Entering 2024, the New Zealand agribusiness sector confronts an uncertain landscape of fluctuating global markets, evolving consumer preferences, and new government with a lot to attend to policy-wise after six years of predominantly anti-farmer policies from their predecessors; particularly around environmental legislation and the Treaty of Waitangi’s interpretation and role in policy.

Global economic and trade context

The global economic environment continues to exhibit signs of volatility, influenced by geopolitical tensions, trade dynamics, and the lingering effects of the COVID-19 pandemic. New Zealand's export-oriented agribusiness sector remains sensitive to these external factors. Trade agreements, such as the NZ/UK FTA, are anticipated to open new avenues for our products, while ongoing negotiations with the EU present potential for further market diversification.

Meanwhile, ongoing unrest in crucial regions affects supply chains and logistics globally. Debt burdens, inflation concerns, and China's economic challenges further complicate matters for trading partners and central banks.

Dairy sector

The dairy farming industry, a cornerstone of New Zealand's economy, has witnessed a significant turnaround from the challenges it faced last year. Improved global dairy prices, coupled with a favourable exchange rate, have contributed to a positive revenue outlook for dairy farmers payout wise, with Fonterra elevating their forecast for the 2023/24 season to $7.30-$8.30 NZD.

Sustainability and innovation

Sustainability initiatives and technological advancements continue to play a vital role in shaping the future of dairy farming. Investments in sustainable farming practices, such as, fencing and waterway protection, effluent management systems, nutrient management, greenhouse gas mitigation research and action, energy efficiency and renewable energy, and water conservation. They are crucial for both environmental stewardship and to bolster consumer appeal in an era of slanted, and often inaccurate, portrayals of the sector in the media.

Financial health

Despite the optimistic revenue outlook, dairy farmers must contend with the residual effects of past inflationary pressures. Although stabilising, input costs remain elevated, impacting profit margins. The dairy farming sector's financial health will also be influenced by the trajectory of interest rates and monetary policy decisions by the RBNZ.

Sheep and beef sector

The sheep and beef sector faces continued challenges, with profitability levels at a multi-year low. Beef and lamb have stated that inflation adjusted farm gate profitability is at a 15 year low for the sector. Factors such as subdued international demand for meat products, competitive pressures from global producers, particularly Australia, and internal production challenges have contributed to this situation.

Environmental and regulatory factors

Environmental considerations and regulations are influencing farming methods in this agribusiness sector. Sheep and beef farmers are integrating sustainability efforts into their farm management, affecting operations and market standing. While dairy farming may afford larger environmental investments, the sheep and beef sector faces profitability constraints. Additionally, sheep and beef farmers are particularly susceptible to short-term cash flow issues and regulatory costs.

The sector's future trajectory will depend on a combination of:

• Market recovery, particularly in key export destinations like China.

• Evolving consumer preferences around how grass-fed meat and sustainable fibre are monetised.

• The government’s approach to the Zero Carbon Bill and how Agricultural emissions are treated.

• Streamlining of regulations for the farming sector and if that can realistically come to pass.

• Fiscal and monetary policy management and its impact on finance costs and access to capital more broadly.

Viticulture and horticulture

The viticulture and horticulture sectors continue to demonstrate resilience and potential for growth. The anticipated NZ/EU FTA and existing trade agreements are expected to bolster export opportunities. This sector is also benefiting from the recovery of international tourism, enhancing demand for premium New Zealand wines and horticultural products.

Challenges and innovations

Challenges such as climate change impacts, regulatory shifts, and ongoing cost pressures require innovative solutions. The sector is witnessing advancements in sustainable practices, precision agriculture, and value-added product development, positioning New Zealand as a leader in premium, sustainable viticulture and horticulture.

Industry outlook

Looking forward, this agribusiness sector is poised to capitalise on growing global demand for high-quality, sustainably produced wines and horticultural products. However, maintaining competitiveness amidst rising costs and navigating complex regulatory landscapes will be key to realising this potential.

