March December quarter 2002 2002

Industry Brief Agriculture This paper includes outlooks for the agriculture and horticulture sectors, following a cold wet spring during which severe frosts and hailstorms hit horticulturalists in the Bay of Plenty, Hawkes Bay, Gisborne, the Wairarapa and Nelson. For the pastoral sector, seasonal conditions improved later on. While Northland, the Bay of Plenty and pockets in the South Island have become dry there are generally places for stock to go. Indeed, the farming season is now set-up so that climate is unlikely to be a problem from this point, despite earlier concerns over the potential for a dry summer associated with the present El Nino weather pattern. Although some individual kiwifruit and apple crops have been seriously impacted by frost and hail, the damage has tended to be localised.

Introduction

volatile prices following record prices for venison in Europe last year. However, there is a feeling that the industry will get through the present lows. Moreover, most deer farmers carry a mix of stock.

Early spring weather was unsettled; windy warm conditions were punctuated by severe but short storms. Very cold temperatures were then accompanied by continuing wet conditions. A mean temperature of 12.0°C was recorded in the October–November period, 1.0°C below normal, the coldest since 1978. This delayed pasture growth with the result that feed supplies looked like becoming short throughout the country.

A continuation of good production levels and good prices will continue to support sheep and beef farm revenue in 2002-03

Dairy production is running at or above last season, although the seasonal peak (flush) was delayed one month to mid November. The key concern for dairy farmers is the sharp drop in payouts from last year’s record, although this was foreshadowed by a sharp drop in international dairy prices in the final quarter 2001 and first quarter 2002. Indeed, the payout remains at a level comparable to those prevailing through the 1990’s and most in the sector appear to have adjusted to the new level after the initial shock.

2002-03e

2001-02p

2000-01

1999-00

1998-99

1997-98

1996-97

1995-96

1994-95

1993-94

1992-93

Source: The Economic Service.

Most worrying for horticulturalists have been severe frosts and hailstorms this spring. Worst hit were the Bay of Plenty, Hawkes Bay and Gisborne. Some growers have lost a significant part of their crop, particularly in the Bay of Plenty, although the damage appears to have been localised in many cases. While frosts are not uncommon in September, the severity and type of frost were unusual, with the typical frost protection methods rendered largely ineffective by the lack of a critical inversion layer.

Elsewhere in the pastoral sector, meat and wool production is expected to increase this season. New Zealand recorded a record lambing percentage (124%) this spring, eclipsing last season’s record, despite high lamb mortality rates in Otago and Southland. Some sheep farmers drafted early this season as feed shortages encouraged early weaning. Others are drafting later to allow lambs time to finish to higher weights. Beef production is expected to lift sharply in response to a high retention of dairy bred calves in the springs of 2000 and 2001 and a carryover of older beef into the 2002-03 season. Lamb and beef schedules remain at historically good levels, although they have not escaped the impact of the NZ$ rise in 2002. Venison is an exception, the schedule languishing at levels similar to lows recorded in the 1990’s. European supermarkets and restaurants have reacted negatively to the prospect of high and ANZ INDUSTRY BRIEF

1991-92

1989-90

Nevertheless, conditions have improved so that climatically the farming sector was pretty well setup by Christmas, with the exception of Northland, the Bay of Plenty and pockets in the South Island which have become dry. Frost and hail caused severe damage on some horticultural properties.

Sheep and beef farms – gross farm revenue

$(000)

1990-91

300 275 250 225 200 175 150 125 100 75 50 25 0

Zespri has warned against the negative impact of excessive loss estimates. At this stage they expect the export crop to be little different in terms of size from last years which itself was low in volume. We would otherwise have expected to see quite a large increase, particularly with increased volumes of Zespri Gold coming on stream this season. In the pipfruit industry, apple orchards in the Hawkes Bay and Nelson were worst affected by frost and hail. The full impact wont be known until January when the fruit is picked and graded for export. However, taking into account the impact of the frosts and hail, the Ministry of Agriculture and Forestry estimate that the national crop will be down 12% in the 2002-03 season.

1

Dairy1

thousand tonnes of skimmed milkpowder stocks in the US has lessened, with the USDA announcing that it has somewhat artificially committed the last of its skimmed milkpowder stocks for overseas donation (200,000 tonnes).

Dairy cattle numbered 4.58 million in July 2002. The herd continues to increase, although the increase to July 2002 (+2%) is estimated to be lower than the previous year (+3.4%) due to fewer conversions.

