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NEW ZEALAND RURAL ANNUAL 2011

Commodity Boom Boosts Incomes

Commodity prices at record levels have seen farm gate incomes rising providing a timely fillip to the sector.

The recovery in commodity prices began in early 2009 as illustrated by the ANZ Commodity Price index. The index monitors the value of a basket of agricultural commodities with movements in values reported in terms of both the New Zealand dollar and a world price index.

From its cyclical low in February 2009 the index appreciated in value by 82%, in world terms, over a 27 month period. During much of this period the New Zealand dollar has held at high levels on the foreign exchanges which has limited the increase in prices when denominated in terms of the New Zealnd currency. Despite this, the New Zealand Dollar index appreciated by 45% between June 2009 and March 2011.

The impact of higher commodity prices is most clearly illustrated in the dairy sector with multinational dairy giant, Fonterra, having made the announcement that its final payout for the 2010/11 season, which closed at the end of May, hit another record high payout of $8.25 per kilogram of milk solids. With production being increased by 5% over the previous year, the total payout will be approximately $10.8 billion.

The latest commodity price boom is however, broader based than that which was experienced in 2007 and 2008. At that time the index was driven almost exclusively by spiralling dairy prices. On this occasion meat and wool prices have also risen sharply while forestry products also reached a new record high.

As a result lamb and beef producers have also experienced a lift in earnings. Beef and Lamb New Zealand has reported that the value of exports this year rose by 9% to $5.8 billion and this despite the fact that lamb volumes were the lowest for half a century.

The value of beef exports totalled $2.5 billion in the year to June, an increase of 14% on the previous year while volumes edged down 3%. The reduction in lamb volumes was far more pronounced, down 15%, however export values rose by 3.4% to $2.7 billion.

The latest rise in commodity prices is driven by a combination of factors, one of which is speculative buying by investors which, as with other investment assets, can lead to volatility in prices, and indeed recent months have seen a slight moderation in prices. However, underpinning the increase are structural changes to demand which seem likely to further increase demand over the longer term. The most fundamental drivers are world population growth and rising incomes particularly in emerging nations such as China and India.

There is therefore a high degree of confidence that, whilst there will always be volatility in the markets, higher prices for New Zealand agricultural profits are here to stay. This view is supported by both Fonterra and the Ministry of Agriculture and Forestry (MAF). Fonterra, for example, has issued an opening forecast for the 2011-2012 season of between $7.15 and $7.25 per kilogram of milk solids. Although clearly below this year’s record level, a payout in this range would still be the third highest recorded.

The upbeat view on the future is likely to be further enhanced following the issuing of MAF’s latest Situation and Outlook for New Zealand Agriculture and Forestry which forecasts that “In a six year period, from 2010 to 2016, gross agricultural revenue is forecast to expand by some 45 percent from $22 billion to $32 billion.”