Crop farming – are better growth conditions ahead?

After a few tough years, the prospects for New Zealand’s primary sector are currently looking pretty good.  There is a lot of commentary going around about the potential $6 trifecta for dairy, beef and lamb prices, while kiwifruit growers and wine producers are also looking forward to continued buoyant returns.  One part of the primary sector, however, that doesn’t perhaps get the coverage that it warrants is arable.

It has been estimated that grain and seed growing directly and in associated activities supports a total of close to 10,000 jobs in New Zealand, similar to fruit growing.  Cropping is a key industry in parts of Southland, Canterbury (especially mid-Canterbury), Manawatu, Wairarapa, the East Coast and Waikato.  As examples, the Infometrics Regional Economic Profile shows that sheep, beef and grain farming accounts for about 13% of Southland District’s economy, and approximately 7% in Ashburton and Manawatu.

There is also a huge amount of research & development spending in the arable industry, particularly in regards to developing specialist seeds with certain favourable characteristics, such as tolerance to pests or weed-killing chemicals.  For example, PGG Wrightson Seeds spends more than $10m per annum on its research programme1, which equates to about 2.5% of gross revenue.  R&D and innovation are vital features of modern industries and economies, and are things that New Zealand generally doesn’t do very well in.  Indeed, the OECD reports that NZ’s R&D spending as a proportion of GDP is around 1.2%.

The outlook for arable

So in this often overlooked part of the agricultural sector, what are conditions currently like for crop farmers?  Unfortunately, the news isn’t as good as other parts of the primary sector.  First, global commodity grain prices are low, held down by large inventories and record harvests last year in key producing countries such as Australia.  Despite an uptick in the past six months, wheat prices at around US$160/tonne are still at their lowest levels for more than a decade.

At the same time, the elevated New Zealand dollar has made it even more cost-effective for key end users (e.g. pig and poultry farmers) to import grain, further denting the returns on offer to domestic growers.  In addition, low milk solids prices over 2014-16 reduced the demand from dairy farmers for supplementary feed, such as barley.  That has also hampered arable farmers’ returns.

As if all of that wasn’t enough, crop farmers in the Wairarapa have had to deal with the pea weevil outbreak and the associated ban on growing peas in the district until the middle of next year.

However, although the last few years have been testing, the tide might now be turning for the arable sector.  For a start, let’s not forget that a silver lining of the strong exchange rate is that inputs to cropping such as fuel and fertiliser are cheaper than otherwise.

Strong milk solids prices are also set to continue and this will boost the demand for specialist seed, as dairy farmers continue to put emphasis towards on-farm feed and re-grassing of their paddocks.  We estimate that the higher dairy payouts will have already pumped an extra $876m into the Canterbury economy this year for example, and $501m into Southland.  Debt repayment will absorb some of this money, but farm improvements such as better pastures will surely feature too.  There may also be some extra demand for supplementary barley to feed cows.

The fly in the ointment is still the overhang of stockpiled grain available around the world.  The UN’s Food and Agriculture Organisation estimates that the ending stocks for 2017/18 in the world cereal market will be 704m tonnes, the highest level for at least 10 years.  However, it’s always worth bearing in mind the huge effect that weather can have on arable farming.  It’s not a reliable peg to hang an economic argument on, but a drought in a key grain producing country such as Russia could still quickly pull those excess stocks down again, thereby boosting prices.


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