Diversification talk as dairy loses shine

Diversification is a hot topic in the agricultural sector, Westpac senior economist Anne Boniface says. Business editor Dene Mackenzie dissects the latest Westpac Agri Update.

Anne Boniface.
Anne Boniface
Conditions for the undisputed heavy-hitter of New Zealand’s primary sector, the dairy industry, are becoming more challenging, Westpac senior economist Anne Boniface says.

Consequently, conversations were turning to the benefits of diversification within the agricultural sector.

While that could offer benefits, experience showed not all the products touted as the "next big thing" would enjoy unbridled success.

Dairy accounted for about 25% of New Zealand’s merchandise exports, creating export revenue of more than $1.4 billion in the year to June.

However, the sector has been losing some of its gloss, she said in the latest Westpac Agri Update.

Recently, it was the performance of Fonterra, New Zealand’s largest dairy company, in the spotlight.

Fonterra processed about 85% of all milk collected in New Zealand, and in its 2018 financial results the company posted its first ever financial loss, of $196 million. In turn, the debate about the sustainability of Fonterra’s current structure had been reignited, Ms Boniface said.

Further weighing on confidence in the dairy sector had been Mycoplasma bovis and the uncertainty as to whether the current phased eradication programme would be successful.

So far, 71 properties throughout New Zealand had been confirmed as infected — a combination of dairy and dry stock farms, and smaller lifestyle blocks. Of those, 37 remained contaminated. The remainder had been depopulated.

Of the 345 compensation claims received by the Ministry of Primary Industries, 126 had been completed in either full or part. A total of $22.2 million in claims had been paid out.

"While any eradication was never going to happen overnight, it is clear M. bovis is set to be a cloud over the outlook for dairy and beef farmers for some time yet."

New stringent rules on overseas purchases of land had hurt farm prices,  notably in the dairy sector, Ms Boniface said.

In contrast to other sectors where land prices had risen in line with growing revenue and increased profitability, the Real Estate Institute dairy farm price index had fallen 15% over the last year. Anecdotally, some of the softness had been attributed to the higher hurdle for foreign ownership.

Perhaps the biggest challenge facing both the dairy and the agricultural sectors was the increased focus and regulation on the environmental impact of farming operations.

Not only would addressing methane emissions inevitably play an important part of New Zealand’s international commitments to reducing climate change, but an increased focus on water quality and preventing nitrate leaching might also add to farmers’ costs and lead to some revaluation of farming practices, she said.

While commodity price fluctuations were par for the course, biosecurity incursions were an unfortunate result of New Zealand’s deepening connections with the  world.

Restrictions on who could and could not buy New Zealand land could easily fluctuate with an electoral cycle.

"The increasing focus on the environmental consequences of different land uses will have a long-lasting impact on the operating landscape of the agricultural sector."

The increase in dairy cow numbers, and the shift in land use observed during the last 20 years, would not be a theme continuing from here, Ms Boniface said.

Already, the value of New Zealand’s dairy exports, as a proportion of total exports, had reached a plateau of 25%.

There was seemingly no shortage of primary products vying to be the next big thing.

Excitement had been building among those in the hemp industry, in anticipation of  law changes which would allow hemp seed products to be sold for human consumption, she said.

Proponents argued it was a high-value and low-input crop able to be grown in most conditions, and with the added benefit of removing contaminants from waterways.

On a somewhat bigger scale, the likes of avocados, manuka honey and kiwifruit production had all received more attention in recent times, following strong international demand, high prices and productivity improvements.

It remained to be seen which industries would live up to the hype and which would retain  niche status, Ms Boniface said.

Success would require hitting the right mark with  demanding international consumers, the ability to differentiate and command a premium for New Zealand products, and doing things smarter than competitors.

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