The turnaround in international dairy markets is encouraging, but as long as the US recovery remains uncertain, key growth markets in Asia will remain fragile. Japan and many key South-East Asian economies remain dependent on exports to the US.

Cool spring conditions and a lack of sunshine delayed the peak production flush this year. The flush is normally around October 20, but was delayed until November 20. Nevertheless, Fonterra processed 67,681 million litres at their peak, up 1.1% on last year’s flush of 66,937 million litres. For the 2002-03 season milk production is expected to increase slightly on last year’s record 1.11 million kg milksolids.

Milk-powder markets have tightened with sellers in wholesale markets now holding off due to concerns about production and availability out of Oceania over the summer, and in anticipation that prices will firm. This contrasts with the situation in the year through to mid 2002, when buyers held-off in anticipation that prices would fall.

The tone of international dairy markets has continued to improve since prices troughed in July. Tighter supplies out of Oceania, particularly as a result of the drought in Australia, have helped improve the mood of markets. As always, EU dairy policy has also been a key influence.

International dairy prices ($US) 2400

The EU Management Committee for Milk and Milk Products has started to reduce export refunds on milkpowders, partly in response to a tighter EU market and partly in anticipation that prices will firm. Since the end of September export refunds on whole milkpowder have been reduced from €1,209/tonne to €1,050/tonne and refunds on skimmed milkpowder have been reduced from €850/tonne to €660/tonne. However, refunds on butter have remained unchanged at €1,850/tonne.

$US/tonne

2200 2000 Cheese

1800 1600 1400

WMP

1200

SMP

1000 Butter 800 96

97

98

99

00

01

02

Source: USDA.

Overall, the European market appears to be in reasonable balance as the northern hemisphere moves into winter, the seasonal low-point for production. Prices steadied at the end of the European summer with supply and demand moving more closely into balance.

Cheese prices have been slower to move than other dairy products, partly a response to over-supply which has acted as a drag on prices. In particular, a switch to cheese as an alternative protein source to meat following the BSE crisis in Europe has abated and cheese consumption in Europe has returned to a slower rate of growth. Moreover, this happened at a time when Australian and New Zealand cheese production increased earlier this year. More generally, cheese markets should benefit from a continuing gradual recovery in the world economy, supported by increasing demand for convenience and fast foods and signs that Russia is returning to buy EU cheese. However, the fragile state of the Japanese economy, in particular Japanese consumer spending, remains a risk to the outlook.

The news that US dairy product sales have begun to recover after a year of stagnation is encouraging, particularly reports that cheese-use is beginning to pick up. Markets should move towards a better balance as consumption increases to match milk production. Milk production has expanded at a brisk pace in 2002, but could tail-off in 2003 under the influence of high feed costs, the culling of cattle and low dairy prices. The US Department of Agriculture (USDA) has taken a managed approach to its Dairy Export Incentive Program (DEIP) in 2002-03, which is restricted to 68,201 tonnes annually as a result of WTO Uruguay Round commitments. The overhang of 550

As the cyclical influences of demand and supply have turned in favour of firmer international dairy markets in recent months, so has EU trade policy. With the international dairy environment improving it is likely that EU export subsidies on dairy products will be reduced further, although the brakes may go-on as international prices approach levels at

1

Dairy, sheep and beef stock numbers, sheep and beef slaughterings and sheep, beef and wool production are based on Economic Service estimates and forecasts. ANZ INDUSTRY BRIEF

2

Beef Cattle1

which unsubsidised US exports of skimmed milkpowder become competitive. As a result, international dairy prices are expected to continue a gradual cyclical recovery in the medium term. Indeed, price levels remain well below those prevailing at their peak in mid 2001 and indeed those prevailing for much of the 1990’s. However, farm gate payouts are likely to be constrained by the continuing New Zealand dollar recovery.

A high retention of dairy origin calves in the spring of 2000 and 2001 and to a lesser extent an increased retention of beef breeding cows drove a 5.1% increase in beef cattle numbers to 1 July 2002, to an estimated 5.03 million head. This was the largest increase in beef cattle numbers since the 1993-94 season. The Economic Service expect cattle slaughterings to increase 9.5% in the 2002-03 season to 2.05 million head in response to increased beef and dairy cattle availability. Part of this is a carryover of older beef animals into the 2002-03 season. Coupled with a small increase (+0.3%) in the forecast average slaughter weight, to 259.9 kilograms, this drives a 9.8% increase in beef production to 532,400 tonnes (forecast).

