NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 Assessment Schedule

NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 1 of 8

Assessment Schedule – 2012 Agricultural and Horticultural Science: Explain how market forces affect supply and demand of primary products (90651)

Evidence Statement

Q Evidence Achievement Achievement with Merit

ONE: Market forces affecting the supply of primary products

(a), (b), Exchange rate States the recent changes States the recent changes

(c) The explanation of changes to recent supply in the relevant exchange in the relevant exchange could include: rate that have occurred, rate that have occurred, and explains in general and explains in detail  increased / decreased returns terms how the supply of how the supply of the  increasing production to maintain level of the product (timing, product (timing, quantity, income quantity, etc) has been etc) has been affected by  costs of production affected by the change in the change in the  main export market and the currency the exchange rate. exchange rate. involved.

Prices States the recent price States the recent price

The prices received by the producer are a trend for the product, and trend for the product, and key driver of changing levels or patterns of explains how the price explains in detail how the supply. The explanation of changes to supply trend has affected the price trend has affected could include: supply in broad or general the supply in specific terms. terms.  changes in volume of the product in the short term

 changes to the markets where the product A M is supplied

 changes in the timing of product supply.

Production may or may not be significantly affected, depending on price trends for alternative products, or the ability of the producer to change production, and the new products’ lead-in time.

Political intervention States a specific trade States a specific trade

An explanation of how governments restriction implemented by restriction (with values)

manipulate the quantity of supply and / or a government, and implemented by a NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 2 of 8

timing. Must include reference to current explains how this government, and explains tariffs, quotas, subsidies or phytosanitary restriction has impacted in detail how this restrictions, free trade agreements, etc, being the supply of the product restriction has impacted enforced by named governments. in broad or general terms. the supply of the product in specific terms.

Seasonality States why the product is States why the product is

An explanation is given as to how seasonality seasonal, and explains seasonal, and explains in influences the pattern or quantity of the how this seasonality detail how this seasonality product supplied. Examples could include: affects the supply of the affects the supply of the product in general terms. product in specific terms.  biological processes in plants or animals

 the impact of weather events A M  influence of having an out-of-season supply for the northern hemisphere.

Q Evidence Achievement Achievement with Achievement with Merit Excellence

ONE (continued)

(d) The relative importance Additional evidence for Additional evidence for The justification of one of market forces affecting Q1 (a), (b), and (c) can Q1 (a), (b), and (c) can market force over the the supply of primary contribute towards contribute towards other two must provide products. Achievement. Merit. evidence of the merits of each market force as they impact on the A M supply of the product to the stated specific market.

Actual data must be stated (trends in prices, exchange rates, seasonality, interventions, etc).

E NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 3 of 8 NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 4 of 8

Q Evidence Achievement Achievement with Merit

TWO: Market forces affecting the demand for primary products

(a) Promotion Explains a relevant Explains in detail a

Explanation should include actual examples of promotional campaign, relevant promotional a relevant promotional campaign, including and the subsequent effect campaign, and the how the key message is conveyed, and how on the demand for the subsequent effect on the demand for the product has changed as a product in broad or demand for the product in result of the promotion. general terms. specific terms.

(b) Consumer preference Explains the change in Explains in detail the

Explanation should state the trend(s) in consumer preference, and change in consumer consumer preference that have occurred, and the subsequent effect on preference, and the how they have affected the demand for the the demand for the subsequent effect on the product. The preferences could be within the product in broad or demand for the product in

single product, or between competing / general terms. specific terms. substitute products.

Changes in demand could be reflected in the A M price, quantity, or timing of the demand.

Q Evidence Achievement Achievement Achievement with with Merit Excellence

(c) Quality requirements Explains the Explains in detail

Explanations must refer to specific specific industry the specific industry industry quality standards that are quality standard, and quality standard, and required by the processors of the the subsequent the subsequent product or are demanded by the effect on the effect on the consumers. In most cases, demand for the demand for the “quality” will refer to product product in broad or product in specific attributes and packaging (ie fitness general terms. terms.

for purpose of described user /

consumer). It could also refer to A M the source of the product via traceability programmes.

(d) Additional evidence Additional evidence The justification of NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 5 of 8

for Q2 (a), (b), and for Q2 (a), (b), and product quality over (c) can contribute (c) can contribute promotion and towards towards Merit. consumer Achievement. preference must provide evidence of M the merits of each A market force as they impact on the demand (price or quantity) for the product.

Appendix: Examples of possible answers

Question One – Market forces affecting the supply of primary products

Example answers for parts (a), (b), and (c)

Exchange rate: Beef into the US

New Zealand beef is receiving record prices in the USA at over US$2.20 per pound, well up on the US$1.80 per pound in the USA before Christmas. However the return for the beef farmer in New Zealand is only slightly up on last year’s prices, as the record prices being paid by the consumer are being eroded by the strength of the NZ dollar against the US dollar. The average return is only NZ$30 more per head. One NZ dollar is currently buying US$0.82, compared to US$0.74 last December and US$0.49 in 2009.

Price: Wool

Lamb prices are dropping dramatically as the high NZ dollar reduces returns to growers. Farmers were experiencing returns of $8 / kg in early February 2012, but now the returns are closer to $6 / kg. As the NZ / US exchange rate continues to worsen, farmers are rushing to sell stock.

Political intervention: Milk powder into the US

China and New Zealand have signed a free trade deal where tariffs on New Zealand’s agricultural products are being phased out gradually. However, in March 2012 China increased the tarriff on New Zealand’s milk powder imports from 5.8% to 10%, as New Zealand has filled its 100 000 tonne quota. Any milk powder supplied within the NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 6 of 8

100 000 tonne limit is subject to a reduced tariff; above this limit, the milk powder is charged the “regular category” tariff.

