US folly and China foster NZ farmers

JON MORGAN

Last updated 05:00 17/01/2013

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OPINION: Thanks to fracking, the United States is moving closer to energy self-sufficiency. Industry experts are talking about reaching this nirvana-like state in 2035-40.

But this hasn't meant the Americans have eased up on their blinkered policy of growing ever more biofuel. Under federal regulations 13 billion gallons (49 billion litres) have to be produced this year.

This would have to be one of the crazier political policies of modern history.

The conversation about creating it went like this:

"Say, Hiram, why don't we make oil from corn?"

"Yeah, but what will our cattle eat?"

"Shoot, we'll just have fewer cattle, I guess."

"But won't that mean we'll have less meat and dairy foods and prices will rise?"

"Well, we'll just have to import more food. We're a trillion in the hole now; no-one's going to notice."

And that's what happened.

We should be glad of crazy Americans. They're keeping our farmers - and therefore us - in the style to which we have become accustomed.

Their demand for red meat hasn't changed as prices have risen, but instead of eating so much steak they've downgraded to hamburgers. And that's good for us, seeing most of our beef cattle end up as patties.

Beef prices are at near-record levels, putting a smile on the faces of hill country farmers who have seen lamb prices sink this season.

Part of the reason for the rise is drought in the northern hemisphere, which has hit world grain prices and driven up feed prices for US beef producers. Corn maize prices have leapt 40 per cent in a year.

The biofuel demands are a big contributor. One of the main reasons for the policy is to reduce greenhouse gas emissions, but fracking and gas plant inefficiencies are said to release a lot of harmful gas. Coal use has dropped as gas is piped to more homes but the US hasn't reduced mining. US coal (along with its carbon emissions) is exported to China and India.

This year's biofuel production will use 40 per cent of the maize harvest and as maize is the main cattle feed this has forced feed prices, and therefore beef prices, upward.

Normally, US cattle farmers would react by culling their herds. This would release meat on to the market and prices would drop. But herds are the smallest in 60 years. The farmers have reached rock bottom and can't cull any further.

This is good news for New Zealand. Our cattle graze on fresh pastures all year. It's much cheaper than the American feedlot system and even with the exchange rate at historical highs and not tipped to fall there's still a tidy profit to be made.

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That's for the burger meat. For the better quality beef cuts, the picture is also looking good. China is taking a wide range of cuts and as tariffs slide under the free trade agreement (reducing from 5.3 per cent to 4 per cent this year on the way to zero in 2016) it offers a big advantage over Korea and Japan where tariffs are at 40 per cent.

If only the lamb view was as rosy. Long term, the industry is still upbeat, but while Europe wallows in recession, demand is low for this luxury meat.

Lamb returns to farmers were down 30 per cent in the usually buoyant Christmas trade, though this is still equal with the third-best season of recent times.

It is not expected to improve, as Europe's plight worsens. One meat company is offering farmers contracts of $4.50 a kilogram for mid-February to the end of March, almost half what it offered a year earlier.

At the same time, the competition in other markets is expected to increase, with more Australian lamb coming from a flock rebuild that has lifted lamb production 15 per cent.

Offsetting some of the lost lamb income for sheep farmers is a forecast increase in wool prices, mainly on the back of Chinese economic growth.

We're not the only nation looking hopefully at China, but as a food producer its economic health means more to New Zealand than most. Thankfully, growth is tipped to rise to 8.8 per cent this year from 7.8 per cent.

From our point of view, the dairy industry will be the biggest beneficiary of this and the farmers' payout could continue to lift.

It's a worry, being so dependent on China for our economic welfare, but we're lucky it's there and should give thanks to our negotiators who won us such a valuable free trade agreement.

Otherwise we'd be at the mercy of volatile Western economies. Not to mention crazy Americans.

- BusinessDay.co.nz

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