International dairy prices (converted to $NZ index) and average dairy company payouts1 160

$/kg milksolids

$NZ Index (July 1986=100)

6.0

150 140 5.0

Export dairy returns ($NZ index)

130 120

4.0

110 100 90

Steer slaughterings show a moderate recovery from the very low levels of the 2001-02 season. This reflects a carryover of older animals into the 2002-03 season. Nevertheless, the premium paid for bull beef over steer and heifers has eroded over the past two seasons to the point where steer now attracts a premium.

3.0 80 2002-03 season

2.0

60 88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

Source: ANZ Commodity Price Index, Livestock Improvement. 1. Includes Fonterra forecast for 2002-03 season, $3.70/kg milksolids

Fonterra forecast a dairy payout of $3.70/kg milksolids for the present 2002-03 season, down 30% on last season’s $5.33 payout. This is more in line with company payouts in the 1990’s which averaged $3.45/kg milksolids (1990-91 season to 1999-2000 season). During the last five years of that period the company payout averaged $3.68/kg milksolids (1995-96 season to 1999-2000 season).

It seems that the beef US industry has faced almost continuous drought since the liquidation phase of the US cattle cycle began in 1996. The continuing drought in many regions and the high price of feed have extended the US cattle cycle, delaying the anticipated re-building phase. However, until mid-year the North Central grain producing areas were largely spared the adverse conditions, keeping grain prices down. This encouraged feedlot placements for finishing, keeping feeding costs down and allowing cattle to be finished to heavy weights. The extended herd liquidation and high slaughter weights resulted in record beef supplies, placing a burden on a US market laden with record levels of production of poultry and pigmeat.

Dairy farm profits increased dramatically in the 2000/01 and 2001/02 seasons. Farm revenues and cash surpluses increased in response to the sharp increase in dairy payouts and good growing seasons. However, a sharp drop in the dairy payout will bring cash surpluses and farm profits back in line with those prevailing in the 1990’s. Livestock values are also likely to reduce as some of the pressure from dairy conversions eases and earnings expectations moderate. This will inevitably bring challenges, particularly where farm expansion has been undertaken and has required taking on more debt. Indeed, for some, the combination of additional borrowings, lower revenues and high terminal tax will generate cash flow stress in the 2003 and 2004 seasons. The implications of buying additional shares out of tax paid income on a lower payout is also significant.

New Zealand beef exports – top 5 destinations ($NZ million free-on-board, year ended September) 1,200 1,000 900 800 700 600 500 400

Nevertheless, providing sensitivity analysis was undertaken at the time of expansion with a view to the business’ break-even point, particularly in relation to where prices have been in the past, these challenges should be able to be managed, after all, agriculture is a cyclical business. ANZ INDUSTRY BRIEF

Fob (NZ$million)

1,100

1997-98 1998-99 1999-00 2000-01 2001-02

Average payout (rhs)

70

300 200 100 0 US

Source: Statistics New Zealand.

3

Canada

Taiwan

Korea

Japan

import regime. It is hard to tell in what part this was associated with the hosting of the World Cup, but the USDA point out that with high domestic beef prices and a declining herd, Korea’s beef imports are expected to expand.

Nevertheless, feed costs have moved higher as grain and oilseed crops deteriorate from drought conditions and US herd liquidation has slowed, indicating rebuilding should begin in 2003. After a seventh year of contraction the US cattle herd is expected to fall to 95.6 million head at 1 January 2003, its lowest level since 1959. As the US cattle cycle moves into its rebuilding phase and widespread drought in Canada reduces the availability of cattle from the north, the USDA forecast US beef production to fall by around 5% to 11.7 million tons in 2003.

Overall, the situation in the US market is expected to change in 2003, following record supplies of beef, pork and poultry in recent years. An unexpectedly strong Korean market has helped offset the Japanese market shocked by the BSE scare in late 2001. The United States, Australia and New Zealand have all placed product in the Korean market that would otherwise have gone to Japan. The Korean market is expected to remain robust, while the outlook for the Taiwan market is also encouraging. Growth has picked up sharply in 2002 and 2003, consumer demand is strong and import tariffs have been reduced.

