New Zealand’s provincial economies contribute greatly to the overall economy, providing dairy, meat, and horticultural products to the nation and overseas export markets.

Meat and dairy prices over the second half of 2023 and into early 2024 were extremely weak, making for a difficult period for farmers as they faced high on-farm input costs. More recently, meat and dairy prices have recovered strongly. As a result, next year’s outlook for farmers and the primary sector looks promising.

This article looks at the changes to the expected dairy payout, red meat prices, on-farm costs, and how primary industries contribute to different regional groupings.

Global dairy prices fell to an almost five-year low in August 2023, driven by weaker demand for dairy imports in China. Farmers saw low profitability due to this subdued demand, resulting in farmers in key dairy-producing areas such as the US and South America decreasing their herd sizes. Weaker growth in the global milk supply is now supporting higher dairy prices. The Global Dairy Trade (GDT) whole milk powder index has increased 23%pa since the final auction of 2023 (see Chart 1).

The opening 2024/25 farmgate milk price estimate in May had a mid-point of $8.00/kgMS. On the back of rallying GDT auction results, the estimate has since pushed up four times to reach $10.00/kgMS last week. The 2024/25 season milk price is set to be a new record, beating Fonterra’s previous best milk price of $9.30/kgMS paid in 2021/22 .

The second half of 2023 was particularly tough for red meat producers as demand from China plummeted amid poor consumer confidence, driving demand lower in the food services industry. Beef prices fell 7%, from $5.96/kg to $5.56/kg. but sheep meat was more heavily affected by a drought in Australia that led to increased slaughtering across the Tasman.

Mutton saw the largest fall across red meat products, as the average monthly slaughter price for mutton fell 46% from June 2023 to January 2024 to $2.33/kg, well below the two-year average of $5.43/kg during 2020 to 2022. Lamb prices also fell, down 23% over the same period, falling from $7.65/kg to $5.93/kg.

However, by November 2024, the average monthly slaughter prices for mutton (up 72%), lamb (up 36%), and beef (up 24%) were all significantly higher compared to January 2024 (see Chart 2).

Improving dairy and red meat prices is great news for farmers, but farmers have been struck with high inflation of input costs in recent years, well beyond the level households have seen during the cost-of-living crisis. On-farm costs grew 15%pa over the year to September 2022, rising more than twice as fast as the 7.2% increase in the consumers price index over the same period (see Chart 3).

On-farm costs have levelled out in 2024, but the surge in 2022 means the operating environment for dairy farmers is much different from the 2021/22 season, when the farmgate milk price payout was at its previous record high.

By looking at our regional groupings in the Regional Economic Profile we can see the important role the primary sector plays in regional economies. Primary industries are the largest broad sector of rural and provincial economies, contributing 28% and 16% of GDP respectively in the year to March 2023 (see Chart 4).

Off the back of higher commodity prices, and falling interest rates, farmers’ confidence in the broader agriculture sector is now at its highest level in over seven years, according to Rabobank’s recent rural confidence survey.

Improved primary sector commodity prices, confidence, and investment intentions should result in better employment numbers across the sector over the coming year. Stats NZ monthly employment indicators showed 1,304 jobs were added across primary industries between September and October, as a combined 3,563 jobs were lost across goods-producing and service industries (all figures seasonally adjusted). Although the unemployment rate is expected to rise further to 5.4% across the broader economy during the first half of 2025, improving conditions for farmers could limit growth in the number of unemployed in rural and provincial areas.

Although there is much to develop in the global economy, the outlook is brightening for red meat and dairy. A much-improved dairy payout for dairy farmers and rising red meat prices will flow through to better economic outcomes for rural and provincial economies, and improved margins will better place farmers to hire and retain staff.

We continue to monitor the effects of global economic developments on our regional economies. The core indicators of GDP, Employment, Living Standards, and Small Areas for 2024 will be updated in the Regional Economic Profile by 7 January 2025.