Global recovery to aid NZ agriculture - Rabobank

New Zealand agriculture should benefit from continuing global economic recovery this year, with higher food commodity prices and household consumption against a backdrop of restricted world supply, says Rabobank.

In its annual New Zealand Agriculture in Focus report, the agribusiness bank says global demand for some agricultural commodities - such as dairy and sheepmeat - is increasing.

But Rabobank's general manager New Zealand Ben Russell said that although global and domestic economic conditions seem to have turned a corner and were expected to gather momentum in 2010, the recovery remained fragile.

"While conditions have definitely been improving there remain a number of downside risks," he said.

"The New Zealand dollar remains high, inflicting serious head-winds on exporters, there are continuing tighter credit conditions and economic recovery remains subdued in key export markets, such as Japan and the United States."

Improving fundamentals should help sustain most of the gains in global dairy prices achieved in late 2009, the Rabobank report says.

However, the pace of recent price rises may overshoot in their bid to adjust to the new market dynamics. This may lead to some correction in the near term, with evidence of this in the January and February Global Dairy Trade auction results.

"Along with dairy, sheepmeat is also well placed to capitalise on the positive outlook," Mr Russell said.

"Different to dairy though, is the fact that New Zealand lamb actually seemed to defy the global downturn, with farmgate prices reaching record levels during the 2008/09 season."

The success of sheepmeat has largely been a story of tightening supply following a number of years of tough operating conditions. Drier-than-average weather in 2007 and 2008, relatively low prices for lambs and the prospect of better prices for other commodities (particularly dairy) saw many producers exit the industry or reduce their flock size.

A return to positive economic growth in key export markets in 2010 should support a general increase in global meat demand, including for lamb. However, this is expected to be a slow and steady improvement, and the high dollar had led to disappointing farmgate prices in the first half of the new season.

The outlook for the beef, grains, deer and horticulture sectors was not yet as positive.

"There is some potential for beef and grains to have a brighter second half of 2010," Mr Russell said. "Beef is being held back by subdued demand, in particular in the United States, and the high currency. Global stocks of most grains are high, as a result of the back-to-back bumper harvests, limiting price moves in the grain sector."

For horticulture and deer the story again is one of consumption, with both industries waiting for their key export markets to fully recover from the economic downturn.

The New Zealand wine sector continued to grapple with oversupply, and while there were some positive signs in terms of demand and export growth, this sector faced a period of adjustment to a more competitive business outlook after a stellar decade of growth.

Mr Russell said the main factors driving the trend back to higher food prices included a return to world economic growth - with global GDP forecast to expand by 3 percent in 2010 - along with increasing population levels, particularly in the developing Asian countries which were important markets for New Zealand.

Other major drivers include rising energy prices and investor activities in commodity markets.

"Rising energy prices affect food prices by increasing the demand for agricultural commodities for the production of biofuels and also because oil and natural gas are used in manufacturing farm inputs, such as fertilisers and chemicals, making farm production costs more expensive," he said.

"Investor activity on commodity markets contributed to price rises in 2007 and we are seeing investors starting to return to commodities now, which may push up prices again."