Ministry for Primary Industries ManatU Ahu Matua Situation and Outlook for Primary Industries December 26134197 New Zealand Government Contents Acknowledgements Natasha Abram, Paul Berentson, Annette Carey, Matt Dilly, Loretta Dobbs, Daniel Hamill, Geoff King, Bijaya Poudyal, Robert Radics, Claudia Riley, Wido van Lijf. Cover photo: NZ Apples and Pears Notes Annual figures are for the year ended June unless otherwise noted. Currency figures are in New Zealand dollars unless otherwise noted. Some totals may not add due to rounding. MPI welcomes feedback on this publication at SOPI@mpi.govt.nz. Overview 4 Dairy 12 Meat and Wool 16 Forestry 18 Horticulture 20 Publisher Ministry for Primary Industries Economic Intelligence Unit Charles Fergusson Building, 34-38 Bowen Street PO Box 2526, Wellington 6140, New Zealand Tel: 0800 00 83 33 This publication is available on the Ministry for Primary Industries website at www.mpi.govt.nz Further copies may be requested from SOPI@mpi.govt.nz Seafood 24 Arable 26 Other primary sector exports and foods 28 ISBN No. 978-1-99-001724-7 (online) ISBN No. 978-1-99-001725-4 (print) Disclaimer While care has been used in compiling this document, the Ministry for Primary Industries do not give any prediction, warranty or assurance in relation to the accuracy of or fitness for any particular purpose, use or application of any information contained in this document. To the full extent permitted by law, neither the Ministry for Primary Industries nor any of its employees shall not be liable for any cost (including legal costs), claim, liability, loss, damage, injury or the like, which may be suffered or incurred as a direct or indirect result of the reliance by any person on any information contained in this document. This work is licensed under the Creative Commons Attribution 3.0 New Zealand licence. In essence, you are free to copy, distribute and adapt the work, as long as you attribute the work to the Crown and abide by the other licence terms. To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/nz/. Please note that no departmental or governmental emblem, logo or Coat of Arms may be used in any way which infringes any provision of the Flags, Emblems, and Names Protection Act 1981. Attribution to the Crown should be in written form and not by reproduction of any such emblem, logo or Coat of Arms. Photographs may not be reproduced without permission. Minister's foreword I am pleased to release the latest Situation and Outlook for Primary Industries (SOPI) for December 2019. Primary sector export revenue is expected to rise by 3.3 percent in the year ending June 2020 and it’s forecast to further increase in 2021 as our sectors continue to build on a number of years of stellar growth. When our primary sectors do well, New Zealand does well and this Government wants to work alongside industry to develop sustainable and valuable pathways forward. New Zealand’s future wellbeing depends on an economy that is both environmentally sustainable and delivering high value. Growing food in the volumes and quality we’ve come to expect depends both upon the availability of land and the quality of our soil and freshwater. Many of New Zealand’s farmers and growers are modelling fantastic environmental practice, and we need to work together across the food and fibres sector to lift everyone’s operations. Best practice needs to become normal practice. To support the sustainable growth of our primary sectors and the Government consulted to protect our best land for growing a range of fruits, vegetables or fibre, or pasture for livestock, on the proposal for a “National Policy Statement for Highly Productive Land”. In addition, to improve water quality within a generation, we also consulted on the “Action for Healthy Waterways” discussion document throughout New Zealand. Our work is being further supported by that of the Primary Sector Council, which I appointed last year to establish a shared vision for the future of our primary sector. Following 18 months of extensive consultation, the Council will release its vision for the future of the sector. We are continuing to explore a range of initiatives to support farmers and growers to respond to regulatory changes and to improve wellbeing for rural communities. Innovation, from small grassroots community projects to large-scale industry development, will continue to play an important part. We must continue to build the foundations now to deliver an enriched future for all New Zealanders. Hon Damien O’Connor Minister of Agriculture SOPI SOPIDECEMBER DECEMBER2019 2019••11 Director-General’s introduction As Director-General, it is my job to ensure that the MPI is in the best possible position to build the trust and confidence of New Zealanders in the important work that we do, and enable the primary industries to continue to thrive well into the future. Essential to that work is having up-to-date, reliable information on the challenges and opportunities facing New Zealand’s primary industry sectors. The December Situation and Outlook for Primary Industries (SOPI), produced by MPI’s Economic Intelligence Unit, outlines the current state of New Zealand’s primary industries and their prospects for growth over the next four years. The December report highlights the continued success of the primary industries, with export revenue forecast to reach $47.9 billion in the year ended June 2020, up 3.3 percent on the previous year. Our traditional areas of strength continue to grow with dairy export revenue forecast to rise 8.4 percent to $19.6 billion for the year ending June 2020. Meat and wool exports remain robust with export revenues forecast to reach $10.4 billion – up 2.5 percent. Some of our other star performers this quarter include horticulture with a 4.7 percent rise in revenue forecast, driven by increases in kiwifruit, wine, apple and pear exports. Meanwhile seafood annual export earnings could surpass $2 billion for the first time, with growth forecast at 6.5 percent. Innovation continues to be a big factor in this growth, with processed foods such as dairy blends being particularly popular in our South Korean and Japanese markets. There have been plenty of gains for the primary industries over the last few months. We’ve made huge strides in market access this quarter, with the Regional Comprehensive Economic Partnership (RCEP) text agreed in November. RCEP participants take 62 percent of New Zealand’s primary sector exports, so it is a high priority for us to get the full agreement concluded and signed in 2020. MPI has also successfully established its new Agriculture and Investment Services branch, designed to partner with the sector on emerging issues and sponsor investment in ideas and innovation. We’re already starting to see how a joined up branch, focused on the needs of the agriculture sector, can have real benefits. An example of MPI’s support for innovation is through Sustainable Food and Fibre (SFF) Futures co-investment funding. With $40 million available each year from MPI, SFF Futures supports problem-solving and innovation in New Zealand’s food and fibre industries that will make a positive and lasting difference. It offers a single gateway to apply for investment, and provides grants of less than $100,000, right up to multi-million dollar, multi-year partnerships. We are here to back the Primary Industries to win and to support them in a changing world. Ray Smith Director-General, Ministry for Primary Industries 2 • MINISTRY FOR PRIMARY INDUSTRIES Dairy Meat & Wool Forestry Horticulture Seafood Arable Other New Zealand’s dairy export revenue is forecast to rise 8.4 percent to $19.6 billion for the year ending June 2020. Expectations of another strong production season, combined with robust global dairy prices and a weak outlook for the New Zealand dollar, are expected to support solid export revenue growth in the year ahead. For New Zealand’s dairy farmers, this is expected to translate into higher farmgate milk prices, supporting robust sector profitability for the season ahead. The outlook for meat and wool exports remains robust with export revenues forecast to reach $10.4 billion for the year ending June 2020, 2.5 percent higher than the previous year. The positive outlook for the sector is being driven by high international meat prices as a result of African Swine Fever (ASF) reducing China’s pork herd and increasing demand for imported protein. Strong schedule prices as a result of international demand have also helped maintain on-farm profitability. Forestry exports for the year ending June 2020 are forecast to fall 12.8 percent to $6.0 billion compared to the year ended June 2019 when prices and volumes were at record highs. This is $0.2 billion higher than the September forecast for year ending June 2020 as log prices are recovering more quickly than expected from their sharp fall over June and July of this year. Horticulture sector revenue is forecast to rise 4.7 percent for the year ending June 2020 driven by increases in kiwifruit, wine, and apple and pear exports. This will elevate the horticulture sector to be the third largest primary sector industry by value, edging ahead of the forestry sector. Kiwifruit exports are expected to rise by 8.6 percent to $2.5 billion, while wine exports are predicted to rise by 1.8 percent to $1.8 billion, and apple and pear export revenue to rise by 7.2 percent to $0.9 billion. Seafood export earnings are forecast to grow 6.5 percent in the year ending June 2020 to $2.1 billion, the first time annual export earnings will surpass two billion dollars. This growth is expected to be underpinned by an increase in export prices and rising aquaculture production. Increasing demand from key markets along with limited supply growth, particularly of wild capture fisheries, is expected to keep prices high. The forecast growth in aquaculture production is expected to result in higher export volumes in the coming years. The 2019/20 year has begun positively with export revenue up 43 percent for the September 2019 quarter compared to September 2018 quarter, and a reasonable growing season to date in most areas. Export sales in all categories increased with vegetable seeds the main contributor, up $16.4 million on the September 2018 quarter. As a result, arable export