Despite international predictions of falling world food prices, New Zealand experts do not see major impacts for most New Zealand exports. Phil Edmonds reports.

The OECD-FAO Agricultural Outlook for the next decade was released last month with some surprising and alarming findings. In a nutshell, food production will increase without need for more land, prices are going to fall, reduction in trade growth is a debilitating prospect, and watch out for Latin America.

While the report is global and big picture, it brings into focus New Zealand’s exposure to changes in supply and demand of agricultural commodities, which in some respects is reassuringly slight. But we are still in the mix and need to be respectfully watchful of any troubling projections.

The key findings show some encouraging signs of the world’s ability to produce food – there is enough, and more. Productivity increases have gone beyond previous expectations and are now likely to outpace growth in demand. Agricultural production is expected to grow 15% over the coming decade, with minimal changes in land use. Improved yields will be derived from further technological innovation.

‘We don’t see prices falling anywhere near their expectations, with such a fundamental level of increasing demand.’

If doubts remained about there being not enough food to feed the world this report lays them to rest. This should also be a nail the coffin for any lingering thoughts that NZ could/should orient its output to taking advantage of global population growth dynamics.

However, the expected ongoing productivity increases means real prices for agricultural commodities will fall over the next decade, which is good for consumers, but challenging for farmers.

For commodities most relevant to NZ – meat and dairy – growth of traded product is expected to fall for meat (down from 3% per annum over the past 10 years to 1.4% for the coming decade) and vary for dairy (depending on outcomes from Brexit, and North American trade policies).

In terms of demand, the composition of dairy products is shifting to fats, leading to more butter production – but with that weaker prices. Sheepmeat production growth will slow, with increases four times higher in developing regions. The biggest influence on growth of beef consumption is westernisation of consumer diets.

These latter findings won’t raise too many eyebrows. But looking at the potentially negative outcomes for NZ as a food producer, what do we think of the OECD’s belief that global prices in real terms will fall, and trade growth will be low at best?

Initial scepticism would sum up expert opinion. Lincoln University senior lecturer in agribusiness management Nic Lees says “it is very difficult to make those predictions because there is such a high level of underlying volatility in prices.” Beef & Lamb NZ chief economist Andrew Burtt agrees. “We don’t see prices falling anywhere near their expectations, with such a fundamental level of increasing demand.”

To be fair, the OCED-FAO Outlook comes with a long list of qualifications.

The report authors note the projections represent a ‘baseline’ and not a forecast. In fact, one of the authors, OECD Director for Trade and Agriculture Ken Ash says “The only thing I know about our projections is that they will not be correct. We assume normal weather, current macroeconomic conditions and policies, all of which are not good assumptions, but they tell us what the baseline will be if nothing different happens.”

To this end, there is certainly some justification in taking the findings with a grain of salt. However a baseline that adopts an ‘all things being equal’ approach also has another purpose. Ash said “if you read the baseline and don’t like the outcome, then the best thing to do is contemplate the policy levers you could use to get the outcome you do want.” This is where governments can start shaping policies to avoid what might otherwise look like unfavourable outcomes.

It’s not only governments that have an incentive to react to the findings, but also farmers and industries.

Beef & Lamb NZ is well aware of trends in global meat production, and acknowledge the very macro, global expectations for meat production and consumption over the coming decade. But at the same time the industry advocate takes comfort in the actions already underway to buffer global commodity trends.

Burtt says NZ has been able to create niche, premium products assisted by investment in relationships with international customers.

In terms of production, he says “With sheepmeat, the markets where production is increasing – Africa for example – are not producing direct substitutes for what New Zealand delivers, and they are not able to export it in reasonable volumes. One of the biggest advantages with New Zealand sheepmeat is that there is no perfect substitute.”

Beef & Lamb NZ agricultural analyst Ben Hancock points to the ‘soft’ value-add that NZ has developed to insulate against some of the competitive threats.

“We were the first country to get into China and we have a great reputation there. New Zealand meat is safe, trusted and we have developed long-term relationships in all our key markets and it is hard to take that away.” Even factors like reliable delivery positions New Zealand ahead of potentially cheaper suppliers.

Burtt says “All this contributes to a situation where overseas customers for New Zealand sheepmeat are likely to buy our product over others for quite a long time beyond a significant fall in international prices. While we can’t rest on what we have achieved, we do need to celebrate what we have done – MPI, MFAT have helped create the conditions where farmers can take advantage of opportunities in the likes of China.”

Unlike sheepmeat, beef is viewed more often as a commodity, and demand for NZ product is determined more transparently based on global availability. As a result, buyers can make decisions on price, and here there might be more risks for NZ if real prices do indeed fall over the next decade.

However, Andrew Burtt still sees NZ well-positioned – especially in the United States.

“Sometimes we beat ourselves up about providing commodity beef to the US to be ground, but it is the richest economy in the world, and given that, why wouldn’t you want to be there? There are always going to be headwinds in the US, but history shows we constantly keep responding to them.”

Hancock notes other resilient features of the US ground beef market that will continue to make it attractive for NZ, whatever the domestic circumstances.

“People in the US often refer to the burger as ‘recession proof’ because it trades through the middle market.” When economic conditions deteriorate consumers tend to move down the quality chain. Instead of eating steak they eat more burgers.

For dairy, the picture is slightly different. NZ is still well placed to capitalise on ‘per capita’ increases in demand – essentially from growing affluence, urbanisation and the westernisation of diets. Unlike for meat however, NZ is more exposed for being such a large part of the global commodity trade, and with that comes more exposure to price volatility.

