NZ agri: facing new challenges

Economic growth rates in New Zealand and globally have been slashed as Kiwis hunker down to avoid the spread of COVID-19.

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Under lockdown rural New Zealand feels like a relatively safe place to be and on farms daily life is continuing in a much more normal manner than in the cities. Having daily tasks to attend to is a good antidote to worrying about something you can do little about.

"Despite the forestry sector shutting down for now [Kiwis] aren’t going to run out of toilet paper any time soon.”

Recent rains have also helped relieve tensions for the agricultural sector although a few more dry weeks would be welcomed by those busy harvesting apples and grapes. Although the drought has now broken in most parts of New Zealand, it will be some time before there is sufficient feed on hand to eliminate the need for supplementary feed.

New Zealand is fortunate to produce enough food to feed themselves eight times over so the supermarket shelves won’t ever be bare but choices may be a little curtailed from time to time. And despite the forestry sector shutting down for now they aren’t going to run out of toilet paper any time soon either.

Sharp contraction

But the economic fallout of this horrid virus can’t be avoided. Gross domestic product (GDP) forecasts have been slashed with a 

Unemployment rates are also expected to lift to levels not seen since the early 1990s. Global economic conditions are also expected to be dire; as a trading nation New Zealand can’t escape the fallout.

The tourism sector has come to a sudden stop and borders will have to remain closed until this global pandemic is under control. This will also impact rural communities who have integrated tourism into their farming operations by providing rural accommodation and experiences.

Countries that have opted for a less stringent approach to managing COVID-19 than New Zealand has are now starting to pay the price as infection rates rocket but the debate about how best to manage such an unprecedented and uncertain situation will no doubt only get louder as the economic costs mount.

Global slowdown

Just a couple of months ago New Zealand’s high reliance on China as a trading partner was being highlighted as a vulnerability but as China reopens as other nations close down it is once again being hailed as a relatively bright spot in an otherwise gloomy global economy. That said, they are an export-oriented economy and the global slowdown will hit their growth hard.

It is true that the world’s population will still need to eat, even shut in their houses, making food currently a safer bet than other types of goods exports, whether they be commodities or manufactured goods. However, when it comes down to it people only need to eat basic foods and when times are tough luxury goods tend to be foregone.

In many of the markets New Zealand supplies, food exports fit more into the luxury end of the market than they do the ‘daily staple’ category. Over the longer term this is definitely where Kiwis want to be positioning their food as that’s where you can command the premium prices and really build a brand but it does mean that demand for goods may not be quite as inelastic as they like to think.

While the relationship hasn’t been as close in recent years, global GDP and New Zealand’s commodity prices do tend to move together despite the fact that the global population was indeed eating steadily throughout. When people feel better off they are more likely to splash out on nice food. And vice versa, unfortunately.

Product to market

The current global environment really tests the depth of our trading relationships. Those with strong long-term relationships will come out through this crisis in better shape than those who don’t.

One of the biggest challenges facing New Zealand’s exporters at present is the logistics of getting product to market. This is particularly the case for high-value foods that need to be kept cool.

Cool storage capacity in New Zealand is limited meaning Kiwis are highly reliant on shipping goods out of the country almost as quickly as they are produced. At present there is a shortage of refrigerated containers in New Zealand due to ports not being cleared as quickly as normal – initially in China and now elsewhere. In New Zealand ports, essential goods like food exports are being prioritised but containers holding non-essential imported goods are currently not being emptied and therefore returned into circulation as quickly as needed.

Airfreight options have been greatly reduced due to the drastic cutback in flights into and out of New Zealand. This situation is not likely to change any time soon so any cargo that needs to be airfreighted will need to go on a flight specifically chartered for that purpose which will add to the cost.

The cost of shipping by sea, however, has fallen due to the drastic drop in oil prices. This will help to keep exports competitive and will be particularly welcomed by sectors such as forestry that export large quantities of relatively low-value goods. Not that any logs are being shipped right now as forestry is not deemed an essential service but low oil prices seem likely to persist for some time.

A lack of cool storage space and a potential shortfall of workers means some apples and kiwifruit may not be picked this season. There is a real risk that pack-houses and processing plants that operate with a large number of people in a relatively confined area will be subjected to regular shut-downs as they try to limit health risks. Workers are being spaced out more than usual to minimise risks but this also means productivity levels are immediately reduced, even halved. Automated technology solutions will become a lot more valuable this season.

Livestock processing is continuing but at lower capacity than normal. Delays and backlogs of stock are inevitable, making forward planning a must this season.

Sale yards are closed but livestock agents are still operating and listings on online platforms are expected to jump. The technology to sell livestock online has been operational for years but the willingness to trade stock in this manner hasn’t necessarily been there. These online platforms don’t provide the banter and social experience that a sale yard does but they do have some advantages such as reduced transportation costs and improved animal welfare outcomes, as well as being compatible with social distancing.

Susan Kilsby is NZ Agriculture Economist & Sharon Zollner is NZ Chief Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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