revenue is expected to rise 10 percent for the year ending June 2020 to $260 million with slightly lower levels forecast for 2021. Export revenue for New Zealand’s other primary sector exports and foods is expected to increase to $3 billion for the year to June 2020, up 7.3 percent from 2019. This builds on the 5.3 percent growth for 2019. This growth is being led by the other products (such as dairy blends and soft drinks), innovative processed foods and live animals categories. Demand for these products is expected to continue to develop in coming years. SOPI DECEMBER 2019 • 3 Overview Primary industries export revenue 2015-21 (NZ$ million) Actual Forecast 2015 2016 2017 2018 2019 2020 2021 14,050 13,289 14,638 16,655 18,107 19,630 19,450 Meat and Wool 9,000 9,200 8,355 9,542 10,176 10,430 10,680 Forestry 4,683 5,140 5,482 6,382 6,883 6,000 6,600 Horticulture 4,185 5,000 5,165 5,392 6,111 6,400 6,530 Seafood 1,562 1,768 1,744 1,777 1,963 2,090 2,210 181 210 197 243 236 260 255 Other primary sector* 2,417 2,714 2,639 2,709 2,852 3,060 3,140 Total 36,079 37,323 38,220 42,700 46,329 47,870 48,865 % Change year on year -6.8% +3.4% +2.4% +11.7% +8.5% +3.3% +2.1% Dairy Arable Source: Stats NZ and MPI. * Other Primary Sector Exports and Foods includes live animals, honey, and processed food. Export revenue is forecast to reach $47.9 billion in the year ending June 2020, up 3.3 percent from the previous year. This forecast is $1.7 billion higher than the previous forecast round, with upward revisions to dairy, meat and wool, and forestry. A lot of these gains can be attributed to rising global commodity prices and the drivers behind rising prices are likely to be sustained through 2020 and 2021. In particular, a weaker New Zealand dollar over the course of this year has helped support strong returns for New Zealand exporters. Since June, the NZD/USD rate has declined from 0.67 to 0.64 boosting commodity prices in NZD terms. For the dairy sector, following a period of initial early season weakness, commodity prices have been on the rise. After a strong start, growing conditions across the country have become more variable in spring, with production of milk solids in the month of October falling behind last season’s exceptional result. This will feed into an international market characterised by tight global supply. Due to strong demand out of Asia, this should sustain continued price strength for the remainder of the season. Red meat prices continue to exceed expectations due to rising demand from China that is transforming global protein markets. The African swine fever (ASF) outbreak in China is the main driver of increased import demand, and the drought in Australia has further reduced global beef and sheep meat supply. The situation in those 4 • MINISTRY FOR PRIMARY INDUSTRIES countries is unlikely to reverse soon, so it is expected that the current run of high red meat prices will persist over at least the next two years. Following a sharp fall in June, log prices are recovering faster than expected. However the flow on effect on export volumes is expected to restrict forestry sector export revenues in the year ahead. Variable weather impacting production Following a hot dry summer and autumn, New Zealand had the seventh warmest winter on record. A wet end to winter returned soil moisture levels to normal, but did not catch up the annual rainfall accumulations which remained below normal in many regions. During spring the North Island received lower than normal rainfall and higher than normal temperatures, resulting in lower soil moisture levels than normal. In parts of the South Island, spring brought a lot of wet spells, making farm management challenging. A hailstorm in November caused considerable damage to Canterbury cereal, seed and vegetable crops, while in Hawke’s Bay an October hailstorm caused significant damage to early summer fruit crops. Heading into summer, the El Niño/Southern Oscillation is neutral and does not look like it will play a significant role. Over the 3 months to February 2020, the National Institute for Water and Atmospheric Research predict near normal rainfall and soil moisture levels. Rural confidence The positive export outlook and the flow on effects to farmer incomes appears to be starting to reflect in sentiment at the farm level. After a series of rural surveys indicating declining rural confidence, ANZ’s November Business Outlook has indicated that profitability expectations in the agriculture sector have improved significantly in the past few months. While employment and export intentions are strong relative to other parts of the economy, investment intentions remain weak, potentially weighed down by uncertainty associated with the pace and scale of change of some environmental regulatory policy proposals. In September 2019, the Government consulted on a package of freshwater policy proposals. This Essential Freshwater programme has three main objectives: stopping further degradation and loss, reversing past damage, and addressing water allocation issues. Some farmers are concerned that these policies will be costly to implement and that farming systems will need to change in some areas of the country. The Zero Carbon Act, passed in November 2019, include targets for agricultural methane emission reductions of 10 percent by 2030 and 24-47 percent by 2050. The Government has also announced that it will enter into a world first programme of action with the agriculture sector aimed at introducing farm gate emissions pricing by 2025. Farm debt remains high, particularly in the dairy sector. Banks have been tightening lending policies over the past year, and a RBNZ policy requiring banks to hold more capital may add to that trend. This could reduce farmers’ ability to borrow money to invest in environmental mitigations where required. At the international level, key risks to the sector’s export performance in the years ahead remain. Global economic growth is beginning to weaken, driven in part by the effects of increased geopolitical uncertainty and heightened trade protectionism. SOPI DECEMBER 2019 • 5 Brexit Currently a major source of international uncertainty are the timing and terms of the United Kingdom (UK)’s planned exit from the European Union (EU). The UK and EU recently agreed to an extension of the Brexit date to 31 January 2020. However, the concerns for New Zealand exporters are the risk of supply chain disruption, the new trading environment that will emerge, and a possible decrease in UK consumer expenditure, especially if the UK were to leave the EU without a deal in place. In an effort to mitigate these risks, MPI has continued to work closely with other government agencies to ensure, where possible, that trade disruption is minimised. In the meantime, the existing conditions for primary sector trade between New Zealand and the UK are expected to remain the same during the extension period. Advice on the implications of Brexit for primary industry exporters and what they can do to prepare can be found on MPI’s website. Other trade disruptions Currently, a range of indicators is pointing to weaker GDP growth for two of New Zealand’s key export trading partners: the US and China. These two countries accounted for 40 percent of New Zealand’s primary sector export revenues in the year ended June. Trade tensions 6 • MINISTRY FOR PRIMARY INDUSTRIES have also had an impact on global prices. The avoidance of further tariff escalation or timely retraction of the current set of tariff measures may help lift confidence about future growth prospects. Regional Comprehensive Economic Partnership (RCEP) In November 2019, the RCEP completed negotiation of the text of the agreement, and agreed virtually all market access issues between 15 of the 16 participating countries. RCEP comprises the 10 ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam) and six of its existing FTA partners – Australia, China, India, Japan, Korea, and New Zealand. The RCEP participants take 62 percent of New Zealand’s primary sector exports. With the text negotiations completed, negotiations on market access will now continue with the aim of concluding and signing the full agreement in 2020. While India still has some outstanding concerns, all RCEP participants are continuing to work with India to enable it to join the agreement in 2020. The agreement is expected to increase New Zealand exporters’ security in the region, while protecting their competitive interests in countries which include seven of New Zealand’s top 10 trading partners. Dairy’s growth and vulnerability The New Zealand dairy industry has grown rapidly over the past two decades, driven by land conversions and productivity improvements. Since 2003, these shifts have resulted in: 25% 20% Increase in the size of the total dairy platform 58% Increase in the size of the national dairy herd Increase in total milk solids production 7.0 2.0 5.0 1.2 Dairy cattle population Dairy production Dairy Industry Growth 2003 – 2019 3.0 2003 2007 2011 2015 2019 Milk solids tonnes/hectares (millions) Dairy cattle (millions) MILK 0.4 Source: StatsNZ and DairyNZ Dairy platform increase The national total dairy platform has steadily increased, rising significantly between 2006 and 2015, before stabilising at its current level of 1.744 million hectares, with much of this growth being driven by dairy farm conversions. Productivity drivers In addition to growth in the total land area, improvements and advances in herd genetics, breeding techniques, on-farm management practices, forages, and new technology have driven consistent increases in on-farm productivity for the dairy sector. SOPI DECEMBER 2019 • 7 Financial vulnerability of the dairy sector This increase in national dairy production has largely been funded with bank debt. On-farm bank debt has increased by $30.1 billion since 2003 and currently stands at $41.4 billion. 