NZ set to profit from misfortune

Friday 6th December 2002

The importance of commodity prices to the economic well being of New Zealand cannot be understated. New Zealand's major exports generally compete against domestic production within the destination country, meaning there is little to differentiate New Zealand products other than quality or seasonality.

Furthermore, New Zealand production is rarely large enough to have a significant impact on overall supply in offshore markets. As such the ability to dictate price terms is minimal.

Instead, export incomes are very much determined by the wealth of our trading partners and how much of New Zealand's exports they demand.

The rural areas of the country are very aware that the prosperity or otherwise of their communities hinge on the incomes earned offshore. The impact of higher commodity prices in the last couple of seasons has seen economic activity climb.

The initial effects were seen in rural areas with balance sheet consolidation being one of the first outcomes.

However, as the incomes seemed more sustainable, a rise in asset prices (first livestock and then land) saw confidence and retail spending rise. The price of farmland rose strongly soon after the commodity price surge, while house price growth is only now reaching levels seen in the rural sector a year ago. Retail sales in rural regions started to take off only about a year after the pickup in commodity prices.

By contrast, the metropolitan centres had to wait another year to catch the wave of economic prosperity flowing through the country. For example, commodity prices started rising in March 1999, yet retail sales in Southland started to rise only in June 2000.

Auckland's retail sales felt the positive impact of the commodity price boom (augmented by the recent boost in migration) only as late as September 2001.

Now, as the rural sector is looking at coming to terms with an appreciating New Zealand dollar and lower average earnings, the cities are basking in the economic good times. But does New Zealand have to wait for the next global recovery before the next pulse of export-driven growth kicks off? Or will other factors keep farm incomes at good levels until that time?

Traditional influences on the price of New Zealand's agricultural exports are very dependent on the wealth and growth of our trading partners in other words, the demand for our exports. However, the outlook for trading partner growth is hardly encouraging enough to suggest a rapid return to high export incomes, a view compounded by the recent appreciation of the New Zealand dollar.

If it weren't for a few anomalies, farmers would be looking toward a rather lean season or two.

Just as the low exchange rate, good production levels and rising commodity prices all combined in a freak alignment at the start of this decade, a few one-off events are again teaming up to maintain agricultural prices at profitable levels.

This time, however, it is not good conditions prevailing for New Zealanders but rather profiting from the misfortune of others. Drought in Australia is expected to be the largest influence on commodity prices over the next few seasons.

However, drought conditions in parts of the US, conflict in the Middle East and recovery from stock diseases in Europe will all play their part. The most immediate impact has already been seen in the beef price where culling of herds in both Australia and the US has seen slaughter numbers soar and the processing beef price plummet.

However, this is a transitional effect. Stock numbers will fall to low levels and take several years to recover hence the outlook for the beef price remains positive. The drought conditions in Australia home to the world's largest sheep flock will also see worldwide supply of lamb and wool at lower levels over the next few years.

Consequently, the prices of these products can be expected to be higher than otherwise until production returns to normal.

Likewise, stock numbers in Europe are still recovering from the disease-induced culls in recent seasons, providing a floor for beef and lamb prices.

Compounding the woes for the northern hemisphere is the potential for escalation of conflict in the Middle East and a consequent rise in oil price.

Heading into a northern winter with prices for fuel oil and synthetic fabrics (many oil-based) rising, demand for wool is likely to rise, further pushing the price up.

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