Seasonality: Grapes

An unseasonally wet summer has seen grape harvests for wine dramatically down on last season. It is estimated that only 300 000 tonnes of grapes will be obtained from the 2012 harvest, down 30 000 tonnes on last year. The summer growing season has been unusually wet, and lacking the usual summer sun, which is needed for the production of the grape crop, according to NZ winegrowers.

Example answer for Question One (d)

(1) Price.

(2) Exchange rate.

(3) Political intervention.

Recent trends in the price paid to farmers for milksolids have had a greater effect on the supply of milk than either the exchange rate or political intervention.

Farmers are very responsive to farm gate prices. Dairy farmers have a number of options to quickly increase their level of production if the outlook appears favourable. The increase in payout over the past few years (Fonterra’s payout in 2010 / 2011 was $7.90 / kg milksolids) has resulted in large-scale conversions from sheep, beef and forestry operations. The feeling that this trend will either continue or at least stabilise has resulted in the large capital investment required for these conversions. This has been a major factor in determining the supply of milk.

Despite the increase in the NZ$, a factor that would normally reduce returns, the rise in price received to $7.90 / kg milksolids has negated the downside of the exchange rate, encouraging more dairy farm conversions and higher production volumes.

While the exchange rate can play a large role in determining the payout farmers receive, we have seen in recent years that despite a strengthening NZ$ (up to $0.80 against the US dollar in April 2011) the payout received by farmers has remained favourable. They would not be looking to change their production, as they have committed financially and physically to this product, and any other product produced would need to be exported and would face the same unfavourable exchange rate.

Political intervention does impact on the returns for milk products in some markets, eg Taiwan has a tariff of 23% on all milk powder imports. However, with the development of free trade agreements with many Asian countries, including China, and the fact that our milk products are exported to more than 70 countries, the effect of political interventions on the quantity being able to be supplied or the price received by the producer is minimised.

Thus, market trends, in terms of the price paid to farmers for milksolids, remain the most significant factor in determining the supply of milk on an annual basis and into the medium to long term. NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 7 of 8

Question Two – Market forces affecting the demand for primary products

Example answers for parts (a), (b), and (c)

Promotion: Beef

New Zealand beef producers are meeting the demand for the health-conscious Japanese market. This market is becoming aware of the healthier, grass-fed New Zealand beef. Beef and Lamb NZ are targeting the decision- makers from the distribution, retail and food sectors, plus chefs and the media. A Masterchef-style competition was held recently where New Zealand beef was the primary ingredient. In 2010 we exported just under 35 000 tonnes of beef to Japan, three times the volume of 2003.

Consumer preference: Kiwifruit

Changing consumer tastes and preferences for the Gold kiwifruit variety has seen its volume produced increasing over recent years. In 2012 there are 20 million trays of the Hort 16a variety being produced for export – up on the previous year. At the same time we are going to harvest 70 million trays of the Hayward green variety, which is projected to decline as global demand shifts to the sweeter gold variety. The growth in demand has been in the Gold variety. There have been more licences made available for the new Gold 3 variety to keep up with the increase in demand for this variety.

Product quality: Wool

New Zealand’s Merino wool is procured by the New Zealand Merino Company for Icebreaker. Icebreaker produces high-end base layer clothing products for export to the US and European markets. These high-end products are comparatively more expensive than their synthetic competitors, and must maintain their high-quality reputation. To be able to supply Merino wool for Icebreaker clothing, growers must demonstrate that their production is environmentally sustainable, and meets the requirements of micron diameter, length of crimp and wool colour. Buyers will continue to demand this product, and Icebreaker will increase its $120 million annual turnover if its customers feel the product meets their requirements.

Example answer for Question Two (d)

(1) Price.

(2) Promotion.

(3) Consumer preference.

Price is the key market force that determines the demand for lamb. While promotion and consumer preferences have some effect, they are not as significant as price.

Lamb is often priced towards the top of the range of meat options available to consumers. From $10–$15 / kg for chops and up to $20 / kg for a leg for roasting ($30–$45 per leg), it represents expensive meat when the fat / bone content is considered. Consumers are very sensitive to the price of meat, and when lamb prices are high (at times of high export lamb prices) there is a noticeable drop-off in lamb meat sales as consumers switch to alternative meats, eg chicken at around $15 / kg (skin off breast). TV promotion by sportswomen has, according to Meat and NCEA Level 3 Agricultural and Horticultural Science (90651) 2012 — page 8 of 8

Wool New Zealand, increased demand for lamb by 5%. However, when the price for lamb rose in 2004, demand dropped in favour of cheaper meats such as pork and chicken.

Promotion, such as campaigns like the TV ads featuring the Evers-Swindell sisters and Sarah Ulmer, attempts to target the female / sporty sectors of society and increase demand from those sectors. However, campaigns tend to be neutralised by high prices.

Consumer preference for lamb as a popular barbeque meat remains, because it is quick and safe to cook (unlike pork and chicken which must be cooked fully). There are still some traditional roasts being sold; however, these are often bought as a special once-a-week / month meal, rather than for common day-to-day consumption, due to its cost, and to its cooking time not fitting into many people’s busy schedules. Even so, it can still often have a higher fat / bone content than many other meat options.

Price variations have been shown to produce significant shifts in consumer demand, with high prices for lamb reducing demand, while demand for pork has increased. The promotional activities of Meat and Wool NZ have at best maintained market share in the meat trade, and while a minor 5% increase in New Zealand consumption is desirable, it must be remembered that 90% of lamb is exported. So to greatly influence demand overall, an increased demand from overseas consumers is vital. Price is the most significant market force in the major export markets, except during times of major animal disease outbreaks, when consumer preference has had a significant impact on demand for New Zealand lamb.