267% increase since 2003 Agricultural industry bank debt 2003–2019 $NZ Billion 70 Dairy farm debt 50 Other agricultural debt 0 2003 2007 2011 2015 2019 Source: Reserve Bank of New Zealand How does this affect the financial vulnerability of the dairy sector? While use of debt to fund business and industry growth can play an important role in economic success, it appears that the level of financial risk associated with the recent expansion of New Zealand’s dairy production has increased significantly in recent years. In the 2017–2018 season dairy farms on average had a debt-to-asset ratio of 50.7 percent. Equity Debt 8 • MINISTRY FOR PRIMARY INDUSTRIES However, many farms are holding high levels of debt: 24 percent have ratios over 70 percent; and 4 percent have ratios over 90 percent. The level of debt held relative to farm assets and production has increased significantly across the sector. $22.0 $23.6k per kg 2019 Debt to production Relative to production, farm debt levels have more than doubled from $9.48 per kilogram of milksolids in 2003 to $21.99 in 2019. Debt per hectare $9.5 The average level of bank debt held per hectare has more than tripled since 2003, rising from $7,700 to $23,600 in 2018. $7.7k per kg 2003 Source: StatsNZ & Reserve Bank of New Zealand In particular, the percentage of farms holding greater than $30 of debt per kilogram of milk solids produced annually has increased from 16 percent in 2014 to 30 percent in 2018. Despite falling interest rates over recent years, the burden of servicing this elevated debt has increased. Since 2014, the average annual cost of servicing this elevated debt has increased by 11 cents to $1.22 per kilogram of milk solids in 2018. Distribution of dairy sector debt per kg of milk solids 2014 and 2018 2013/2014 2017/2018 50% Percentage of Dairy Farms In addition, the number and proportion of farms holding high levels of debt have also increased. 25% 0% <$10 $10–$20 $20–$30 $30–$40 $40–$50 >$50 Source: DairyNZ Debt to income ratio by sector 2018 Dairy Relative to its income, the dairy industry holds a lot more debt than other agricultural producers. Other agriculture In fact, despite having enjoyed relatively good milk price pay-outs in recent years, the dairy industry still currently holds 60 percent more debt compared with other agricultural producers. 0 1.75 3.5 Ratio of debt to income Source: Reserve Bank of New Zealand The ratio of non-performing loans in the dairy sector has doubled over the past three years. Currently at 2.1 percent of the dairy sector total, this figure is three times higher than that of other comparable primary sector industries. Non-performing loans as a percentage of total sector debt 2015-2019 Dairy Horticulture & Other Sheep & Beef 3% Non-performing loans Early warning signs may now be beginning to appear, with the number of farms experiencing financial distress increasing in recent years. 1.5% 0% Jan 15 Oct15 Jul 16 Apr 17 Jan 18 Oct18 Jul 19 Source: Reserve Bank of New Zealand SOPI DECEMBER 2019 • 9 Upcoming challenges The high levels of debt currently held by vulnerable dairy farms may inhibit their ability to successfully meet the challenges ahead and adapt to changes in their operating environment. Financial pressures associated with this highly indebted sector may constrain the ability of financially vulnerable farms to invest and adapt to the changes associated with increased environmental and other regulatory requirements on the sector over the longer term. These changes include investment in on-farm technology and infrastructure, to reduce the sector’s impact on freshwater quality and climate change. These new regulatory constraints may have the effect of limiting future intensification of farming practices and further growth in the national milking platform area. The national milking platform area’s size, total dairy herd, and level of intensification are thus expected to experience modest declines in the medium to long term. As a result, further investment in on-farm productivity gains will need to continue if the sector is to achieve future industry growth. The appetite of banks to keep funding sector growth through the provision of credit is decreasing. Evidence indicates that the banking sector is positioning itself with a more conservative approach to dairy sector debt in its portfolios, reducing credit lines and requiring active repayment of loans. This has the potential to increase the cash flow burden on many of those farmers who are already facing squeezed margins. In addition, for some financially distressed farmers, their options for addressing these problems are becoming increasingly constrained by falling demand for dairy farm land and signs that rural asset values may be falling. The Government has introduced several initiatives to support the primary sectors through these upcoming challenges. MPI’s Agricultural and Investment Services business unit is supporting work to increase farm business resilience by linking farm advisers and accountants with farmers to enable better strategic and financial planning and create effective business cases where required. The farm debt mediation scheme recognises the pressure debt places on farmers and rural communities. The scheme will help farmers by addressing the power imbalance between farmers and banks and providing a consistent platform for constructive discussions. The aim is to improve outcomes for both farmers and banks through early engagement. The Productive and Sustainable Land Use package promotes farm land-use practices that deliver more value and improved environmental outcomes. 10 • MINISTRY FOR PRIMARY INDUSTRIES Top 10 Export Destinations Dairy Forestry Seafood Meat & Wool Horticulture Arable Other China $14,377m USA $4,217m Japan $2,662m UK $1,174m S. Korea $1,357m EU $3,167m Hong Kong $1,087m Taiwan $1,155m Australia $4,553m 6% 4% 4% 3% 3% 2% 2% 10% All other United States UK EU (excl. UK) Canada China Japan Hong Kong Singapore South Korea 16,000 14,000 31% 12,000 25% 10,000 8,000 6,000 10% 9% 4,000 7% 6% 3% 3% 2,000 2% 2% 2% 0 SOPI DECEMBER 2019 • 11 All other All other 0 0 11% 2% 2% 1% UK Taiwan Hong Kong Malaysia 8% 7% 6% 5% 5% 5% Australia All other Indonesia Thailand Taiwan Vietnam South Korea Japan India United States China 17% 40 20 3% 3% 2% 2% 1% EU (excl. UK) Australia Japan Hong Kong 0 5% Thailand South Korea Canada Singapore 200 2% China 3% 3% Australia All other Indonesia Taiwan Canada South Korea China 60 United States Japan United States China UK Australia EU (excl. UK) 80 12% 13% 200 All Exports 100 42% 600 13% 12%12% Taiwan South Korea Canada Hong Kong 4% 200 4% 2% 2% 2% 2% Arable 400 All other 400 10% United States EU (excl. UK) Japan South Korea 9% 600 7% 6% 5% All other 12% 400 9% 120 35% 43% 800 South Africa Chile UK China 13% 13%13% 12% 800 0 800 2,000 0 Other 1,000 1,000 Seafood 16% 1,200 United States Japan Switzerland South Korea Horticulture 0 13% 5% 4% 4% 3% 2% 2% 1% United States Thailand Hong Kong All other Indonesia UAE Japan China Australia 1,000 14% 1,000 5% 4% 4% 3% 3% 3% 3% 3% Malaysia P{Philippines 7% United States 2,000 1,000 19% 2,000 3,000 1,400 3,000 EU (excl. UK) UK Japan Australia 4,000 1,200 33% 3,000 5,000 0 Forestry 4,000 51% Australia 6,000 31% 4,000 China Meat & Wool 34% EU (excl. UK) Dairy 7,000 Australia Malaysia $1,000m Dairy New Zealand’s dairy export revenue is forecast to rise 8.4 percent to $19.6 billion for the year ending June 2020. Expectations of another strong production season, combined with robust global dairy prices, and a weak outlook for the New Zealand dollar, are expected to support solid export revenue growth in the year ahead. For New Zealand’s dairy farmers, this is expected to translate into higher farmgate milk prices, supporting robust sector profitability for the season ahead. Dairy export revenue 2015-21 (NZ$ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Whole milk powder 5,385 4,609 5,271 5,818 6,675 6,980 6,460 Butter, AMF, and cream 2,219 2,378 2,794 3,812 3,612 3,530 3,730 Skim milk & butter milk powder 1,762 1,347 1,385 1,228 1,323 1,720 1,630 Casein & protein products 2,129 1,834 1,735 1,601 1,574 1,810 1,740 Cheese 1,557 1,720 1,830 1,905 1,965 2,150 2,140 Infant formula 415 685 778 1,240 1,641 1,900 2,090 Other dairy products* 582 716 845 1,050 1,318 1,550 1,670 Total 14,050 13,289 14,638 16,655 18,107 19,630 19,450 % Change year on year -21.0% -5.4% +10.1% +13.8% +8.7% +8.4% -0.9% Source: Stats NZ and MPI. * Other dairy products include: liquid milk and cream, ultra-high temperature milk, yoghurt, and ice cream. 5 - 0.4% (5) - 3.0% - 20.1% (15) (25) -39.6% (35) SMP & BMP Casein Cheese 12 • MINISTRY FOR PRIMARY INDUSTRIES 11.8% Infant Formula 15.1% Liquid Milk & Other Products • Expectations of relatively flat New Zealand milk solids production growth this season will feed into a global dairy supply chain that remains relatively constrained. Modest milk production growth in Europe (up 0.3 percent) and the US (up 0.1 percent) over the year to date, is being offset by weakness in Australia (down 6.9 percent) so far this season. 6.8% Butter & AMF • Despite the strong start to the season, overall export volume growth has been relatively mixed for the September quarter, compared to the same period as last year. Volume growth for whole milk powder (WMP), butter, and liquid milk products were offset by falls in skim milk powder (SMP) and casein products (Figure 1). 