Animal health was a key issue in the beef industry in 2001/2002, following the discovery of Bovine Spongiform Encephalopathy (BSE) in many Continental EU countries towards the end of 2000, the confirmation of BSE in Japan in September 2001 and Foot and Mouth Disease (FMD) outbreaks in Argentina, Brazil, Uruguay and Great Britain.

Export beef prices (NZc/kg) and export schedule all beef (NZc/kg)

Foot and mouth related restrictions have curbed competition from South American imports in the US, Japan and Canada. In particular, this allowed a sharp increase in New Zealand exports to Canada in the 2000-01 and 2001-02 seasons (see chart above). However, Uruguay was recently allowed to resume exports to Canada and Argentina is seeking re-entry. The future return of South American producers to beef markets also presents a threat to other markets. This is illustrated by Brazil expanding its presence in Europe which accepts its regional-FMD-free status.

650 NZc/kg

NZc/kg

550

375 350

600 Export beef prices (New York) NZ c/kg (lhs)

Average export schedule season average (rhs)

325 300

500

275

450

250 400

225

350

200

300

175

250

(forecast) 150

200

125 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

Source: The Economic Service, Meat NZ, NZEconomics@ANZ

A critical lack of confidence in beef products in Japan since BSE was confirmed in September 2001 was compounded by a product labelling scandal involving three of the country’s largest meat wholesalers. Japan is Australia’s largest export beef market and a large market for US beef, and competition in other markets has intensified as a result.

This points to a reasonable solid outlook for export beef receipts. However, increases in the exchange rate are expected to translate into lower beef schedules. Nevertheless, a drop in the average all-grades beef schedule to around 300-320 c/kg, from 365 c/kg in the 2001-02 season, would remain favourable compared to levels prevailing in the late 1990’s.

Japanese beef consumption fell by 70% immediately following the BSE outbreak in September 2001. Since then, consumption has slowly recovered. However, a fourth confirmed case in May re-ignited health concerns. Nevertheless, demand is expected to recover as concerns over safety diminish in 2003. New Zealand beef exports to Japan slipped in the 2001-02 season. However, the collapse of the Japanese market mainly affected Australian and US exporters. Both countries looked to divert product to Korea, which has experienced its sixth year of decline in its cattle herd. It has also experienced solid economic growth and an appreciation of the Korean Won in mid 2002 (making prices cheaper when converted from the US$ to the Korean Won). Despite increased competition from the US and Australia, New Zealand exports to Korea increased sharply in the 2002 season. This has been facilitated by the liberalisation of Korea’s beef ANZ INDUSTRY BRIEF

Sheep1 A new record lambing percentage was set this spring. At 124% it eclipsed last year’s record (119%) and could have been higher had cold, wet conditions not resulted in a significant increase in lamb mortality in Otago and Southland, particularly coastal regions. The record lambing percentage underpins a 2.4% increase in the estimated lamb crop to 37.0 million lambs and a 4.0% increase in export slaughterings in the 2002-03 season, to 24.8 million head. Export lamb production is forecast to lift 2.8% to 414,500 tonnes and assumes a slightly lower (-1.1%) average export slaughter weight of 16.74 kilograms in the 2002-03 season.

4

The cool conditions had a mixed effect on drafting dates. Some farms drafted earlier as feed shortages encouraged early weening. Others are drafting later to allow lambs time to be finished to higher weights.

Export lamb prices (NZc/kg) and export schedule all lamb (NZ$/hd, incl skin) 750

NZ$/hd 70

650

60 Average export schedule season average (rhs)

600

Overall, steady demand and low production in both Europe and the US have contributed to a balance in lamb markets which is expected to hold through to the main seasonal peak at Easter. The UK has resumed limited exports to Europe, but there are constraints on its capacity to recoup markets, particularly given the significant reduction in stock numbers that followed the outbreak of Foot & Mouth Disease (FMD) last year. The impact of the associated cull is expected to be felt for a number of years yet as the UK flock slowly re-builds. The initial impact became clearer with the release of the December 2001 UK sheep census, which recorded a 13% drop in the breeding flock.

50

550 40

500

30

450 400

20 Export lamb prices (offshore) NZ c/kg (lhs)

350 300

10 (forecast)

0

250 86

87

88 89

90

91 92

93

94 95

96 97

98

99 00

01

02 03

Source: The Economic Service, Agrifax, NZEconomics@ANZ

Overall, declining sheep flocks in New Zealand and Australia are expected to be mirrored in a decline in the sheepmeat trade in the medium term. Indeed, a Meat NZ report predicts that an international shortage of sheepmeat will drive up demand and prices for New Zealand lamb. This is supported by strong demand internationally and should allow exporters to focus on higher priced markets.

