Primary sector exports to fall 8% in 2015; outlook shows strong recovery

New Zealand's primary sector export revenues will probably drop 8% to $35.2 billion this year, due to a substantial decline for dairy and forestry products although the outlook for the next four years is rosier.

The Ministry for Primary Industries' latest Situation and Outlook for Primary Industries shows revenue for dairy, the traditional heavyweight in the primary sector accounting for 40% of total export revenue, is expected to decrease 22% to $14.2 billion in the year ending June 30, 2015.

Forest products are forecast to fall 10% to $4.63 billion. The slowing Chinese economy and real estate market, coupled with high log inventories and the potential for more Russian imports, mean the outlook remains tough for log and timber exports into China for the rest of this year.

MPI director Jarred Mair said it had been a tough year with volatility in overseas markets for some of New Zealand's key export commodities and challenges to production from climactic events such as drought, storm and floods.

The report gives a positive outlook through to 2019 with total primary sector export revenues expected to be up 17% from 2015 to $41.3 billion, underpinned by income and population growth in China and Southeast Asia and a recovery in the US housing market.

China remains New Zealand's most important export market despite a reversal in the strong demand for dairy and an end to the construction boom that earlier lifted forestry export earnings.

"Excessive inventories and slowing construction have reversed these price gains for the 2015 year," Mr Mair said. "We expect the Chinese economy to slow down a little bit but still remain our largest export destination, with continued strong growth from the Asean countries and longer-term demand from India."

The big change in India will come when a strong cool chain is established that will mean premium-end primary products don't deteriorate too fast in the hot climate. "That's starting to be developed now. We expect apples to be a forerunner into that market and other products such as timber."

Overall, Mr Mair said he expected horticulture to perform strongly in the next four years, dairy to recover, and some high-value niche products to start to make their mark.

"I'd watch for a lot of food products where some new innovation is coming out, including in existing categories such as dairy," he said. "It's about that switch from commodities to high value, we've seen that quite significantly in the past two years."

Offsetting this year's drop in dairy and forestry were higher beef and veal prices, growing demand for seafood, a recovery in the kiwifruit industry, and higher wine exports. The small but growing "other" primary sector category is also forecast to lift 26% this year to $1.96 billion on the back of demand for innovative processed foods, honey, and live animal exports, mainly driven by dairy cow exports to China.

There is uncertainty about when constrained world dairy prices will lift and a rebalance in milk supply and demand, with depressed short-term demand from the world's two largest importers, China and Russia. Low prices have led to new markets emerging in Southeast Asia, the Middle East and North Africa.

The report expects China's import demand for dairy to recover during the June 2016 year, although the high prices achieved in 2014 are unlikely to return. Overall dairy export revenue is forecast to grow at a compound annual growth rate of 6.8% from 2015 to 2019, starting in 18 months.

That rise will be driven mainly by price rather than volume increases, with New Zealand milk production forecast to drop slightly next year due to lower prices before starting to grow again in following seasons. The farmgate milk price is forecast to be $5.62 a kilogram of milk solids in the 2016 May year, and the milk price is projected to average $6.70/kgMS from 2017 to 2019, factoring in a continued gradual depreciation of the kiwi against the US dollar.

Total meat and wool sector export revenues are expected to be up 8% this year to $8.75 billion, with high prices for beef and veal and strong New Zealand production countering weaker returns for sheepmeat, venison and some co-products. Beef export prices are thought to have peaked and the forecast is for prices to be maintained over the next 12-to-18 months before softening as global supply grows.

The US housing market recovery should stimulate timber exports in the forestry sector and the medium-term prospects for the Chinese log and timber trade remain positive. Supply will be enhanced by plantings in the 1990s that can be harvested in the next few years.

Prices are thought likely to remain high in the seafood sector, because of growing demand from the top export destinations of China, Europe and the US. Australia, New Zealand's second-largest market, declined 4% this year due to the strong depreciation of the Australian dollar against the kiwi.

Aquaculture, which accounts for 19% of the forecast $1.51 billion total seafood export value this year, is likely to be a key driver of future growth through planned expansion of salmon farming and increased mussel production. Total seafood exports are forecast to rise 19% to 2019, with aquaculture research trials and initiatives into new species under way including kingfish, geoduck and hapuku.

In the horticulture sector, total revenue is expected to be $3.97 billion this year and to rise to $4.68 billion by 2019. High export volumes due to last year's record harvest means wine export revenue should be up 3.2% this year to $1.36 billion, making it New Zealand's sixth-largest export. The lower export price per litre of $6.59, down 40c, reflects weaker economic conditions in some markets, particularly Australia, and bulk versus bottle exports rising from 30% to 35%. Revenue is expected to hit $1.6 billion by 2019, with market diversification allowing more exports of higher priced wines and the export price per litre rising to $7.30 by 2019.

The kiwifruit industry has recovered from the devastating Psa disease with kiwifruit export revenue likely to rise 19% this year to just over $1 billion. Gold kiwifruit sales are surging and a 150% lift in export volume is forecast in the next two years, while green kiwifruit volumes will fall slightly.

(BusinessDesk)