15 Whole Milk Powder • This has resulted in total milk solids collections as at October tracking 0.4 percent higher than at the same time last year. However, we do not expect production to match the record levels achieved during the December 2018 quarter and accordingly, are forecasting milk solids production to be up only 0.2 percent for the 2019/20 season, compared to the previous year. Figure 1: Dairy export volume growth has been mixed for the first three months of the 2019/20 season Expoprt volume (thousand tonnes) • Dairy production has made a positive start to the 2019/20 season. Mild winter conditions have supported pasture growth which, combined with increased winter milking, have boosted early season production. However spring growing conditions have been more variable in September and October, with below average temperatures and wet conditions across some key dairying regions. Change in dairy export volumes: September quarter 2019 compared to the same period in previous year. Source: Stats NZ. • As a result, global dairy markets have remained relatively resilient in the face of slowing global growth and the ongoing US-China trade dispute. In particular, despite slowing economic growth in China (the world’s largest dairy importer) and a weakening in the purchasing power of its currency, there appears to be resilience in the China’s household sector which is underpinning demand. • This has helped support prices for global dairy commodities. Despite some initial weakness in dairy prices for butter and cheese early in the season, Global Dairy Trade auction prices have subsequently firmed in September and October, with WMP prices now 3.9 percent higher and SMP prices 18.7 higher than the start of the season (Figure 2). GDT Index (5 Nov 2019) 8.1% higher than 2018/19 season average Global Dairy Trade Index 1100 1000 900 GDT Index average for the 2018/19 Season 2018/19 Dairy Season 5/11/2019 1/10/2019 3/09/2019 6/08/2019 2/07/2019 4/06/2019 7/05/2019 2/04/2019 5/03/2019 6/02/2019 2/01/2019 4/12/2018 6/11/2018 2/10/2018 4/09/2018 7/08/2018 3/07/2018 5/06/2018 800 2019/20 Dairy Season Global dairy trade index: June 2017 to November 2019. Source: Global Dairy Trade. • Strong milk solids production supported by robust global prices and a weakening NZD has translated into a $261 million (8.4 percent) increase in export revenues for the September quarter compared to the previous year. Across our major markets, export growth into China, Indonesia, and Sri Lanka has been somewhat offset by a significant fall in exports to the US. • For China, our largest export destination, exports rose 9.1 percent to $993 million for the first three months of the season, driven by volume growth in butter (up 18.3 percent), liquid milk products (up 12.6 percent), improved prices for infant formula (up 11.2 percent) and WMP (up 7.5 percent). However, this has been offset somewhat by a 40 percent decline in SMP volumes (Figure 3). Figure 3: Growth in export revenues to China and Indonesia have been partially offset by declines to the US • Given the strong demand from key Asian markets and weak international supply growth, we are expecting global dairy markets to remain resilient and supportive of strong dairy prices over the short term. Combined with a soft outlook for the NZD, this is expected to support an 8 percent growth in export revenues for New Zealand producers to $19.6 billion for the year ended June 2020. In particular, we expect to see strong revenue growth in higher added value dairy products such as infant formula (forecast rise of 12.9 percent) and liquid milk products (forecast rise of 15.1 percent) in the year ahead, driven by continued volume growth into China. • These factors should support the profitability for New Zealand’s dairy farmers in the current season. We have accordingly adjusted upwards New Zealand’s all company average milk solids payout forecast (including dividend) for the 2019/20 season to $7.25 per kilogram of milk solids (Figure 4). Figure 4: Farmgate milk solids price outlook revised upwards from previous forecast 9.00 Farmgate payment (NZ$/kg ms) Figure 2: Global commodity prices have risen since September 8.41 Forecast 6.36 6.72 7.25 7.00 6.28 6.00 4.77 4.35 3.00 0.00 2014 2015 2016 2017 2018 2019e 2020 2021 New Zealand all company average farmgate milk solids payment (including dividend), year ended May 2014-21. Source: DairyNZ and MPI. Hong Kong Thailand United Arab Emirates Indonesia Philippines Malaysia Japan United States Australia China (80) (60) (40) (20) 0 20 40 60 80 Export value (NZ$ million) Change in dairy export revenues (Top 10 export nations): July-September 2019 compared to 2018. Source: Stats NZ. SOPI DECEMBER 2019 • 13 ICE CREAM IN NEW ZEALAND The retail value of the New Zealand ice cream market is estimated at $419 million in 2019 and is expected to reach $533 million by 2024. Home ice cream still leads the category, with bulk ice cream enjoying the highest rate of growth, which totalled 5 percent in 2019. Single portion ice cream enjoyed faster growth compared with this category in previous years. This was driven by impulsive supermarket and convenience store purchases during summer, a trend that is expected to continue. Other significant market trends also shaping the New Zealand industry are listed below. 56% 42% Take-home ice cream Impulse ice cream (bulk dairy, multipack dairy, ice cream desserts) (single portion dairy, single portion water) 0.9% KEY TRENDS Shift to premium products and product innovation is driving value and increased customer interest. Growth in health and wellness product (e.g. with non-dairy, low calories, high protein benefits). Asia Pacific is a key export market, with 42 percent of exports by value in 2018 going to China. Rise in demand for unique flavors such as “matcha” to cater specifically to the Asian population Mess-free, single-portion formats (cups, bars) gaining traction as “convenience” continues to gain importance Innovation in visual and sensory features of ice cream to target new social media and “eat-with-your-eyes” focused customers 14 • MINISTRY FOR PRIMARY INDUSTRIES Unpackaged ice cream 0.6% Frozen yogurt KEY TRENDS New Zealand ice cream exports to China have experienced dramatic growth in the last few years. This leap in growth is in part driven by catering to the China market demand for unique flavours (as noted in the key trends). Global market estimated at $US77 billion in 2018 ASIA-PACIFIC ICE CREAM EXPORTS China 30 Global market enjoying an average growth rate between 4.1 percent and 4.9 percent (000,000) GLOBAL MARKETS Global production of 11.5 million tonnes in 2018 Australia 15 0 Japan 2010 2013 2016 2019 SOPI DECEMBER 2019 • 15 Meat and Wool The outlook for meat and wool exports remains robust with export revenues forecast to reach $10.4 billion for the year ending June 2020, 2.5 percent higher than the previous year. The positive outlook for the sector is being driven by high international meat prices as a result of African Swine Fever (ASF) reducing China’s pork herd, increasing demand for imported protein. Strong schedule prices as a result of international demand have helped maintain on-farm profitability. Meat & Wool export revenue 2015-21 (NZ$ million) Forecast Actual Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Beef & veal 2,980 3,096 2,706 2,943 3,324 3,560 3,570 Lamb 2,504 2,569 2,441 3,018 3,227 3,280 3,410 Mutton 418 419 417 575 576 560 600 Wool 805 760 522 543 549 490 490 Venison 174 182 162 196 186 180 190 Other meat* 466 503 513 543 610 600 660 Hides & Skins 570 509 416 396 354 330 330 Animal by-products 578 598 587 700 729 770 780 Animal fats & oils 118 125 156 147 115 120 120 Animal products for feed 216 247 273 332 376 400 400 Carpets & other wool products 172 192 163 148 130 130 130 Total 9,000 9,200 8,355 9,542 10,176 10,430 10,680 % Change year on year +10.3% +2.2% -9.2% +14.2% +6.6% +2.5% +2.4% Source: Stats NZ and MPI. * Other meat includes: edible offal, processed meat, and poultry. • Growing demand from China for New Zealand meat products as a result of ASF continues to support export growth and schedule prices. Since September 2017 exports to China have grown from 20.8 percent to 39.9 percent of New Zealand’s total beef and sheep meat exports (Figure 5). The shift in trade to China can also be seen in an increase in the proportion of Chinese yuan denominated trade for meat products. From October 2018 to June 2019, 7.5 percent of beef and sheep meat trade was denominated in Chinese yuan, compared to 1.6 percent for the same period the previous year. • The value of beef and veal exports is surging due to increased demand from China. Beef and veal exports are forecast to reach $3.6 billion for the year ending June 2020, a 7.2 percent increase from the previous year. The increase in revenue is predominantly driven by prices that are forecast to increase by 6.8 percent, while volumes are forecast to remain flat. This growth builds off the strong previous season that saw massive spikes in demand in China for beef as a result of ASF. Growth in 16 • MINISTRY FOR PRIMARY INDUSTRIES Chinese demand for prime cuts and manufacturing beef has continued in the early season, creating competition with the US, resulting in rising global beef prices. Figure 5: Red meat exports shifting to Asia 8000 Asia Europe Middle East Oceania and Antarctica The Americas 7000 Export value (NZ$ million) • The impact of ASF outbreaks in China has changed the face of global protein trade. China is the world’s largest producer and consumer of pork, home to just over half of the world’s pig population. Over 40 percent of China’s pig herd is estimated to have been lost as a result of the disease. This gap in domestic protein production is being met by increased imports of all meat products, not only pork. 6000 5000 4000 3000 2000 1000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Beef exports by region 2010-2019, year ended June. Source: Stats NZ • The changing consumption trend for beef in China predates ASF as boneless beef exports to China have been rising steadily since late 2015. This is alongside a rising chilled beef trade to China which has nearly doubled in the past year from $32 million to $61 million. • New Zealand’s beef herd is expected to remain relatively static with beef cattle numbers expected to be at 3.66 million for the year ending June 2020. This is a 0.5 percent fall from the previous year of 3.68 million. Export price (NZ$/kg) (clean equivalent) 100 0 2019 • Wool export revenue is forecast to fall to $490 million for the year ending June 2020, an 11 percent decrease from the previous year. Export quantities are expected to remain stable as a result of the stable sheep flock looking forward. Strong wool export prices remain low, whereas fine and mid-micron wool prices remain variable (Figure 6). This is due to reduced demand from China as they are exporting fewer clothes and textiles to the US due to trade tensions. 