The next year will be 'tough' for farmers, but the future is terrific, MPI boss says
Ministry for Primary Industries director-general Ray Smith says its challenging for rural communities at the moment, and may be for the next year, but the outlook for the countrys products remains bright. Global prices for New Zealands biggest primary sector exports have fallen sharply as the Chinese economy has been slow to bounce back from the Covid-19 pandemic, while costs remain elevated. Thats putting pressure on farm profits and will push some into the red this season. I think its difficult at the moment, said Smith, who has been in the role since November 2018. Its difficult for companies, its difficult for farmers and growers. We have to all support each other to get through this period because the future for New Zealand in food and fibre exports is terrific. Smith feels a strong connection with rural New Zealand. Born in Pukekohe in 1965, he remembers as a little kid tagging along with his father as he visited farms buying pigs for the meatworks in Auckland. The family shifted to Taranaki in 1975, where his father managed the Hawera TAB, and in school holidays Smith was often sent off on the bus to farms where his older brother Graham was working, giving him exposure to the farming environment during his formative years. In his role at the ministry (MPI), Smith wants to support the productive economy to grow and ensure we are looking after the natural resources that our wealth is based on. He said Covid has had a profound effect on world markets. The world sort of stopped and then it started again, and different economies have started in different ways. He notes New Zealands exports are very tied to China, accounting for 34% of dairy products, 37% of meat products, 54% of forestry products, and 36% of seafood, but just 14% of horticulture. While China has been slower to recover after Covid restrictions and regain confidence, Smith said it will bounce back. I don't think there's any doubt that it will come back because the middle class is growing. Its growing rapidly, he said. Chinas middle class was expected to include about 800 million people by 2030, he said. While New Zealand was in a bit of a difficult period, overall export growth was still pretty positive, Smith said. Food and fibre sector export revenue rose 8% to a record $57.4 billion in the year to the end of June, and is up 24% since 2019. Its forecast to slide 2% to $56.2b in the coming year but then grow again to reach $62b by 2027. I think next year is going to be tough, and then it'll come back again, Smith said. If you're trading big commodities, at some point you're going to hit these cyclical falls, everybody sort of knows that but they still really hurt when they arrive. He noted the impacts wont be felt evenly. Those who have paid down debt during better times would pull back spending and probably be okay while more indebted farmers would struggle. We have been in this cycle before and it will be incredibly challenging, he said. They'll tighten everything up that they can, they will work with their banks, they will work with the company that they're supplying, they'll do everything they can to tighten up and get their way through it. He said the flow on effects of farmers delaying projects to preserve cash flow would trickle through to rural communities. It's spring at the moment, it's a busy time for farming, so I suspect everything's still quite busy, even though people are concerned, but we'll start to see some consequential impacts. But we'll come out of the back of this. Those prices will come back. Everyone's pretty confident that the demand will resume, it has to. Smith said he hopes farmers wont go out of business, and that banks and other financial institutions will look through this period. I think what it probably depends on is how protracted this is, he said. He noted Fonterra and others were seeing a positive outlook within a year. If that's accurate, then I think we'll pull through that and banks and other lending institutions will continue to support people through that period, he said. If it becomes more protracted, then it gets harder. A recovery also depends on the outlook for costs, which have been rising rapidly. Stats NZ data shows farm inflation hit a peak of 15% last year, but had since slowed to 12% in the March quarter and 7% in the June quarter. We're just in this unfortunate period where prices are depressed and costs are rising, and there's also been weather related factors, Smith said. Some people are facing really quite critical situations, and you have got to feel for them. My sense is it will be difficult, but we will get through it and we've just got to hope that this cycle doesn't last too long. Primary sector companies were doing what they could to support their farmer suppliers, including looking at their own cost structures and making sure they had diversified markets to give them options, he said. I think all of the companies are flat out trying to figure out what they can do, he said. Theyre all very conscious of growers or farmers and where theyre sitting in the cycle and how they can support them. But they will be a bit limited a lot of this is driven by factors well beyond their control. Still, Smith is positive about the outlook. The global middle class, seen as a strong driver of future growth for New Zealands primary sector exports, is forecast to expand from 3.8 billion in 2020 to 5.4 billion in 2030, according to a 2019 report from MPI's Economic Intelligence Unit . Spending by this group is expected to soar from US$33 trillion (NZ$5.5t) in 2015 to US$63t in 2030 mainly driven by economic growth in emerging economies. The report said the growing urban middle class in developing countries presented a significant opportunity for New Zealands primary sector, particularly for China where spending from the expanding middle class was projected to grow from US$4.2t to US$14.3t by 2030, with increased purchases of higher value and quality foods such as meat and dairy. Smith said it helped that New Zealand exporters never missed a beat through Covid. One of the things that guarantees our success is that we are a reliable supplier of food into markets, he said. Youve got a rising number of people in these middle classes with more disposable income, and theyre going to buy New Zealand products. While New Zealand had to adapt to climate change, it would be less affected than others, he said. New Zealand is in an amazing position because climate change will affect us too, but it will affect others much more. We are going to continue to get rainfall hopefully not as much all at once in places, but we are more fortunate climatically than others will be. Other countries are going to face more food insecurity, and so New Zealand is going to be well positioned to keep doing what we're doing. He expects demand for sustainable products to increase in the future, benefiting New Zealand producers. In New Zealand, we produce products from our natural environment that's our strategic advantage. We have got a pasture based system for raising animals, so it's highly efficient. We've got plenty of rainfall, we've got great soils, we're well positioned climatically and so we're in a very good position. Still, he said the country needed to reduce its emissions profile to make sure it was well positioned as pressure mounted from international markets. Ultimately, our ticket to the game will depend on us being able to demonstrate that weve got a lower emissions profile, Smith said. MPI, on behalf of the Government, has partnered with major agribusiness companies Fonterra, Synlait, Silver Fern Farms, Anzco, Ravensdown and Rabobank to invest in methane reducing mitigants. The joint venture , under which the Government matches private funding, has committed to invest $170m over the next four years to find practical, affordable solutions for farmers. Were doing all the right things to try and find a solution, Smith said. Im super optimistic that we will get mitigations to reduce methane emissions from pasture-based animal products. Customers in overseas markets are obviously demanding it because they can see the consumer pressure on wanting products that are better for the environment and that are lower in emissions profile. Governments all around the world are also introducing this into trade agreements. Smith said while only a small niche were prepared to pay a premium for food with sustainability credentials at the moment, that group would grow as the impacts of climate were felt more strongly and a new generation felt it more acutely. He noted Silver Fern Farms was getting double the value for its grass-fed carbon-zero certified steak at Costco in the United States, with the higher returns flowing back to farmers. Eventually the sustainability credentials will become a ticket to the game. But if you can get there early, and if you can differentiate your product on a shelf in a market, you can get a premium, he said. New Zealand can take a lead role in this. Were in an amazing position, we just think we can strengthen it. Were in a difficult space at the moment, but we will come out the back end of that and the demand for our product and the prices associated with it will grow again. Theres no reason not to think that when you think about the world thats growing and the population thats moving into the middle classes that can afford New Zealands products.