The Bennett Newsletter
"Food - Situation and Outlook"
Perhaps little of lasting value will emerge from the World Food Summit next month. But food is the basis of the economy, easily overlooked when finance grabs the headlines. As an example of its importance, our Ministry of Agriculture predicts a great surge in the value of agricultural exports by 2014.
The result may be correct, but it is based on questionable assumptions; it projects small increases in export volumes but massive returns owing to a 30% fall in the exchange rate ( to 0.51cents).
The Ministry offers a patchy guide to further reading. I prefer robust sources like the FAO and OECD which it ignores. Their research also predicts growth, but on favourable economic conditions including the growth of the world economy (especially in the developing economies) and increasing demand due to rising bio-fuel production and anticipated higher costs of energy-related inputs.
Readers will recall that I am bullish on commodities in the next decade especially, oil, gold, and food. As it happens New Zealand is well placed to excel in all of these categories. Nevertheless, I anticipate great competition in dairy but otherwise this country has marvellous prospects if it deals responsibly with debt and farms for profit, rather than capital gain.
Ministry of Agriculture.
The Ministry’s statement is nicely pitched to the general reader. It is beautifully illustrated, strong on short-term assessment of the market, and even wise in discussion of some general issues, especially water use.
Not unreasonably it uses Treasury’s projections of future exchange rates, opting for 0.51c in 2014 for the US$ and 0.75c for the Aussie. It states that some predictions are for higher rates than these, which is my view too on the past history of the dollar appreciating on higher interest rates followed by a rash of foreign bonds issued in our currency.
A currency which depreciates from its current 71c to 51c in 2014 amounts to a rise in receipts of around 30%. The Ministry’s paper makes much of this. It expects wool production to fall but receipts to increase by 29% by 2014; lamb volumes to rise slightly but receipts to increase by 56%, and beef production stable but producing 53% more cash in 2014. Some products like logs, wine, kiwifruit and dairy will increase volumes and reap huge rewards. Obviously this study is too long on the gloss and too short on research to be convincing.
FAO/OECD
This superb study identifies a ‘dynamic and highly predictable element at the heart of world agricultural markets. This is the inexorable shift underway…towards an increasing role, and rising importance, of the developing and emerging markets”. These markets are growing quickly and represent the major growth markets. It looks to the BRICS to drive the boom while much of the OECD stagnates. Emerging countries will grow treble the developed-economy rate.
Prices 2010-2019 will generally be higher than the last decade 1996-2007(excluding the anomalous 2007-8 spike). Grain will be 15%-40% higher, and vegetable oils higher still. Meat is expected to be higher due to lower supplies, higher feed costs and rising demand. Pigmeat will be subdued because of large production in China and Brazil. Dairy can expect 16%-45% price increases, especially for butter. As incomes rise, diets will shift towards more meat and dairy products.
Developing countries will drive production and consumption because of population growth, urbanisation and increasing incomes. Price transmission to domestic markets varies considerably because of different levels of market integration. Governments could underpin farmer’s risk management, and create more effective markets. They should not create incentives in the form of ad hoc support and assistance. Some stockpiles may be useful in some circumstances to allay emergencies and increase confidence in access to food. Organised commodity exchanges are useful if they are properly regulated and attract sufficient volume to avoid monopolistic practices.
Prices for New Zealand
The FAO/OECD Report has much detail on policy which is not investigated here. My interest has focussed more on production and consumption because I feel our nation has a legacy of producing commodities but not devoting enough attention to refining , branding and marketing them. It might over-concentrate on traditional markets and be unaware of the dazzling opportunities in emerging markets. Some development is very challenging to our future.
The developing nations will invest heavily in their own food processing and manufacturing industry, especially in the expanded BRIICS ( Indonesia included) which want to capture a growing share of the value-added component. Moreover, as market liberalisation increases, the comparative advantage will move more to lower cost producers.
In the 15 commodities covered in the Report, the non-OECD producers are expected “to eclipse” established producers. It produces a table of growth rates for production and consumption of the commodities in the OECD and non-OECD, and it predicts faster growth in the non-OECD of meat and dairy, and the majority of the production and consumption growth is in the OECD.
A glance at it tables is not reassuring for New Zealand. New entrant, lower-cost producers are getting ahead. The report predicts the fastest growth in production (2.9%) is in vegetable oils, but the Non-OECD grows at 3.2%. Global whole milk powder growth is at 2.5% p.a. but at only 0.7% in the OECD and 3.8% in the non-OECD. Thus the UN/OECD expect whole milk production to increase five times faster in the non-OECD. Skim milk powder, which New Zealand is investing heavily in, is projected to grow at only 1% p.a., and most of the growth will be in the emerging counties. Their growth rate will be 10 times the OECD rate. Low prices are expected for skim milk. The bulk of increased milk production in the coming decade will be in the emerging counties.
The Report expects strong global production of butter (2.2% p.a.) and cheese (1.8%) but the non-OECD grows at 3% p.a. I draw attention to these production figures because they indicate the possibility of strong competition to New Zealand in its chosen niche, especially as the developing counties want to do the maximum value added processing for themselves, and this must extend to branding and marketing. This is important as projected consumption of the products expands mildly in the OECD, but is robust in emerging markets.
http://www.agri-outlook.org/dataoecd/13/13/45438527.pdf
http://www.maf.govt.nz/mafnet/rural-nz/statistics-and-forecasts/sonzaf/2010/2010-sonzaf.pdf
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