200 2018 Source: Stats NZ 300 2017 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 2016 2017 2018 2019 400 2016 More than 31.4 microns 500 2015 24.5 to 31.4 microns 600 2014 Less than 24.5 microns Steers and Heifers Mutton 700 2013 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Cow Lamb 2012 Figure 6: Strong wool export prices remain low while fine prices remain variable 900 800 2011 • The retention of lambs from last season has increased the hogget population while ewe numbers are falling. This is forecast to result in 2 percent fewer lambs being born this coming year, assuming a similar lambing rate to last season. Global sheep meat production is also constrained as Australia’s sheep flock shrinks from drought creating upward pressure on prices. Figure 7: Schedule prices remain high early in the season Price (NZ$ per kg carcass weight) • New Zealand’s sheep meat exports have also continued to perform well with lamb and mutton exports expected to reach $3.3 billion and $560 million respectively for the year ending June 2020. Export quantities are expected to be flat, while prices are expected to increase as a result of ASF. Schedule prices for steers and heifers, cows, mutton, and lamb: Year ending December 2011 – 2019 Source: Beef and Lamb NZ • Schedule prices for livestock are at near record levels resulting in continued strong on-farm profitability (Figure 7). Although a small drop is expected compared to last season as higher on-farm revenues are being offset by rising farm expenditure. Beef and Lamb NZ forecast earnings before interest, tax, and managers’ wages, are expected to be 0.7 percent lower for the year ending June 2020. • Poultry exports to Australia have been falling as a result of Infectious Bursal Disease Virus (IBDV) being discovered in New Zealand. Last year poultry export revenue reached $91 million, of which 56 percent went to Australia. Poultry meat must now be heat treated to remove the virus before it is exported to Australia, which reduces the range of products available to export. SOPI DECEMBER 2019 • 17 Forestry Forestry exports for the year ending June 2020 are forecast to fall 12.8 percent to $6.0 billion compared to the year ended June 2019 when prices and volumes were at record highs. This is $0.2 billion higher than the September forecast for year ending June 2020 as log prices are recovering more quickly than expected from their sharp fall over June and July of this year. If prices continue their sharp recovery, export volumes may increase faster than currently forecast. Forestry export revenue 2015-2021 ($NZ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Logs 2,059 2,224 2,687 3,337 3,806 3,080 3,640 Sawn timber & sleepers 751 860 830 890 936 920 970 Pulp 628 683 651 828 812 640 620 Paper & paperboard 473 522 488 491 491 480 440 Panels 451 512 476 501 514 560 600 Chips 52 64 59 56 67 70 80 Other forestry products* 268 275 290 281 257 250 260 Total 4,683 5,140 5,482 6,382 6,883 6,000 6,600 % Change year on year -9.9% +9.8% +6.7% +16.4% +7.9% -12.8% +10.0% Source: Stats NZ and MPI. * Other forest products include: structural or moulded wood, furniture, and prefabricated buildings. Figure 8: Log prices are beginning to recover All Other Destinations China Export Price 180 170 2.0 160 1.5 150 1.0 140 0.5 0.0 Export price (NZ$/m3 FOB) Log export volume (million cubic metres) 2.5 130 Feb May Aug 2017 Nov Feb May Aug 2018 Nov Feb May Aug 2019 120 Log export volumes and prices 2017-2019. Source Stats NZ. • Forestry exports for the year ended June 2019 reached $6.9 billion. Just over half of this value was from log exports, through record high export volumes and prices. • Log export prices for A grade logs dropped sharply (down 11 percent to a low of $138.0/m3 in July due to a build-up of softwood inventories in China following very high log export volumes from New Zealand. At the same time, the supply of logs increased from Europe and Russia. Prices recovered to $143.5/m3 in September (Figure 8), and are expected to continue rising to $155-$165 m3 by the middle of 2020. This has driven a forecast fall of $726 million (nearly 20 percent) for New Zealand log export value for the year ending June 2020. • The price recovery during August and September was driven by log inventories at China’s ports declining much quicker than expected. This recovery is unlikely to continue over the next few months as sales to China traditionally slow in January and February. High volumes of logs from beetle-damaged forests are continuing to arrive in China from Europe. As these have a similar use 18 • MINISTRY FOR PRIMARY INDUSTRIES as New Zealand logs they are slowing the export volume recovery. However, we are expecting to see volumes increasing in subsequent years as both small and corporate growers respond to the log price recovery by increasing harvest volumes. • China’s construction market remains active and there is no sign of decreased demand. Therefore, industry is expecting export volumes to China to recover over the next year, but for prices to be slightly lower than recent levels. However, any increase in shipping costs resulting from new requirements on the sulphur content of fuels from 2020 could slow down the export volume recovery by impacting the marginal returns on harvest. • Longer-term, the recent log price drop has underlined the importance of increasing domestic processing and diversifying export markets. Interestingly, the price of wood products has not followed the log price drop, and demand from other export markets such as Japan, South Korea, and India, has remained stable with potential to increase. • Additionally, log exports have grown from 24 percent of forestry exports in 2009 to 55 percent in 2019 (Figure 9). With 75 percent of New Zealand’s exports going to China, forestry is heavily exposed to risks of changing demand in this market. The key drivers for this are New Zealand’s increased log supply, the increasing log demand from the China’s construction industry and New Zealand’s wood processing capacity remaining relatively static over the last decade. Figure 9: Log exports continued to gain proportion of export share until the June 2019 year new dwellings consented was 34,804, up 6 percent from the June 2018 year. The number of consents is accelerating, with an increase of 20 percent for the September 2019 quarter compared with the same quarter in 2018. 100 90 70 60 Figure 10: Sawn timber production remains robust 50 40 30 5000 20 4500 10 4000 0 Logs 2009 2010 Sawn timber 2011 Pulp 2012 2013 Panels 2014 2015 2016 Paper and paperboard 2017 2018 2019 Chips Proportions of Log export volumes and prices 2009-19. Source Stats NZ. Volume (thousand cubic metres) Export share (percent) 80 3500 3000 2500 2000 1500 1000 500 • Exports of pulp, paper, and panels remain steady despite pulp prices decreasing by 15 percent in the last 12 months (to $766/t from $904/t). The key reasons for the pulp price drop were increased supply from Brazil to China and a slowdown in China’s paper exports to the US, due to increased tariffs applied by the US. 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Production Consumption Export Import Sawn timber production, consumption, and trade, year ended June 2006-19. Source: MPI. • Sawn timber export revenue for the year ended June 2019 increased 5.2 percent to $936 million. Both export and domestic market demand remains stable (Figure 10). Domestic market demand is expected to increase due to an increase in the number of new dwelling consents. In the year ended June 2019, the number of SOPI DECEMBER 2019 • 19 Horticulture Horticulture sector revenue is forecast to rise 4.7 percent for the year ending June 2020 driven by increases in kiwifruit, wine, and apple and pear exports. This will push the horticulture sector to the third largest primary sector industry by value, edging ahead of the forestry sector. Kiwifruit exports are expected to rise by 8.6 percent to $2.5 billion, while wine exports are predicted to rise by 1.8 percent to $1.8 billion, and apple and pear export revenue to rise by 7.2 percent to $0.9 billion. Horticulture export revenue 2015-21 (NZ$ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Kiwifruit 1,182 1,673 1,664 1,861 2,302 2,500 2,560 Wine 1,408 1,558 1,661 1,694 1,807 1,840 1,840 Apples & pears 571 701 701 745 839 900 910 Fresh & processed vegetables* 588 612 614 622 696 650 660 Other horticulture** 436 456 525 471 466 510 560 Total 4,185 5,000 5,165 5,392 6,111 6,400 6,530 % Change year on year +10.0% +19.5% +3.3% +4.4% +13.3% +4.7% +2.0% Source: Stats NZ and MPI. * Fresh vegetable exports include onions, squash, capsicum, potatoes and other fresh vegetables. Processed vegetable exports include frozen vegetables (including frozen potatoes, peas, sweetcorn, etc.), dried vegetables, dry legumes, prepared and/or preserved vegetables, and vegetable juices. ** Other horticulture exports include: other fresh fruit (including avocados, cherries, blueberries, etc.), frozen and processed fruit, fruit juices, nuts and ornamentals. apples and pears in the year ended December 2020 are influenced by: −− a return to normal production levels in China in 2019; −− a reduced apple crop in Europe in 2019 due to adverse weather, estimated to be down by 20 percent on the prior year, although production is up in France and the Netherlands; −− tariffs on US apple imports into China and India; and −− a slightly lower New Zealand dollar against the US dollar and Euro compared with the 2019 exporting season. Apples and pears • The 2019 apple and pear export season is near completion, with new records being set for export volumes and prices. Exports are expected to reach 395,000 tonnes (21.9 million cartons) and $870 million for the year ending December 2019. Favourable climatic conditions during ripening and harvest helped lift the proportion of export-grade fruit. • Apple and pear exports are forecast to increase in 2020 and beyond due to trees maturing and the ongoing increase in planted area. However, there may be some downside risk to the 2020 crop forecast once the impacts of several localised spring hail events are fully realised. The lower prices received for Braeburn in 2019 will likely speed up growers’ timelines for the replacement of Braeburn with apple varieties in higher consumer demand. Orchard replanting and new plantings are expected to continue, with the total planted area on track to reach 11,000 hectares by 2021. • Export revenue for the year ended December 2020 is forecast to be similar to the 2019 year, with higher export volumes offset by a slightly lower price forecast of $38.00 per carton. Price expectations for New Zealand 20 • MINISTRY FOR PRIMARY INDUSTRIES Figure 11: China’s reduced apple crop provided more opportunities for apple exports to Asia in 2019 250,000 China Hong Kong 200,000 Export volume (Tonnes) • Strong demand from Asian markets, in particular China, driven in