New Zealand sheepmeat exports – top 5 destinations ($NZ million free-on-board, year ended September) 600

NZc/kg

700

Fob (NZ$million)

550 500

The lift in the NZ$ is expected to knock the edge off lamb and mutton schedules. Nevertheless, they are expected to remain at historically high levels.

1997-98 1998-99 1999-00 2000-01 2001-02

450 400 350 300 250

Wool1

200 150 100

Shorn wool production in the 2000-01 and 2001-02 seasons has been lower than both sheep numbers and shorn clip per head estimates indicated and the discrepancy cannot easily be explained (particularly given sheep numbers are consistent with known slaughter yields). Nevertheless, wool production is expected to lift 3.5% in the 2002-03 season to around 237,000 tonnes. This reflects the temporary lift in sheep numbers and a higher clip per head.

50 0 UK

Germany

France

US

Belgium

Source: Statistics New Zealand.

There appears to be little immediate threat to continental European markets, which have been filled by New Zealand following the FMD outbreak last year. New Zealand is the primary sheepmeat importer in to the EU, the tariff quota of 226,700 tonnes (carcass weight equivalent) accounts for more than 70% of EU sheepmeat imports.

China stopped buying towards the end of 2002, as their 2002 quota filled, settling the market after a frenzied season driven by concerns about wool supplies out of Australia and New Zealand. This allowed European mills, who have struggled at the high prices, back into the market.

The US market continues to do well, reflecting solid demand and declining domestic sheepmeat production. This has allowed meat exporters to take advantage of the removal of restrictions for lamb imported into the US.

More generally, a sharp decline in global wool production has brought the market into a better balance during the past two seasons. In particular, a supply squeeze saw prices jump at the start of the year, with mills around the world facing shortages of wool supply. Last season there was a better supply/demand balance in wool markets, without the oversupply seen in previous years. This has been repeated this season, but with no stocks of shorn wool and increasing concerns about Australian production there has been a further improvement.

A sell-off of breeding ewes as Australian farmers struggle to cope with the drought is cutting into the Australian breeding flock. The drought will mean fewer heavy-weight lambs available for export to the US in the 2002-03 season, it is also raising concern about a shortage of prime breeding stock next season.

ANZ INDUSTRY BRIEF

5

Wool markets have therefore been a lot more buoyant than they have been for some time.

the UK should help sustain prices in the current season.

Fine wool (18-24 micron) prices slumped at the height of the 2001/02 season, after a strong early start. They then recovered early in 2002 as supplies out of Australian fell, in what was a roller coaster season. Prices lifted again in September as Australian production forecasts were reeled back, bringing Chinese buyers firmly back into the market.

Cereals Prices internationally have rocketed as droughts in Australia and the United States cause global production to wither.

Australian export wheat prices (NZ$/tonne) and indicative NZ grower price for milling wheat (100 points, NZ $/tonne)

Mid micron wools have benefited from lower supplies out of Australia, Argentina and Uruguay. Increased Chinese buying activity in the 2002 season was largely mid-micron wools.

450 NZ$/tonne 425 400

Wool Market Indicator Prices (NZ cents per kilogram clean) 1800

NZc/kg clean

NZ$/tonne

400

375

375

350

350

325

325

300

300

275

275

250

250

225

Fine

1600

225

NZ milling wheat contract price (rhs)

200

1400

200 (forecast) 175

175 150

1200

150 86

1000

Medium

450 425

AWB export price for ASW $NZ/tonne FOB eastern Australia

87 88

89 90

91

92 93

94 95

96 97

98 99

00 01

02

03

Source: The Economic Service, MAF, NZEconomics@ANZ

800 600

Strong

As a result, premium milling wheat contracts are expected to average $345/tonne in the 2002-03 season, up $20 from the 2001-02 season, as millers anticipate higher prices for imported Australian milling wheat. The big winners may be those selling free (subcontracted) wheat. There has been some switch back to milling wheat from feed grains, particularly maize, after the area of milling wheat reached what is believed to have been a historic low.

400 200 95

96

97

98

99

00

01

02

Source: The Economic Service. Note: There are gaps where there were no auction sales for the particular micron category in the month.

