[ This post was first published in the Fairfax NZ Sunday Star Times on 21 December 2014]
With another year winding down, it is time to reflect on how well the agri-food industries have been travelling, and to look forward to what the next twelve months might bring.
2014 will be the remembered as the year that the dairy industry started on the super highway but then hit a pot hole. Many in the industry expected a slow-down, but most have been surprised by the depth of the hole. It is also the year when the dairy industry began to recognise the full extent of the nitrogen leaching challenge.
For beef, 2014 was the best farming year there has ever been, and for sheep farmers it was also a positive year. The kiwifruit recovery gained momentum, and the wine industry moved forward. These outcomes have all occurred despite an exchange rate that for much of the year was at record highs.
There were several events that were not foreseen. In particular, the crisis of government in Ukraine has impacted on global dairy markets as Russia has closed its borders to European product. Also, the rapid decline in oil prices was not foreseen by most. Whereas the ongoing development of the American oil fields with fracking technology was expected, the increase in output from Saudi Arabia, driven by changing politics rather than economics, was not factored in. It is the combination of those events that is now driving oil prices down.
In the coming year, particularly if exchange rates moderate, then wine, kiwifruit, and most other horticultural crops can look forward with some confidence. Beef prices should stay high, particularly into the United Sates. Lamb and mutton have started the season well, but a lot will depend on China.
One complication for beef is that Brazil now has access to the China market. This access will increase with more plants about to be approved.
The dairy situation remains complex. Even if whole milk powder prices were to increase sharply throughout January and thereafter, then it will take at least until next spring for this to flow through to farmer payouts.
There are countervailing forces at work which make dairy predictions difficult. Within Europe, we can expect years of turmoil following the removal of production quotas next April. British, French and German farmers will all be marching in the streets as European prices continue their recent decline and adjust to world prices. Over time, the larger European farms will get larger while many of the smaller dairy farms will drop out of the industry, but the adjustment period will be painful.
American dairy farmers have had a stellar year and their milk prices are only now starting to drop. In the long run, it is the Americans who will be New Zealand’s greatest dairy competitor. A lot will depend on the relative exchange rate. Currently, with the American recovery well under way, the American dollar is rising relative to most of the World. This will reduce their competitive position.
If recent land sales are any indication, then some New Zealand farmers are seeing through any short term dairy problems to a longer term situation where the protein business is still the best business to be in. Good quality rural land has risen about 30 percent in the last two years. In recent weeks, it has still been moving up.
One of the big rural debates in 2015 will continue to be about how to work within acceptable environmental limits. The key assessment tool on dairy, beef and sheep farms is a computer program called Overseer. The limitations and apparent anomalies within Overseer are a major source of frustration, even for those who are committed to the new world of regulated farming.
The other big debates are likely to be about industry structure.
Within the red meat industries, 2015 is likely to be the year when New Zealand’s largest meat processor, Silver Fern Farms, undergoes major restructuring. There are alternative scenarios as to how that will play out, but one of the least likely is that the two co-operatives, Silver Fern Farms and Alliance, will join together. Many in the industry would like to see this happen, but Alliance is not a willing suitor. From Alliance’s perspective, and having done the numbers, merging with Silver Fern Farms is simply not a bankable proposition.
Within Fonterra, there is simmering debate about the current ownership structure. At some time this will boil over. Fonterra has moved a long way since it was founded in 2001, at which time all farmers owned shares in proportion to their production. Now there are non-farmer unit holders who earn dividends on their investment. Also, in the last two weeks Fonterra has announced its intention to accept new suppliers in Canterbury, Otago and Southland without any need for them to purchase shares.
There is business logic to what Fonterra is doing. However, Fonterra is steadily moving further away from co-operative principles. As a consequence, the ownership structure is becoming increasingly unstable.