What farmers face in 2013

It's not good.

Farmers face their most volatile year in recent memory as New Zealand's agriculture sector remains at the mercy of world markets, according to industry commentators.

While every year comes with a certain level of uncertainty for the farming community, Waikato University's head of agribusiness, Professor Jacqueline Rowarth told NBR ONLINE it is of particular concern this year.

"Many farmers are already running at a very slim margin.

"Add to that a lower payout forecast, increasing compliance costs and a risk of drought, and farmers are coping with a huge amount of uncertainty."

KPMG's head of agribusiness, Ian Proudfoot agrees, but doesn't see potential volatility as a bad thing.

"I think we'll see improvement in prices as a result of the global market conditions, and that will be beneficial to the industry."

More volatile

ANZ's chief economist Cameron Bagrie says the global economic conditions make the situation for farmers as volatile as ever.

"We're lingering through the after-effects of the global financial crisis, and we're seeing more variability in global weather patterns.

"We are also seeing the emergence of the Asian consumer and less importance of the traditional Western consumer.

"These things just add more layers of volatility, and that is going to be here for a number of years."

Drought could be good for prices

With a forecasted drier-than-usual New Zealand summer, many farmers are facing lower production and the added cost of feed.

Prof Rowarth, who is also a National Business Review columnist, says the summer is off to a particularly dry start in the dairy-heavy Waikato region, which usually enjoys year-round rain.

NIWA had predicted a drier summer than usual, with soil moisture levels likely to be below average, raising the risk of drought.

"That means we've got to buy feed, and with the current predictions in payout and the cost of production matching or exceeding them, that's going to be tough," Prof Rowarth says. 

Mr Bagrie says the weather has been particularly good to farmers over the past year, and the climate has to balance itself out some time.

However, while a drought would almost certainly hit the rate of dairy production, this could have the positive effect of improving dairy prices.

"If production and supply is down, winning a bit in terms of prices is a partial recoup," Mr Bagrie says.

But any benefits are probably lost in other areas such as the cost of feed to make up for a lack of grass.

Mr Bagrie says a drop off in production from New Zealand also may not have such a large impact on global dairy prices, as many other countries are also large dairy producers.

Cost of production

Prof Rowarth says with a lower payout forecast this year, many farmers are going to struggle to make a profit.

Fonterra's latest payout forecast is $5.50 per kilogram of milk solids, down from $6.40 in 2012.

She says Dairy NZ has estimated it will cost farmers $5.90 per kilogram of milk solids to produce, but the payout is significantly below this.

"The mood is not good. And with political uncertainty in terms of what will happen with the next round of the emissions trading scheme, farmers are feeling pretty insecure."

Payout could be higher

Mr Proudfoot says the payout could be as high as $6.00.

However, he says economic conditions are unlikely to improve.

"There's a greater risk of the exchange rate strengthening rather than weakening over the coming months as the US tries to avoid its fiscal cliff, and ongoing austerity measures in the UK.

"Things are still not looking great in the western economies, which drives our exchange rate much more than what we do locally."

He says there will need to be fundamental improvements in the US economy before the exchange rate returns to something more export-friendly for New Zealand. 

"But I don't think we'll see a strategic improvement in the US economy any time soon.

"Businesses have to think very seriously about what their business models look like and align those to the market situation as it is now, rather than expecting it to return to how it was in 2007.

"The likelihood is we're not going back there."