part by a reduction in China’s 2018 apple crop by an estimated 25 percent, increased the average export price to a new high of $39.50 per carton. A lower New Zealand dollar also assisted. Asia will account for around 50 percent of New Zealand apple exports in 2019, up from 40 percent in the prior year. The increased demand in Asia helped offset lower demand from Europe due to large domestic stocks from the 2018 harvest (Figure 11). Thailand Vietnam Taiwan India Rest of Asia 150,000 100,000 50,000 0 2012 2013 2014 2015 2016 Year ended December New Zealand apple exports to Asia, 2012-2019. Source: Stats NZ and MPI. 2017 2018 2019 YTD • After emerging from the impact of Psa, the kiwifruit industry is in a period of strong growth. Kiwifruit export revenue is forecast to grow to $2.5 billion in the year ending March 2020, based on total export volume of 149 million trays. While this overall volume is forecast to be down slightly on the previous season’s crop volume, the balance continues to shift from green (down 14 percent) to gold (up 11 percent). Sustained growth is forecast based on improving prices and maturing Gold3 vines further increasing production. Figure 12: Monthly export value for gold kiwifruit, year to date (March to September 2017 – 2019) 350 Export value (NZ$ millions) 120 Rest of world Chile Iran Italy New Zealand 100 80 60 40 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Top 4 Kiwifruit exporting countries by volume, 2018 Source: GTA 300 2017 2018 2019 • As production switches from green varieties to gold, the green producing area is decreasing alongside some variability in yields. This season’s green yields are down on the previous year, which were close to the record. Gold yields have climbed steadily for the last three years, and it is yet to be seen what the long term average yield might be for mature Gold3 orchards. 250 200 150 100 50 0 Figure 13: Global kiwifruit exports are dominated by four countries; southern hemisphere countries generally supply to the northern hemisphere during their production off season. Export volume (thousand tonnes) Kiwifruit Mar Apr May Jun Jul Aug Sep Gold export values up on previous two seasons Source: Stats NZ. • A hot, dry summer produced an early start to the Gold3 season with increased dry matter and taste, but these conditions also reduced fruit size. A favourable exchange rate and growing demand has seen prices above those of last season in five out of seven months, despite the smaller fruit size, which is a great result given the increasing supply. For the March to September year to date Gold3 volumes and prices were up 8 and 2 percent respectively, resulting in 11 percent more revenue compared to the same point last year (Figure 12). • The tail of the export season sees remaining green kiwifruit from the reduced crop facing increasing competition from northern hemisphere grown fruit as summer production comes on line (Figure 13). • While the smaller fruit size this season has not reduced prices, larger kiwifruit are generally more highly sought in premium markets. As the crop for the coming season establishes, growers will be carefully managing vines to maximise value from a balanced yield, fruit size and taste. • Although Gold3 has consistently outperformed Hayward green kiwifruit in terms of orchard gate return, there are opportunities to exploit other segments of the fruit market with new kiwifruit varieties. The new red kiwifruit variety will be available in New Zealand and other international markets, after being well received in a Singapore trial this season. This variety is likely to be popular in other Asian markets, where the shorter shipping times make this a more realistic destination than Europe. Earlier maturing varieties such as Sweet Green enable green fruit to reach the market earlier in the season, ensuring longer seasonal supply of New Zealand grown fruit. SOPI DECEMBER 2019 • 21 • Wine exports are forecast to reach $1.84 billion in the year ending June 2020, up 1.7 percent from the previous year. In the September 2019 quarter, export volumes were up 4 percent from the same period last year, continuing the strong export volume growth seen in the first half of calendar year 2019. • Given that the 2019 vintage is down 1.4 percent from the previous year, it is unlikely this pace can be sustained throughout the current export season. As a result, export volumes are expected to rise just 0.5 percent during the year ending June 2020. While export volumes are maintained, the reduced vintage will likely result in falling inventories and less New Zealand wine consumed domestically. • The main markets driving growth are the US, UK, and Europe, with export revenues up 9.5, 15.1, and 4.8 percent respectively, in the year to September 2019. Wine sales to the US are expanding again following a lull in mid-2018. The UK has been a strong market for New Zealand wine over the past year, although exports have slowed in the past few months, possibly due to uncertainty created by Brexit (Figure 14). • While wine export revenues from Australia have held constant in recent years, Australia remains our third largest export market. • The latest Vineyard Benchmarking Report was released in August 2019, covering Marlborough vineyard profitability for the vintage harvested in early 2019. The report shows profit before tax of $8,700 per hectare for a 30 hectare vineyard model. • This is 13 percent lower than 2018, and the third straight year of falling returns after an excellent result in 2016. Incomes have fallen slightly as production has slipped, while working expenses continue to increase. • Production per hectare is the largest source of variability in vineyard income, and is largely out of growers’ control. After bumper crops in 2014 and 2016, the weather hasn’t been as cooperative, and as a result, yields have fallen. (Figure15). At the same time, production expenses have increased, rising by 10 percent in the past year alone. • Increases in the minimum wage are a significant factor, contributing to higher labour costs for pruning, canopy/ crop management, and other wages. This trend is expected to continue with further minimum wage rises scheduled in 2021. Expenditure has also increased on electricity, fuel, and fertiliser over the past year. Figure 15: Vineyard profitability hindered by lower yields and rising expenses Income (per hectare) $35,000 Vineyard working expenses per hectare Yeild (Tonnes per hectare) 14 $30,000 Figure 14: Wine exports strong to UK and US Dollars per hectare 600 Export revenue (NZ$ million) 500 400 12 $25,000 10 $20,000 8 $15,000 6 $10,000 300 4 $5,000 200 $0 100 Australia United Kingdom United States EU (excl. UK) 2017 2018 Jul Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2016 Oct Jan Apr Jul 2015 Oct Jan Apr 0 16 Tonnes per hectare Wine 2 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 Vineyard income, expenses, and yields 2011-19. Source: MPI and New Zealand Winegrowers. 2019 Wine export revenue by destination (12 month rolling average) 2015-19. Source: Stats NZ. Wine production and trade, year ended June 2014-21. Actual 2014 2015 2016 2017 2018 2019 2020 2021 Area harvested (hectares) 35,511 35,463 36,226 36,943 38,073 38,680 39,200 39,600 Grape production (metric tonnes) 445,000 326,000 436,000 396,000 419,000 413,000 431,000 436,000 Wine production (million litres) 320.4 234.7 313.9 285.1 301.7 295.0 310.0 315.0 Export volume (million litres) 186.2 206.7 211.4 252.2 253.9 269.0 270.5 271.8 Export price (NZ$ per litre) 7.11 6.81 7.37 6.59 6.67 6.70 6.80 6.75 Export revenue (NZ$ million) 1,323 1,408 1,558 1,661 1,694 1,810 1,840 1,840 Source: MPI, New Zealand Winegrowers, Stats NZ. Forecast 22 • MINISTRY FOR PRIMARY INDUSTRIES 250,000 $1,000 Export price 200,000 $800 150,000 $600 100,000 $400 50,000 $200 0 2010 2011 2012 2013 2014 2015 2016 Year ended December 2017 $0 2018 2019 YTD Export volumes and prices for New Zealand onion exports, 2010-2019. Source: Stats NZ and MPI. Figure 17: Proportion of avocados exported to Asia expanding 25% Forecast 20% 15% 10% 5% 0% 2016 2017 2018 2019 2020 Proportion of New Zealand avocados exported to Asia by value 2016-2020. Source: Stats NZ. SOPI DECEMBER 2019 • 23 Export price (NZ$/tonne) Export volume Export volume (tonnes) • After topping a record $170 million in export revenue in the year to December 2019 (Figure 16), onion growers are anticipating a return to more typical export market conditions for the 2020 crop, with the planted area remaining stable. Brown onions are the predominant onion type grown with red onions accounting for around 10-12 percent of the total planted area. • The 2019 avocado harvest is underway and estimates are for a moderate crop, though up on last year. Two years of increasing volumes following the low bearing crop of 2017-18 shows a disruption to the biennial bearing cycle. Industry has been working on stabilising the bearing cycle using new horticultural management techniques and expansion into warmer growing areas in Northland. Export prices in the September 2019 quarter are down slightly on the same quarter last year, consistent with the increased supply, resulting in a rise in forecast export revenue of 14 percent to $118 million in the year to June 2020. • Traditionally, over 80 percent of our avocados were exported to Australia. However, New Zealand’s avocados are likely to face increasing competition in Australia, with the removal of tariffs following the CPTPP agreement and expansion of global exports from Mexico and other large South American producers. There has also been an increase in avocados exported from South America to Asia, particularly to South Korea and Thailand (Figure 17). Figure 16: A shortage of onions in Europe led to strong market demand and record prices for New Zealand onion exports in 2019 Proportion of export value Other horticulture Seafood Seafood export earnings are forecast to grow 6.5 percent in the year ending June 2020 to $2.1 billion, the first time annual export earnings will surpass two billion. This growth is expected to be underpinned by an increase in export prices and rising aquaculture production. Increasing demand from key markets along with limited supply growth, particularly of wild capture fisheries, is expected to keep prices high. The forecast growth