Strong wool prices fell following the terrorist attacks in the US in September, but recovered through the remainder of the 2001-02 season and again in the 2002-03 season, dragged up by the lift in fine a medium wools and benefiting from concerns about tight supplies more generally.

Feed maize, wheat and barley prices have trended up under the influence of a general rise in cereal prices and competition for land. Malting barley prices remain high due to short supplies world-wide.

Present margins for wool over competing fibres are expected to narrow. This will be forced by competition from other fibres, which will result in substitution away from wool. This is already being seen in the increasing use of wool blends rather than pure wool products. ABARE point to substitution away from wool in favour of lower priced synthetics and cotton as the main risk to continued favourable wool prices. However, a shift in the fashion cycle back to natural fibres may limit the extent of substitution.

The drop in dairy payouts is expected to impact on demand for maize silage over the coming seasons. The marginal profit on a high input/high output dairy production system is going to get pretty tight at the lower payout. Most dairy farmers are locked into their present system this year, but may reassess the benefit next year.

Deer

For the present, higher oil prices, as concerns over the possibility of global conflict mount, has put upward pressure on competing synthetic fibre prices.

The deer schedule reached record levels in September 2001 following Europe’s BSE and FMD scares last year. However, demand in Europe, slumped at the record prices which became uncompetitive relative to substitute meats.

Hides and Skins Skin prices recorded a sharp decline in the second half of 2001, but retraced some of the loss in the first half of 2002. Nevertheless, prices remain 35% below their peak in August 2001. Retail demand remains flat, but lower supplies out of Australia and ANZ INDUSTRY BRIEF

As a result the deer schedule slumped to $5.30 per kilogram by mid June. It clawed its way back between August and October when premium schedule prices are paid for shipments timed for the

6

European hunting season between October and December, the seasonal peak in demand in Europe. The schedule has since retraced to around $4.60 at the time of writing, down 26% on the 10-year average for early December ($6.25). The last time the schedule was significantly lower was in 1991 when it dipped below $4.00.

to total exports of 65.9 million trays in the 2001-02 season. This is low, particularly given that we would have expected to see quite a large volume of Zespri Gold coming on stream this season and would otherwise have expected a larger crop than in the 2001-02 season. With Italian kiwifruit largely clear of the market, early entry into the European market in the 2002-03 season allowed New Zealand fruit to compete against cheap Chilean exports, setting up a platform as New Zealand moved into a period of exclusive selling later in the season.

New Zealand venison schedule (NZ$/kg) and European bone-in venison haunch price (Euro/kg) 12 NZ$/kg, Euro/kg 11 NZ venison schedule NZc/kg

10 9 8 7

Early season prices in Europe were around 10% above those prevailing the previous year. The margin lifted in August and was held through to the season’s close in November. As the season closed, Italian and French kiwifruit took over the market at prices well below Zespri kiwifruit pricing.

6 5 4

European bone-in frozen haunch price Euro/kg

3 2 1 0 94

95

96

97

98

99

00

01

02

Sales to Japan remained strong throughout the season, despite consumer spending remaining depressed in a disinflationary environment and a sluggish market for domestic fruit, which has been hit over publicity of the use of non-registered chemicals on domestic fruit.

Source: Agrifax.

Continuity of supply has been a key issue for the industry in recent years. More recently, price levels that became uncompetitive in Europe have damaged the industry. The prospect of volatile and high prices has deterred some supermarkets from purchasing venison and led some European restaurants to take venison off the menu.

Despite stiff competition in North America from large quantities of summer stone fruit and Chilean kiwifruit, strong sales through September and October have also contributed to a good season in that part of the world.

The response, which is possibly an over-correction, highlights the risk associated with over-dependence on a very narrow seasonal-niche for venison in Germany, and likewise, the traditional Korean market for venison.

Prices in Europe for New Zealand kiwifruit (Euros per kilogram) 2.30

Deer slaughterings for the season ended September 2002 fell by 11% to 450,000 head. This was down 13% on the initial Game Industry Board estimate.

2.25

Kiwifruit

2.05

2.20

2002

2.15 2.10 2002

2.00

The key concern for horticulturalists has been severe frosts this spring. Worst hit have been the Bay of Plenty, Hawkes Bay and Gisborne. Some growers have lost a significant part of the crop, particularly in the Bay of Plenty, although the damage appears to have been localised in may cases.

