equal steps over nine years. China is our 10th largest kiwifruit market, comprising

“ Deer velvet,

apples, vegetables

and wine all have

tariffs in the range

of 6 to 20 percent

and these will be

phased out over

five years. ”

(29)

$16 million. Exports have grown strongly, from zero in 1995 to $8 million in 2005, and over the last two years the value has almost doubled.

wOOD PRODUCTS

Trade in forest products represents approximately 25 percent of our exports to China. For our largest forest product export items (logs, sawn timber and wood pulp), the current tariff is zero, with 80 percent of the trade already entering duty-free. The free trade agreement binds these existing favourable conditions. The agreement also secures immediate elimination of tariffs on a limited number of engineered wood products where tariffs are either 4 percent or 7.5 percent.

Tariffs will remain in place for some wood products, including paper and paperboard products with tariffs of either 5 percent or 7.5 percent, and specific types of engineered wood products, including specific types of fibreboard and plywood, with tariffs of either 4 percent or 7.5 percent.

In total, these products account for approximately 4 percent of current exports to China. China will not make tariff reductions under the free trade agreement for these products because, as part of China’s accession to the World Trade Organization, it agreed that any preferential

commitments on wood and paper products in a free trade agreement must then be offered to all members of the World Trade Organization.

So, for these few products, China will not make any reductions at this stage.

The free trade agreement will serve to facilitate trade in food and fibre products in both directions. Over time, New Zealand growers and farmers can expect to see more competition from Chinese goods, and Chinese producers can expect the same. Trade facilitation and mutual economic benefit is what multilateral and bilateral free trade agreements are all about.

For more information on the New Zealand–China Free Trade Agreement, go to:

http://www.chinafta.govt.nz

http://www.nzte.govt.nz/section/14722.aspx

›

(30)

FAST FORwARD 22

FAST FORwARD 4

New Zealand’s primary sectors are the powerhouse of our economy and we enjoy a comparative advantage in our pastoral and food industries (horticulture, dairy, meat and seafood).

The environment is changing, both domestically and internationally, and we need to invest more in innovation to remain both competitive and sustainable, and to better align the pastoral and food industries with trends and opportunities in global markets.

Discussions between industry and Government identified an urgent need to collaboratively marshal public and private resources to lift economic and environmental performance in our most important and competitive industries.

To this end, the Government has recently announced the New Zealand Fast Forward initiative, which will establish a unique partnership between government and industry. Under the scheme, the partners will collaboratively invest in targeted innovation programmes and projects that enhance sustainability and productivity across all the primary sectors.

New Zealand Fast Forward is a new way of working to ensure we have a highly skilled workforce and an innovation system that supports sustainable economic transformation.

The Government has committed $700 million upfront (plus all interest earnings) to be invested over the next 10 to 15 years. It expects industry will match this over the same timeframe – resulting in an estimated total of $2 billion.

An Establishment Group has advised on the New Zealand Fast

Forward governance structure and strategy development. This included leaders from 10 industry organisations and government agencies, including Fonterra, Meat & Wool New Zealand, Zespri, DairyNZ, PGG Wrightson and the Meat Industry Association.

Further information is on the MAF website at

http://www.maf.govt.nz/mafnet/new-zealand-fast-forward.

›

“ New Zealand Fast Forward is a new way of

working to ensure we have a highly skilled workforce and an innovation system that

supports sustainable economic

transformation. ”

(31)

CLIMATE ChANGE 23

25

A ChANGING CLIMATE

The effects of climate change are real, but not all bad for New Zealand agriculture. There may be relatively little change this century in production when averaged across the country. But extremes, such as drought and major storm events, may become worse and there may be major differences in how we expect individual regions to be affected.

A consortium of national experts known as EcoClimate has looked at how climate change could affect New Zealand agriculture in the 21st century. By downscaling global models used by the Intergovernmental Panel on Climate Change (IPCC), EcoClimate has made projections on future temperatures, rainfall and droughts across the regions of

New Zealand.

The results provide broad-scale information for risk assessment and future planning. This will be useful for land management sectors, including farmers, foresters, growers and regional councils.

IMPLICATIONS FOR PRODUCTION

EcoClimate concludes that, for an average year later in the century, the economic effects on production in dairy, sheep and beef farming are small when averaged out across the country. For instance, projected national dairy production ranges from 96 to 101 percent of the 1972 to 2002 average, and projected sheep/beef production from 91 to

96 percent.

Improvements in production are projected in both dairying and sheep/

beef farming in Southland and the west coast of the South Island. These regions are likely to remain wetter with a warming climate.

On the east coast of both islands, production is set to decrease in areas affected by water shortages. This includes Northland, Hawkes Bay and parts of the Tasman and Marlborough regions.

Flows in the rivers fed from the Southern Alps in Canterbury and Otago are expected to increase (on average) under most climate change

scenarios, even during dry years on the east coast. Water supply

reliability from irrigation systems fed from this source may increase. But it is yet unclear whether the increase in water supply will compensate for a rise in demand in drier eastern areas.

“ EcoClimate

concludes that,

for an average

year later in the

century, the

economic effects

on production in

dairy, sheep and

beef farming are

small when

averaged out

across the

country. ”

(32)

CLIMATE ChANGE 24

FREqUENCY OF FUTURE DROUGhTS

Of concern is the projected national decline in production for the driest years during the 2030s and 2080s – the two future periods considered that used the IPCC Third Assessment Report. This is significantly worse than for the driest year in the 1971 to 2002 period (this includes the serious droughts of 1977/78 and 1997/98).

Analysis was undertaken using two global emissions scenarios – a “low medium” and a “medium high” on the frequency of the driest annual conditions that occur on average once every 20 years. The changing frequency of droughts under each of these scenarios is shown in Figure 5.1. For example, in the low medium scenario, Timaru is light brown, meaning that, rather than a drought occurring (on average) once every 20 years, the drought could occur between once every five years and once every 10 years. That’s two to four times more frequent than now. In the medium high scenario, the drought could occur between once every two and a half years and once every five years, which is four to eight times more frequent than now.

FIGURE 5.1: PROjECTED AvERAGE RECURRENCE INTERvAL (YEARS) IN 2080S UNDER (A) LOw MEDIUM AND (b) MEDIUM hIGh SCENARIOS FOR DRIEST ANNUAL CONDITIONS ThAT CURRENTLY OCCUR ON AvERAGE ONCE EvERY 20 YEARS

Note

See the text for details.

Source EcoClimate.

Low medium – 2080s

Medium high – 2080s

Low medium scenario

Expected return period of drought

Medium high scenario

Expected return period of drought 2.5–5 years

5–10 years 10–15 years 15–20 years

>20 years

1–2.5 years 2.5–5 years 5–10 years 10–15 years 15–20 years

>20 years

Timaru Timaru

SITUATION AND OUTLOOK FOR NEw ZEALAND AGRICULTURE AND FORESTRY

MAF POLICY MINISTRY OF AGRICULTURE AND FORESTRY