in aquaculture production is expected to result in higher export volumes in the coming years. Seafood export revenue 2015-21 (NZ$ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Wild Capture 1,242 1,380 1,338 1,372 1,509 1,580 1,670 Aquaculture 321 388 406 406 454 500 540 Total 1,562 1,768 1,744 1,777 1,963 2,090 2,210 % Change year on year +4.1% +13.2% -1.4% +1.9% +10.4% +6.5% +5.7% Source: Stats NZ and MPI. Forecast Export value (NZ$ million) 2,000 1,500 1,000 500 0 2015 2016 2017 Wild capture 2018 2019 Aquaculture 2020 2021 Seafood export earnings, year ended June 2015-21. Source: Stats NZ and MPI • New Zealand wild capture export volumes are likely be slightly down at least in the short term due to an expected decrease in Hoki catch volumes following the Government’s decision to reduce the catch limits for the 2019/20 fishing year to ensure recovery of the stock. The industry had already been implementing a voluntary catch reduction. catch levels have remained well below the allowable commercial catch limit (quota level), which was set at 82 thousand tonnes in the 2016/17 fishing year. Squid prices have increased by 16 percent per year over the last five years, driven by strong demand and global shortages in supply due to overfishing and possible stock depletion. Key markets driving demand include China, the US, the EU, and South Korea (Figure 19). Figure 19: Rising prices contributing significant growth in squid exports 35 7 30 6 25 5 20 4 15 3 10 2 5 1 0 0 2014 2015 2016 Export volume • Despite an expected fall in export volumes, export earnings from wild capture seafood are expected to increase by 5.2 percent per year over the next two years. The main driver for this growth is an expected increase in export prices resulting from limited global supply of wild capture seafood, combined with increasing demand. Export earnings from wild capture fisheries grew by 10 percent in June 2019 compared to the previous year, mainly due to increased prices despite a small decrease in export volumes (Figure 18). • Squid export earnings have increased by an average of 34 percent per year over the last five years, reaching just over $202 million in June 2019. The growth in export earnings is driven by increased prices over the past five years, and a spike in volume in the past year. Actual 24 • MINISTRY FOR PRIMARY INDUSTRIES Price (NZ $/kg) 2,500 Export Volume (thousand tonnes) Figure 18: Strong prices and growing aquaculture lifting export earnings 2017 2018 2019 Price Squid exports by volume and value, year ended June 2014-19. Source: Stats NZ and MPI. • Global supply of wild capture seafood is constrained by sustainability and environmental factors and production is expected to remain stable in the coming years. The Food and Agriculture Organisation (FAO) Organisation for Economic Co-operation and Development (OECD) Agricultural Outlook 2019-2028 estimates total seafood (including aquaculture) production growth of just over 1 percent annually over the next decade, with aquaculture contributing all production growth. A key driver of this slow global growth is the restrictions placed by China’s 13th five-year plan (2016-2020) on its seafood production. • New Zealand’s aquaculture export earnings are expected to grow by 10.2 percent in the year ending June 2020 to $500 million on the back of both rising prices and volumes. Figure 20: Supply shortages, along with strong demand, driving salmon prices up 25 15 10 5 0 2014 2015 United States 2016 Australia 2017 Japan 2018 2019 China New Zealand salmon prices in key export markets, year ended June 2014-2019. Source: Stats NZ and MPI. • Strong prices have been lifting export earnings up in the key markets in recent years. Over the past four years, export earnings have increased 9 percent annually in China and Europe, 7 percent in the US, and 2 percent in Australia and Japan. Given the strong demand along with limited global supply of seafood, particularly of wild capture production, prices are expected to remain strong during the forecast period (Figure 21). Figure 21: Strong prices driving export earnings up in key markets 800 China 700 Export revenue (NZ$ million) • Overall, aquaculture export prices have performed well in recent years (up 13.9 percent in the year to June 2019) due to strong demand in key markets. Salmon prices, in particular, have led the way with a 19.4 percent up in the year ended June 2019. Prices improved across all the key export markets. This is mainly due to supply shortages caused by production losses at Norwegian farms following an algal bloom in mid-2019 (Figure 20). Reports also suggest worsening biological performance at Chilean farms due to high levels of sea lice. As a result, salmon prices are expected to remain strong in the short-term. Per kig price in NZ$ 20 • Aquaculture export volumes are expected to increase over the short to medium-term. The supply for hatcherybred mussel spat is expected to gradually lift mussel production, with trial results showing faster growth than wild capture varieties (16.7 months to reach market size rather than 28 months). Salmon production is also expected to grow gradually as recently established farms begin to reach their full capacity. The Government recently released its Aquaculture Strategy, with a goal for the industry achieving $3 billion in annual sales by 2035. Research and investment towards open ocean aquaculture and land-based aquaculture systems are important components of this strategy. Australia Japan US Europe 600 500 400 300 200 100 0 2004 2006 2008 2010 2012 2014 2016 2018 New Zealand’s key seafood export markets by earnings, year ended June 2005-19. Source: Stats NZ and MPI. SOPI DECEMBER 2019 • 25 Arable The 2019/20 year has begun positively with export revenue up 43 percent for the September 2019 quarter compared to September 2018 and a reasonable growing season to date in most areas. Export sales in all categories increased with vegetable seeds as the main contributor; up $16.4 million on the September 2018 quarter. As a result, arable export revenue is expected to rise 10 percent for the year ending June 2020 to $260 million, with slightly lower levels forecast for 2021. Arable export revenue 2015-21 (NZ$ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Vegetable seed 62 74 64 92 87 105 100 Ryegrass seed 49 46 46 55 60 60 60 Clover/legume seed 22 20 23 28 20 25 25 Other grains and seeds* 48 70 63 68 69 70 70 Total 181 210 197 243 236 260 255 % Change year on year -21.6% +15.6% -6.0% +23.2% -2.7% +10.0% -1.9% Source: Stats NZ and MPI. * Other arable products include: maize, other grains, and oilseeds. • Nationally, areas sown in feed wheat and feed barley are estimated1 to be down 7 percent and 12 percent on last season, while areas of milling wheat and malting barley are up 20 and 23 percent. Areas of maize planting in the North Island based on seed sales are expected to be up for silage and similar to 2018 for grain (Figure 22). • Demand for feed wheat and barley has been subdued with unsold stocks up on this time last year. Prices for feed wheat and barley are about $30 per tonne lower than last year but remain above the four year average by about $50 per tonne, while milling wheat prices have held (Figure 23). End user contracts for maize grain have been difficult to negotiate due to carry over stocks from the influx of maize imports from Romania last year. • Domestic demand for forage seeds is strong while the dairy and dry stock sectors get good returns. Figure 22: NZ total hectares planted for 2019 harvest and predicted for 2020 harvest 45 2019 Forecast 2020 40 35 '000 hectares 30 25 20 15 10 5 0 Milling wheat Feed wheat Malting barley Feed barley Source: AIMI 10 October 2019 Figure 23: Domestic spot grain prices 500 450 Spot Price (NZ$ per tonne) • Seasonal conditions were favourable in Canterbury with crops looking exceptionally good until a hail storm in late November caused considerable damage to cereal, seed and vegetable crops. A mild winter allowed autumn and winter sown crops to come through it well, but the cool spring delayed some spring planting. Conditions in Southland have been more difficult with a cold wet spring making it difficult to get crops planted, and similarly in the North Island the cool spring delayed planting. 400 350 300 Milling Wheat 250 Canterbury feed barley Canterbury feed wheat 200 150 2017 2018 2019 Source: NZX Grain & Feed Insight • A recent economic impact assessment report2 commissioned by the Arable Food Industry Council found that for 2018, the value of grain and seed sales was $781 million, split 62:38 percent between grain and seed production. Adding indirect and induced impacts3 1 Source: Arable Industry Marketing Initiative (AIMI) New Zealand Survey of Cereal Area and Volumes: October 10,2019 (Foundation of Arable Research) 2 Source: BERL Arable Production 2018 – Economic Impact Assessment 3 Impacts: Direct – initial spending; Indirect – additional inter-industry spending as a result of the direct impact; Induced – the impact of additional household expenditure resulting from the direct and indirect impact. 26 • MINISTRY FOR PRIMARY INDUSTRIES the gross output was $ 2,089 million and contributed 0.3 percent of national GDP. Figure 25: September quarter arable exports 90 • The bulk of the grain crop (including maize silage) is sold directly to farmers as animal feed with feed mills as the next largest consumer (Figure 24). 