Despite significant ongoing global turmoil, New Zealand agricultural producers are positioned for another profitable year in 2022, according to a just-released report by agribusiness banking specialist Rabobank.
This would represent the sixth consecutive year of general profitability for the country’s agricultural sector.
In the bank’s annual flagship report, Agribusiness Outlook 2022, titled ‘Will the Party Continue in 2022?’, Rabobank says while the outlook for another profitable run looks likely for most of New Zealand’s agricultural commodities, it is “too early to break out the champagne just yet” as elements of 2022 will be “unpredictable”.
Report co-author, Rabobank senior agricultural analyst Emma Higgins said as 2022 gets underway, the year “will hold bright sparks, despite headwinds gathering strength”.
The report says 2021 had seen record farmgate pricing locally for most New Zealand-produced agricultural commodities (with the exception of wool) – fuelled, in large part, by global factors including adverse weather conditions in a number of regions, concern about food shortages and Covid-induced supply chain chaos. Returns had also been underpinned by a favourable Kiwi dollar.
The New Zealand agricultural sector had also performed well in navigating erratic supply chains and with trade flows holding up well despite the global pandemic, while trade relations with China had remained strong.
New Zealand remains well positioned on global agricultural markets for the year ahead, the report says, with the production prospects for competitors remaining crimped, as South America, the west coast of the US and parts of Europe continue to deal with inclement weather conditions, reducing their ability to ramp up production in the face of high prices.
Constrained global production of key commodities will support firm demand and pricing for New Zealand products.
Ms Higgins said other factors set to be positives for the country’s ag sector in the year ahead include some easing in urea fertiliser prices and a continuing favourable exchange rate for exporters.
“While cost of inputs in New Zealand are likely to remain elevated over the year, we see some possibility that local urea prices will follow global prices lower over the next six months, although lower local prices could take three to four months to flow through,” she said.
“And when it comes to the New Zealand dollar, local exporters are still looking at a favourable exchange rate. The Kiwi US cross is anticipated to trade at current levels over the next three months, before rising slightly to 73 cents by the year’s end.”
The year ahead will also, however, bring elevated risks for the country’s agricultural sector, the report says, with Covid and the Chinese economy in particular continuing to loom large, while spiralling inflation and ongoing supply chain issues will provide their own challenges.
“The rapid spread of Omicron worldwide illustrates the pandemic is not quite done with us in 2022. And New Zealand’s year of reckoning with Covid-19 is upon us. How our key trading partners deal with the virus this year will be central to our export performance, compounding the already-significant challenges ahead this year for our agricultural exporters,” Ms Higgins said.
Ms Higgins said economic growth headwinds in China remain a key consideration for New Zealand agricultural exporters.
“In China, dwindling demographics, property price pressures and debt crackdown – in addition to specific commodity challenges like elevated Chinese dairy inventories – remain important red flags to our export return strength,” she said.
Freight challenges and mounting inflationary pressure through the supply chain will also both continue to “cause headaches” in 2022.
In addition, Ms Higgins cautioned, although many commodity sectors are enjoying record pricing, this may not translate into record profitability in 2022.
“Inflationary pressures driving up input costs, in addition to reduced production – particularly for the dairy industry – will likely degrade overall business profitability,” she said.
“Meanwhile,” Ms Higgins said, “labour shortages are a very real and weighty challenge for the ag sector, causing stress on businesses and taking the shine off excellent returns. Horticulture and agricultural contractors will be most impacted in particular over the upcoming months, alongside an ongoing shortage of dairy staff.”
More change and uncertainty
More uncertainty is also expected in 2022 as regulatory frameworks continue to develop in the area of environmental sustainability, the Rabobank Outlook says. Key milestones will include a decision on an emissions-pricing mechanism for agriculture and the release of the Government Emissions Budget.
“Pressure on the New Zealand ag sector to contribute to the broader cause of the country’s environmental sustainability will continue,” Ms Higgins said.
“New Zealand ag has the unique opportunity to be true world leaders for solving the global methane issue in a holistic way that is good for both farming business – and therefore the New Zealand economy – and the environment.
“It will be of particular interest to see whether the government revises current policy settings that strongly incentivises the planting of pine trees over native, in order to achieve the scale and form of afforestation as recommended by the Climate Change Commission.”
Ms Higgins said now was the time to hold a broader discussion on land use, farming systems and the role of technology in New Zealand agriculture. “We must establish a pan-sectoral strategy linking our obligations for low-methane farming systems with environmental, social and economic ideals across future generations,” she said.
Commodity outlook for 2022
Dairy: Global supply shortages will underpin firm commodity prices, but inflationary cost pressure will take away some of the record price shine.
Beef: Rabobank expects farm-gate beef pricing to remain elevated above the five-year average in 2022, supported by constrained global beef supply and strong demand from China and the US.
Sheepmeat: Steady demand from China in particular will likely support elevated farm-gate pricing over the coming year, despite an expected lift in global availability of sheepmeat.
Venison: The venison market is expected to continue to recover in 2022, with the re-opening of food service in Europe and the US. Rabobank anticipates farm-gate pricing to remain subdued in 2021/22, but strengthen into 2022/23.
Horticulture: Orchard-gate returns for kiwifruit are expected to remain elevated in 2022, off the back of strong consumer demand. Significant changes to licence areas and the tender process will be made in 2022.