Gloomy outlook for farming

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A depressed outlook for agriculture as it weathers the global financial crisis is foreseen by the Agriculture and Forestry Ministry in briefing papers prepared for the incoming government.

The papers, released yesterday by Agriculture Minister David Carter, say a world economic slowdown is likely to reduce demand for agriculture products and will reduce export revenue.

How the ministry sees sectors being affected:

Dairy: Reduced demand from oil producing nations and emerging Asian economies that currently take about 40 per cent of dairy exports.

Meat: Demand for New Zealand lamb is likely to fall as consumers turn to cheaper substitutes. Demand for beef is expected to remain strong as consumers switch to lower-cost ground beef.

Kiwifruit: New Zealand kiwifruit, which sells at a premium 40 to 100 per cent higher than other kiwifruit, faces a potential threat from cheaper substitutes. This is against a background of four years of low returns and slowing demand. Horticultural exporters who typically rely heavily on seasonal finance will be further hit by an increasing cost of credit.

Apples: Exports of pipfruit are largely reliant on markets in the European Union and are likely to face reduced demand and a shift from premium varieties to lower priced products.

Wool: Prices are likely to remain low as new housing is the biggest market for wool carpets.

Forestry: International demand for new housing has decreased, resulting in a reduction in wood panel and sawn timber exports. Volumes and prices for pulp and paper exports will fall due to the decline in sawn timber production from slower housing markets.

Currency: The depreciation in the New Zealand dollar will mitigate the reduction in demand for exports.

The dollar went from 82 cents to the United States' dollar at the end of February, to 58 cents at the end of October - a 28 per cent depreciation in eight months.

This is the largest eight-month fall since the New Zealand dollar was floated. At the same time, falls against the Euro have been less and there has been some appreciation against the Australian dollar.

The ministry sees the global crisis making it harder to obtain and service debt.

This follows a rise in farm indebtedness and an increasing vulnerability to financing costs, particularly for dairy farmers, and lower commodity prices, especially for sheep and beef farmers.

"Therefore any recession is of concern," the ministry says.

"It is likely there will be fluctuations in income levels and less ability for farming businesses to obtain and service debt financing."

Added to this is the much tighter credit environment that has emerged following the global financial crisis.

The combination of these two factors may lead to:

Tighter rural lending policies that could harm investment in the agriculture and forestry sector and the ability of businesses to refinance existing debt.

Reduced availability of trade credit in key markets potentially leading to reduced demand.

Reduced access to capital and loan financing for acquisitions or new businesses in the sector.

A higher likelihood of some producers, processors and agribusinesses becoming financially distressed and either reducing operations, going out of business, or being acquired by new owners.

Difficulties in the wood processing industry - particularly sawmilling - have been accelerated. Sales have further decreased and credit is less available. In the short-term there may be significant impacts on individual businesses, employees and communities, the ministry says.

- © Fairfax NZ News