Strong dollar stems rich return on food

HAMISH MCNICOL
Last updated 05:00 05/02/2014

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Listed food, beverage and agriculture companies yielded good crops last year, as most outperformed the average return of the NZX 50 overall.

But while the agricultural sector can also look forward to 2014, New Zealand's strong dollar will likely hinder food and beverage export earnings.

A report from broker Forsyth Barr said the sectors outperformed the market in 2013, and strong commodity prices, favourable weather forecasts and high farmer confidence were all positives for this year.

"Strong dairy prices are driving the rural economy," it said. "However, growth in lamb, seafood and rural property prices is also prevalent, boosting rural confidence to near long-term highs."

Prices in the sector had risen significantly in the past year, particularly in dairy, lamb, seafood and coarse wool products.

Ministry of Business, Innovation and Employment figures released yesterday showed processed food exports, such as infant formula, chocolate, and frozen meals, were worth $2.1 billion in 2012. This was up about $81 million from 2011.

MBIE general manager of tourism, sectors, regions and cities Lisa Barrett said the food and beverage industry was critical to increasing exports.

"The pleasing message from these reports is that the sector is more diversified than many think, with real and growing strengths beyond dairy."

But Forsyth Barr said New Zealand's strong currency, which yesterday was trading at about US81c, would likely weigh on food and beverage exporters.

"We believe pricing and demand challenges also exist in the alcoholic beverage space."

PGG Wrightson and Sanford had "accumulate" ratings, while A2 Corporation was considered a "hold". But Fonterra, Delegat's Group and Moa were all given negative "reduce" views.

Fonterra's outlook was reduced on "rising input costs", as higher commodity prices had forced the farm gate milk price higher.

"Dairy prices are an input cost for companies like Fonterra and A2 Milk, however, with the lag between rising commodity prices and retail price increases weighing on short-term profitability where floating contracts exist."

Moa was facing distribution challenges, while Delegat's faced trading obstacles in Australia.

Beer prices had deflated in the past year, while wine prices were rising at the slowest rate for five years, probably fuelled by an industry glut in recent years, the report said.

However, the broker expected a recovery.

Otherwise, coarse wool prices were up, and climbing lamb prices had seen sheep farmer confidence return to positive for the first time in 18 months.

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Seafood prices, particularly in greenshell mussels, were also positive, though the value of seafood exports in the past year was down 2 per cent.

Perhaps most importantly for the sector, however, was the indication that the weather during January through March would be more favourable than last year's drought.

"The absence of either La Nina or El Nino over the next few months is a positive for the agri-sector given the lower expectations for drought-like conditions through to the end of March."

- BusinessDay

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