80 Clover seeds Ryegrass seeds Other grains and seeds Vegetable seeds Total Arable 70 $ million 60 Figure 24: Grain flows to farms and industry, 2018 50 40 30 20 10 0 Sep-16 Sep-17 Sep-18 Sep-19 Source: Stats NZ To farmers Feed mills Human milling Other livestock Source: BERL Arable Production 2018 – Economic Impact Assessment • Export revenue for the 2019 September quarter was up 43 percent on the previous year to $ 73.5 million, due to higher export volumes and prices. • An increase in ryegrass seed to China and clover seed to the EU drove the 30 and 62 percent increases in export returns for the September on September quarter for these categories. The forage seed market is buoyant in Europe with a mixed 2019 harvest following three poor years, and regrassing following the dry years driving the demand for seed. • Arable export revenue is expected to rise 10 percent for the year ending June 2020 to $260 million with smaller increases forecast for the years out to 2024. • Returns for all the arable export categories rose with vegetable seeds being the greatest contributor. There has been an improvement in the global vegetable seed market following a slowdown last year and the outlook is good for the next few years. Export revenue for the 2019 June and September quarters (the main export period for vegetable seeds) was $91.0 million, up from $62.8 million and $75.9 million for the same periods in 2018 and 2017 (Figure 25). SOPI DECEMBER 2019 • 27 Other primary sector exports Export revenue for New Zealand’s other primary sector exports and foods is expected to increase to $3.0 billion for the year to June 2020, up 7.3 percent from 2019. This builds on the 5.3 percent growth in 2019. This growth is being led by the other products (such as dairy blends and soft drinks), innovative processed foods and live animals categories. Demand for these products is expected to continue to develop in coming years. Other export revenue 2015-21 (NZ$ million) Actual Forecast Year to 30 June 2015 2016 2017 2018 2019 2020 2021 Innovative processed foods 471 681 664 759 788 820 840 Honey 233 315 329 348 355 340 350 Sugar & confectionery 293 312 305 263 225 230 230 Cereal products 255 274 285 306 304 310 310 Live animals 370 242 274 241 239 310 270 Soup & condiments 183 187 186 184 196 200 210 Other products* 612 704 595 609 745 850 920 Total 2,417 2,714 2,639 2,709 2,852 3,060 3,140 % Change year on year +20.8% +12.3% -2.8% +2.7% +5.3% +7.3% +2.6% Source: Stats NZ and MPI. * Other products include: beverages, vegetable-based dyes, and spices. • The other products category is continuing to exceed forecasts, with the forecast for the year to June 2020 up from $830 million in the last quarterly forecast to $850 million for this forecast. The key categories driving this increase are various niche food products, mineral water and soft drink exports (Figure 26). Various niche food products are mostly dairy blends (for example mixes of milkfat or butter and vegetable oil, lecithin or salt) and premixes of food ingredients (for example for cakes or biscuits). The top markets for various niche food products are South Korea and Japan (Figure 27). Figure 26: Various niche food products, mineral water and soft drinks leading growth in Other Products 1000 Export revenue (million $NZ) 900 800 Other Various niche food products Tobacco Water Beer Soft drinks Forecast Spirits 700 600 500 400 300 200 100 0 2014 2015 2016 2017 2018 Year ended June Other Product export revenue: year ended June 2014-21. Source: Stats NZ and MPI. 28 • MINISTRY FOR PRIMARY INDUSTRIES 2019 2020 2021 Figure 27: South Korea and Japan are key markets for various niche food products 300 South Korea Japan United States Other countries 250 Export vlaue (NZ$ million • Innovative processed foods exports are on track to build on the growth in 2019 into 2020. Exports to Australia continue to be lower than 2018 and previous years, balanced by increased exports to China, Singapore, and Hong Kong. 200 150 100 50 0 2014 2015 2016 2017 Year ended June 2018 2019 Various niche products export revenue: year ended June 2014-19. Source: Stats NZ. • The value of live animals is expected to increase 29 percent in the year ended June 2020 to $310 million, mainly due to more cattle expected to be exported to China than in 2019. • Over 9,000 cattle were exported in the September 2019 quarter, and a further 14,000 are expected to leave in the December quarter. The total for the year to June 2020 is expected to top 40,000 as compared to around 25,000 cattle in recent years. These cattle will be used to improve genetics in China’s dairy herds to increase productivity. High numbers of cattle exported in particular years have historically not continued in following years, so we expect cattle export volumes to drop back again from 2021 onwards. • Exports of live poultry reached $36 million for the year to June 2019, a 20 percent increase on the previous year, with growing demand from China continuing to be the key force driving this increase. We expect this growth to continue into future years. • Honey exports are now only forecast to reach $340 million (down from $360 million in the previous forecast) in the year to June 2020. Export volumes are expected to continue to recover from just over 8,065 tonnes in 2019 to levels similar to those of earlier years at around 8,500 tonnes. • Growth in the average honey export prices is looking less likely to continue, so the average export forecast price for 2020 onwards has been reduced. The average export price for monofloral mānuka honey is expected to remain steady or increase, while the average export price for multifloral and non mānuka honey is expected to remain soft. Prices for multifloral mānuka honey and non mānuka honey are expected to remain soft, or decrease, as long as surplus inventories of honey continue to overhang the market. • New export codes were introduced in 2018 to capture honey exports by three floral types: monofloral mānuka, multifloral mānuka, and non-mānuka honey. A review of these new codes earlier this year identified that industry needed more assistance with the new process. Now that more assistance has been provided, the data is much more reliable (particularly since the beginning of July 2019) and it is feasible to explore the data at a more detailed level. Figure 28 shows a detailed analysis of the 1,985 tonnes of honey that was exported in the September quarter 2019: the UK was our largest export partner, followed by China, and 75 percent of this honey was retail, while 54 percent was monofloral mānuka honey. Advance Snapshot: Apiculture Monitoring Programme 2019 • New Zealand honey production for the year to June 2019 has been estimated at 23,000 tonnes, up 3,000 tonnes from last season • This rise is due to increasing hive numbers and a modest increase in the average hive yield. • The number of registered beekeeping enterprises in 2019 increased 8.5 percent to 9,282 registered beekeeping enterprises, up from 8,552 registered beekeeping enterprises in 2018. Figure 29: Apiculture monitoring programme statistics New Zealand’s estimated honey production was 23,000 tonnes 15,500 North Island 7,500 South Island Honey production New Zealand had 918,026 registered beehives New Zealand had 9,282 registered beekeeping enterprises 693,552 North Island 224,474 South Island 1-50 hives 51-1,000 hives over 1,001 hives Hives Source: AsureQuality Limited, Registered beekeeping enterprises and hives under the National American Foul Brood Management Plan. The full apiculture monitoring programme report on the 2019 honey production year will be released in early 2020. Figure 28: Most honey exported in the September quarter 2019 was retail packed monofloral mānuka honey Other honey 397 Retail honey 1,489 Bulk honey 488 Multifloral manuka honey 511 Japan 180 Australia 270 United States 296 China 334 Monofloral manuka honey 1,068 United Kingdom 396 All other countries 509 Honey export volumes by category, September quarter 2019. Source: Stats NZ. SOPI DECEMBER 2019 • 29 Forecast tracking Expectations of a solid production season, combined with strong global dairy prices, has pushed the dairy forecast upward by $1,010 million. Figure 30: MPI export revenue forecasts 2015-23 50 NZ$ billion The export forecast of $47.9 billion for the year to June 2020 is up $1.7 billion from the previous forecasting round in September 2019. The main drivers for this revision are expectations of a solid production season, a strong outlook for red meat prices and favourable exchange rates. SOPI June 2019 SOPI Sept 2019 SOPI Dec 2019 45 40 Strong global red meat prices are driving an upwards revision of $360 million in the meat and wool sector. A faster recovery in log export prices than expected last quarter resulted in the forestry forecast being revised upwards by $190 million. 35 2014 2016 2018 2020 Source: Stats NZ and MPI. Small revisions across the remaining sectors have been driven by expectations of a solid horticulture and arable production season, rising prices for seafood and increasing demand for other agricultural products including innovative processed foods, soft drinks and dairy blends. Total exports Other Arable Seafood Horticulture Forestry Meat & wool Dairy Year to 30 June Actual Forecast Forecast round 2015 2016 2017 2018 2019 2020 2021 Dec 2019 14,050 13,289 14,638 16,655 18,107 19,630 19,450 Sept 2019 14,050 13,289 14,638 16,655 18,120 18,620 18,940 Difference – – – – –12 +1,010 +510 Dec 2019 9,000 9,200 8,355 9,542 10,176 10,430 10,680 Sept 2019 9,000 9,200 8,355 9,542 10,168 10,070 10,150 Difference – – – – +8 +360 +530 Dec 2019 4,683 5,140 5,482 6,382 6,883 6,000 6,600 Sept 2019 4,683 5,140 5,482 6,382 6,931 5,810 6,350 Difference – – – – –48 +190 +250 Dec 2019 4,185 5,000 5,165 5,392 6,111 6,400 6,530 Sept 2019 4,185 5,000 5,165 5,376 6,110 6,340 6,510 Difference – – – +15 +1 +60 +20 Dec 2019 1,562 1,768 1,744 1,777 1,963 2,090 2,210 Sept 2019 1,562 1,768 1,744 1,777 1,963 2,070 2,180 Difference – – – – – +20 +30 Dec 2019 181 210 197 243 236 260 255 Sept 2019 181 210 197 243 236 240 245 Difference – – – – – +20 +10 Dec 2019 2,417 2,714 2,639 2,709 2,852 3,060 3,140 Sept 2019 2,417 2,714 2,638 2,706 2,852 3,000 3,090 Difference – – +1 +3 – +60 +50 Dec 2019 36,079 37,323 38,220 42,700 46,329 47,870 48,865 Sept 2019 36,079 37,323 38,219 42,682 46,380 46,150 47,465 Difference – – +1 +19 –52 +1,720 +1,400 30 • MINISTRY FOR PRIMARY INDUSTRIES 32 0 MINIS.TRY FOR PRIMARY INDUSTRIES If a Economic Intelligence Unit online resources: More primary industry data can be found on the MPI website: www.mpi.govt.nz/EIU Market insights Reports that provide insights into consumer preferences and purchasing behaviour, as well as in-depth research into the channels that supply them. Situation and Outlook for Primary Industries The latest update and underlying data for our outlook on the primary industries, plus access to previous SOPI reports. Farm monitoring Reports assessing the annual production and financial performance of typical farm or orchard businesses. Data A range of publically available data covering primary industry production and trade. SOPI DECEMBER 2019 • 33 New Zealand Government