The outlook for the primary sector remains worse for the year ahead, driven by several factors including higher costs, lower global demand, and weather influences.

This article profiles some of these trends, including recent falls in meat slaughter prices and changes in the expected dairy pay-out. These lower revenue trends are compared against on-farm costs that are still rising, with implications for export returns also discussed.

Infometrics’ analysis of AgriHQ data shows that prices for a range of primary sector outputs are substantially lower than a year ago. In November 2023, average monthly slaughter prices for mutton were 49% lower than a year ago, at $2.58/kg. This price is the lowest for mutton since September 2016, and compares to an average price of $5.43/kg between 2020 and 2022.

Lamb prices are lower too, although not to the same degree. Lamb slaughter prices are down by 24%pa in November 2023, to $6.49/kg. This price level is similar to prices seen at the start of 2021 of around $6.40/kg. Beef (steer) slaughter prices are down by 11%pa to $5.76/kg.

Slaughter volumes are very slightly lower than in 2022, with the number of livestock killed over the 10 months to October 2023 sitting 0.2% lower than for the same period in 2022. However, there are some large regional differences, with kills in the top of the South Island and West Coast up 5.6%, Otago/Southland up 3.1%, and Northland through to Bay of Plenty up 1.0%. Canterbury kills are down 0.6%, Taranaki to the bottom of the North Island are down 1.4%, and Gisborne and Hawke’s Bay are down a substantial 5.7%.

In slightly better news, the farmgate milk price has been revised higher again, on the back of stronger Global Dairy Trade auction results recently. Fonterra’s opening forecast in May this year for the 2023/24 season had a mid-point of $8.00/kgMS, which was lowered to a mid-point of $6.75/kgMS by late August. However, in early December, Fonterra had raised the mid-point estimate to $7.50/kgMS.

By value, the starting price forecast was set to produce a pay-out of around $15.0b to the national economy (assuming current milk solids levels). The low point price forecast would have produced a pay-out of $12.7b, a 16% cut from the initial estimate and taking $2.3b from the economy. The current price forecast is still 6.3% below the starting forecast, and it would return $937m less to the national economy.

The pace of primary sector cost pressures has become less intense in recent quarters, a welcome shift in trend. But the cumulative effect of higher input costs is substantial. Each quarterly rise in 2023 on-farm costs has been below 1.0%, compared to two years of quarterly rises ranging between 1.0% and 4.8%. After peaking at 15%pa in the September 2022 quarter, annual input cost inflation has moderated to 4.5% in the September 2023 quarter.

The “three Fs” – fuel, fertiliser, and finance costs – currently look like a mixed bag, but only because some of the cost increases in recent years have partially reversed out. Fertiliser costs are down 12% over the last year, a welcome respite, but they remain 21% higher than two years ago. Fuel prices are down 9.5% over the last year on-farm, but they remain 39% more expensive than two years ago. Finance costs are 35% higher than a year ago and are up a massive 81% from two years ago.

Altogether, current on-farm costs are still sitting 20% higher than two years ago. These continued higher costs would be challenging enough, but together with reduced revenue (from the lower slaughter and milk prices), they are substantially squeezing primary sector profit margins.

The latest Situation and Outlook for Primary Industries (SOPI), produced by MPI, shows a 5.4%pa drop in export values is expected for the year to June 2024. However, that expected drop comes after two strong years of growth, with primary sector export values rising 20% in two years.

That 5.4%pa drop in 2024 equates to a hit of just over $3b to export returns. Nearly two thirds of that drop is due to lower dairy returns (-$1.9b), with dairy remaining the largest component of primary sector exports. Lower global demand has reduced dairy returns, alongside the more specific hit from a weaker Chinese economy and higher domestic milk supply in the world’s second largest economy.

Both meat and forestry contribute another $550m or so each to the decline. The fall in meat exports (and the cause of lower slaughter prices) is weather-driven, with large destocking in Australia occurring as El Nino weather conditions require farmers to reduce their animal numbers in anticipation of drier conditions and less feed. A high level of Australian meat on the market for export has expanded supply even as demand remains softer, hitting prices.

For forestry, China’s importance is clear, taking 54% of forestry products and an even higher proportion of raw logs. The struggling Chinese property market has seen lower construction activity occurring, depressing demand for New Zealand wood.

Slightly lower horticulture returns come despite higher commodity prices for key New Zealand exports. The drop reflects lower volumes, with Cyclone Gabrielle hitting several horticulture export categories, and poor weather that saw the kiwifruit season end 10 weeks early and with 13% less volume than normal.

Most of the hit to the primary sector is occurring at present or has already occurred, and will be counted in the year to June 2024. But MPI expects stronger returns in the year to June 2025, with total primary sector export values predicted to return to above 2023 levels, with a 6.1%pa forecast jump. Whether Chinese and global demand is recovering sufficiently by the end of next year to lead to this reasonably quick improvement remains to be seen.