Economic and policy considerations:

Inflation and interest rates

Inflation remains a significant concern, impacting the cost of production across all sectors. While the rate of inflation is showing signs of moderation, its cumulative impact continues to influence farm economics. Interest rates, a critical factor in farm financing, are expected to stabilise and potentially decrease later in the year. Although the timing and scale are uncertain, this would offer some relief to farm cash flow.

Environmental and economic policies

Environmental policies and sustainability measures are increasingly influencing agribusiness operations. The intersection of the governments approach and the sector’s response to environmental issues will be pivotal in shaping its long-term viability.

One key issue which is bubbling away and has the potential to cause serious challenges to New Zealand’s agribusiness industry, particularly in the dairy sector, is how the new government deals with the National Environmental Standards for Freshwater.

In January of this year, significant modifications were enacted to the National Environmental Standards for Freshwater, a policy initiative aimed at safeguarding New Zealand's waterways. This was legislation lead by the previous Labour Government. The amendments encompassed a wide range of measures designed to protect both urban and rural water, impose restrictions on agricultural intensification starting in January 2024, and establish minimum standards for feedlots and stockholding areas. These measures include wintering barns, ensuring a comprehensive approach to freshwater management.

The new government has signalled its plans to initiate work on a new National Policy Statement for Freshwater Management (NPS-FM), offering councils now until December 2027 to align their freshwater plans with the updated standards. This move is seen as a positive step towards reinforcing the policy's robustness, although parts of it have already been implemented. Notably, there have been instances where for example a new wintering barn proposal was declined by local Iwi, reflecting concerns over the potential for increased cow numbers and the associated environmental impact.

This review, along with ongoing debates on Treaty principles and Iwi authority over farming, waterways, and fencing consents, will be tough but crucial. The current NPS-FM is costly and ineffective. The talks aim to balance sustainable farming with accountability, minimising bureaucracy and nepotism.

The Overseas Investment Office (OIO) policies significantly impacted New Zealand's agricultural sector. Despite a steady milk price averaging $8 over the past four years, which typically influences pastoral land values, land values have remained stagnant. Under the previous administration, there was irony in the large amount of farmland sold to foreign entities, while the former Agriculture Minister, Mr. Damien O’Connor, criticised the incoming government for its more pragmatic approach to Foreign Investment.

This slowdown can be attributed to two main factors:

1. The Reserve Bank of New Zealand's (RBNZ) capital overlay on Australian-owned banks in New Zealand, which has reduced the profitability of agricultural lending compared to other types of lending.

2. A perceived deliberate effort by the RBNZ, under Labour leadership, to curb growth in the farming sector. This stance was underscored by Jacinda Ardern's statement that "farming is not our future," accompanied by a near-complete ban on foreign investment in pastoral farms, unless directed towards forestry.

These policies have severely curtailed capital growth and investment in the agribusiness industry, affecting farmers' financial positions and hindering their capacity to innovate and grow. The Coalition Government, and more specifically the Act Party, has addressed the need for a more pragmatic Overseas Investment policy that backs large-scale farming operations, which require significant equity for liquidity and expansion. Changes in approval processes will lead to an industry boost in confidence in large-scale farming operations, fostering growth and investment, which would benefit all farmers. A review of the RBNZ's approach to align more closely with growth-focused governance would further benefit the agribusiness sector.

The review to the National Environmental Standards for Freshwater represents a forward step in environmental stewardship, balancing protection with agricultural productivity. However, the economic framework surrounding agriculture, particularly in terms of investment and land value, calls for a reassessment to ensure the sector has access to capital for innovation, sustainability and growth.

Key takeaways for agribusinesses

The year 2024 presents a complex set of local and global considerations for New Zealand’s economy, which will impact farmers and growers. While challenges persist, particularly in the context of global economic uncertainty and environmental pressures, there are also significant opportunities for growth and innovation, as well as an improving outlook for the dairy farming sector and continued strength in several key segments of the viticulture and horticulture sector.

The agribusiness industry’s ability to adapt to these dynamics, underpinned by a focus on careful financial management, technological advancement, market responsiveness and sustainability will be key to its success. As we navigate these challenges and opportunities, the resilience and ingenuity of New Zealand's farmers and growers will continue to be our greatest asset.

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The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.

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