Barber’s Wire: MPI’s SOPI report suggests it is on different planet

Allan BarberWhen Allan Barber read the headline forecast in the December update of the Ministry for Primary Industries’ (MPI) Situation and Outlook for Primary Industries report, his initial reaction was “they must be joking, what planet are they on?” After a slightly more in depth study of their analysis, he is still baffled, he writes.

Their prediction for the 2016 year appears to be based on two main premises: firstly product prices will be roughly maintained at present levels due to strong overseas demand and secondly the exchange rate will be 15 percent lower than at the time of the June update. These factors indicate an increase in export revenue of $1.9 billion, roughly half from red meat and the other half from forestry and horticulture.

Now I am not qualified to judge whether or not the forestry and horticulture forecast is realistic or not, but I seriously question how the red meat sector will manage to increase its exports by this much. There is a risk in basing hopes on a collapse in the New Zealand dollar which appears to be moving doggedly in the opposite direction against all major trading partners apart from the US dollar. But added to this, market prices in all main markets for beef and lamb have moved down throughout 2015 and show very little sign of improving in the first half of 2016.

MPI draws attention to the depressed state of the sheepmeat market due to low prices, drought in the South Island, poor mating conditions leading to reduced lambing percentage and lower flock numbers. But hey presto! The effect of the falling dollar is enough to more than offset all these negatives. The confidence in a beef recovery is based on a substantially lower Australian cattle kill and reviving demand from China and other Asian markets.

The dairy forecast is based on seven percent lower production than last year, but a recovery in prices from a low point of $3.50 in the last quarter of 2015 to $5.60 12 months later. The effect of this is predicted to be a three percent drop in export revenue for the 2015/16 year followed by a 32 percent increase in the following year.

Global conditions such as higher EU production following the removal of quotas, increased Chinese domestic production and the effect of the trade ban on Russian imports are all positive indicators of an improvement in dairy revenues. But 32 percent? I’m sure dairy farmers and Fonterra’s management would be thrilled to think their recovery will be this good, but they won’t be willing to bet the farm on it.

We mustn’t ignore the effect of e-commerce, which MPI touts as a great source of future growth. While I admit there is potential for export growth, New Zealand exporters are not the only ones seeking to take advantage of this trend. To gain disproportionately from the trend, we must do it better than our competitors.

So, on balance, I am sceptical of MPI’s rosy forecast of future export growth. They are still trying to paint an optimistic picture against a backdrop of some negative factors which, while not insurmountable, pose the danger of some substantial headwinds. The SOPI report mentions most of these factors, but I am not convinced they have fully taken them into account. The improvement bears a strong resemblance to the ‘hockey stick’ forecasts contained in all strategic plans which are trying to convince readers that improvement is just round the corner after the present trough.

Potential downside risks to the optimistic forecast for 2016/17 are: our dollar may not fall as anticipated or hoped for, the dairy price may not recover as quickly, red meat prices and volumes may suffer more than forecast from drought and soft market demand, China or the global economy as a whole may not recover as hoped.

None of these may occur or only a couple of them, but MPI’s optimism appears to be predicated on them all meeting their best case scenario.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

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