Nic Lees says “because New Zealand’s meat production is relatively insignificant on a global scale we can target select markets more easily – where prices are higher. For dairy this is more difficult because we are such a big part of the global trade there is a big drive to sell volume.

“Smaller, niche markets that might present opportunities are realistically not in play because we are not able to push a large proportion of our traded dairy commodities into high value consumer products.”

The report predicts the most favourable supply and (per capita) demand dynamic for dairy commodities over the next 10 years is cheese (increases in cheese consumption are still likely in developed countries despite overall flat growth for dairy).

“Cheese is also increasing because of the shift to Western diets but New Zealand is not a huge cheese exporter because our focus remains on whole milk powder which means we tend not to separate out the fat.”

Latin America a threat to New Zealand? Yeah, nah.

Turning to the source of key production changes relevant to NZ, this year’s report pays special attention to the role of Latin America. It notes the region will achieve 16% growth in livestock products, 2% faster than the global average, and is also picking an increase in exports, which will be driven by more focus from these countries on trade openness. By 2028, the report suggests Latin America will be responsible for more than 25% of global exports in agricultural products.

That said, there is some reluctance in NZ to feel the explicit threat of Latin America’s ability to challenge our market positions in the coming decade.

Nic Lees said Latin America’s potential has been talked up for the past 30 years. Argentina’s cost of production has always been lower. But unlike NZ, there are still large, growing internal markets for their producers to focus on and there remain disincentives to export.

“In Argentina for example, export taxes have often been applied, being one of the only reliable methods of collecting revenue.

“South America is certainly growing in terms of cropping commodities, but this has actually driven down their production of beef and dairy as soya beans has become the equivalent to dairy in New Zealand. It’s what farmers have shifted into as the most profitable land use.”

Lees says there are also residual structural and cultural problems.

“A lot of farms are very large scale with distant owners which has implications on productivity. And beef production is also susceptible to being used as a tool to maintain favourable social outcomes. There are requirements in Argentina that domestic beef prices don’t get too high. In some cases the government have shut down exports to avoid rioting from high beef prices.”

Beef & Lamb NZ’s Burtt is slightly more concessionary to the report findings.

“A brief way to sum up the potential growth in LATAM is that New Zealand can’t rest on our laurels. There are huge volumes that could be produced in those countries.” But he says infrastructure remains a problem. For example, in winter some roads can’t be used so product can’t be moved. This has implications for reliability and trustworthiness – these are attributes of the relationship between exporter and customer we take for granted.

Burtt adds “they might get on top of infrastructure challenges over the next 10 years, and they are improving their market access, but they also have challenging financial headwinds. It will always be difficult for them to keep farming when they have expanding debt levels.”

Price volatility and land use change

Wider doubts about the projected productivity-driven fall in real prices for commodities have emerged since the report was published, particularly as more weighty analysis of climate change effects emerge.

Anita Wreford, Associate Professor at Lincoln University’s Agricultural Economics Research Unit (AERU) was one of the contributors to the IPCC report on Climate Change and Land released in August. She says despite the anticipation of dropping commodity prices over the next decade, “there is definitely potential for increased commodity prices with shocks from extreme events in different parts of the world”.

If global meat or dairy prices did spike due to extreme weather events, it could be beneficial for NZ production, but at the same time very difficult for those who are struggling with food security. Ultimately however, climate-driven price spikes would not be a great outcome for NZ particularly if there were flow on effects to the cost of food commodities we import.

Looking at the next decade, Wreford says NZ is already starting to see a change in land use in response to climate change with the government incentives to plant trees.

“At the moment the tree-planting strategy is perceived quite negatively, but if it settles down and we are clear about planting the right tree in the right place on marginal land it could still be really beneficial.

“There will be some more land use change, particularly in areas where nutrient limits have been reached, but I don’t anticipate it being a massive afforestation destroying our rural communities which there seems to be current fear about.”

Wreford did offer one proviso.

“If we start taking action now to reduce our emissions with more sustainable land management practices than what we are already doing then it is going to reduce the need later on for large-scale afforestation and bioenergy planting. But if we don’t take action now then we are going to be looking for more radical changes in our landscape because we will be more desperate for a solution.”

Stronger regard for trade openness

In the climate where global trade tensions have been raised to levels unseen for many years the Outlook places more importance on the ability of nations to trade food production surpluses than any other issue. Director of trade and agriculture Ken Ash says “trade uncertainty is the single biggest fear we see on the wider economic horizon and agriculture is caught up in this. The dampening effects on growth in agricultural output are evident. When you have an environment where markets for inputs and outputs are not clear then you tend to keep your money in your mattress. The confidence needed to drive production growth appears to be falling.”

This fear is echoed in NZ.

“Looking out 10 years, increasing agriculture protectionism is something that could be very detrimental. We have depended on expanding access to markets since the Uruguay Round agreement on trade and that is in danger, which could ultimately suppress prices for New Zealand,” Lees says.

“I think we have probably taken trade liberalisation for granted. There is a belief or an expectation that things are going to get better. And to some extent they have, particularly with the signing of the CPTPP.” The future does however remain uncertain, with vested national interests rising to the fore as countries consider changes to their trade policies.

In terms of outcomes, Wreford notes there is evidence that greater interconnectedness has more chance to mitigate weather-related shocks. The IPCC report on climate change looks at countries with higher levels of interconnectedness and trade, and others that are more isolationist.

“It found some impacts on food production from climate change will be moderated in countries and regions that have is more openness on trade. Countries trying to deal with things on their own will experience more food insecurity and pressure on water.”