1.95

2001

2000 1.90 1.85 1.80

May

Jun

Jul

Aug

Sep

Oct

Nov

Source: ZMP.

For the third consecutive season New Zealand kiwifruit had a small fruit profile in 2002-03. Nevertheless, Zespri are forecasting a 16% increase in average returns for the 2002-03 season to $8.35 per tray.

While frosts are not uncommon in September, the type of frost and severity were a rarity, with the usual frost protection methods rendered largely ineffective by the lack of a critical inversion layer. However, the industry has a compulsory frost insurance scheme which provides growers with cover. Zespri has warned against the negative impact of excessive loss estimates. At this stage they expect the export crop to be little different in terms of size from last years, which itself was low in volume at an estimated 60 million trays, compared ANZ INDUSTRY BRIEF

Euro/kg

Pipfruit Frosts and hail hit apple orchards during the spring, killing-off flowers in Hawkes Bay and Nelson orchards before the fruitlets had a chance to form. There are varying estimates on the impact in the

7

two regions, with the Hawkes Bay braeburn crop particularly affected. The full impact wont be known until January when the fruit is picked and graded for export. However, taking into account the impact of the frosts and hail, the Ministry of Agriculture and Forestry estimate that the national crop will be down 12% in the 2002-03 season.

the number of exporters is expected in forth-coming seasons. ENZA announced a final 2002 season payment of $24.00 per TCE (tray carton equivalent, or 18kg box), up from $19.75 per TCE in the 2001 season. Market conditions suggest similar returns should be achieved in the 2003 season, with apple production in Northern Hemisphere countries expected to decline for the second consecutive season. The decrease mainly reflects reduced production in China and the US, the leading world apple producers, as the planted area in both countries continues to decline. US apple production in 2002/03 is forecast to decrease for the third consecutive season to 4.1 million tonnes, the smallest volume since 1988/89 due to unfavourable weather during the spring and a reduction in orchard areas. Likewise, the Europeans are not expecting a large crop next year.

Prices in Europe for New Zealand braeburn apples (Euros per 18kg carton) 30.0

Euros per carton

28.0 26.0 24.0

2001

22.0 2002

20.0 18.0 16.0 14.0

2000

12.0 10.0

1999 Apr

May

Jun

Jul

Aug

Sep

Oct

Conclusion

Source: ZMP.

For the pastoral sector, there is presently sufficient feed that farmers have been able to hold on to stock to see how things play out in the New Year. There is a general anticipation that schedules will remain around current levels. Moreover, two exceptional seasons in 2000-01 and 2001-02 (after a lean period in the mid/late 1990’s) have allowed a financial 'catch-up', leaving most in the sector well placed to weather a return to more normal income levels.

Prices in Europe for New Zealand gala apples (Euros per 18kg carton) 30.0

Euros per carton

28.0 26.0

2002

24.0

2001

22.0 20.0

A sharp increase in debt in the dairy sector, which has driven a sharp increase in lending to the agricultural sector over the past two years, will require careful management in some cases and may test farm business and bank ability to manage a “reduced profitability/high indebtedness” environment. Nevertheless, if sensitivity analysis was undertaken at the time of expansion with a view to the business’ break-even point, particularly in relation to where prices have been in the past, this should be able to be managed.

2000

18.0 1999 16.0 14.0 12.0 10.0

Apr

May

Jun

Jul

Aug

Sep

Oct

Source: ZMP.

In Europe, prices for New Zealand braeburn were strong early in the current 2002-03 season, but eased as the season progressed. Prices for other apple varieties have followed a similar path to last season, holding up better than in 1999 and 2000. Overall, reduced world supply and solid demand contributed to a lift in average payments in the 2002 season.

Although some individual horticultural crops were devastated by frost and hail, the damage tended to be localised. Nevertheless, for some this will mean discussions with crop underwriters. For the balance prices remain favourable.

There have been a few teething problems as the industry has moved into a deregulated environment. This has seen a proliferation of exporters although ENZA has remained dominant. Some reduction in

The real implications of reduced proceeds from dairy and horticulture enterprises will not be evident until Spring 2003 when increased pressure on working capital will be evident, if businesses are unable to exercise corresponding restraint over expenditure.

John Bolsover NZEconomics@anz Ph: 64-4-496 -8757 ANZ INDUSTRY BRIEF

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