Tag Archives: Dairy

Tourism booming in New Zealand and Lions tour still to come.

Recent figures show that the tourism industry is now a bigger export earner that the traditional dairy industry. For the year ending December 2016, total exports of dairy and related products were $12.05bn, accounting for 17.2% of all exports. Over the same period, tourism (including air travel) was worth $12.17bn, or 17.4% of exports. These compare to 18.2% and 16.9% (respectively) for 2015, showing the increasing importance of tourism to the NZ economy. After these two industries, the next largest export is meat, all the way back on 8.4% of total exports, leaving tourism and dairy well out in front. If you look at GDP figures – Tourism accounts for 5.6% whilst Dairy is 5% of GDP.

NZ Goods and Services Exports (Values $m)

Exports - Dairy and Tourism

NZ Visitor arrivals.pngWhat are the drivers behind the tourism numbers?
1. The growth of the Chinese middle class who can now afford to travel overseas and additional carriers operating out of China into New Zealand
2. The impact of The Lord of the Rings and Hobbit films
3. The 2011 Rugby World Cup and 2015 Cricket World Cup boosted arrivals significantly.

Also there are two further events which are bound the increase tourist numbers – The World Masters Games that finished today and the British Lions Tour in June/July. The Lions Tour is bound to have a significant impact on the economy especially with the hype that is currently building which largely comes about as the tour only occurs every 12 years.

British Lions Tour 2005 and its impact on NZ Economy

Contribution to New Zealand’s GDP – 16,000 supporters at approximately $10,000 per trip equates to NZ$160 million or 0.1 per cent of GDP. But spending doesn’t equate to value added. Value added is broadly a third of the initial spend therefore this leaves a direct macro impact on value added of $53 million. Second round multiplier effects increase the impact to NZ$132.5 million or broadly 0.1% of GDP.

Retail sales figures for June 2005 were up 1.2%. Accommodation providers, for example, experienced a 5.1% increase in turnover during June. And spending in bars increased by 3.9% in June from May and spending a café and restaurants increased by 1.3% while liquor sales surged 3.7%.

Some economic pricing invariably led to higher prices in some markets. A terrace ticket cost NZ$100 for the Lions vs All Blacks game at Eden Park but excess demand on the black market did mean that some tickets were double the face value. Also prices in bars and cafés increased significantly in the main centres.

Spending Spree
Sales figures for June and July 2005 released by credit card operator Visa International show visiting Lions fans pumped millions of dollars into the New Zealand economy.
UK and Irish-based Visa card holders spent $42.2 million during the two-month period, more than double the amount spent by cardholders during the same period last year. Below is some of the breakdown:

Hotels, motels, resorts: $5,967,931
Travel agencies: $4,927,429
Vehicle rental: $2,574,812
Restaurants: $2,245,621
Tourist attractions: $1,588,492
Air New Zealand: $1,446,342

Although results didn’t go their way, the Lions supporters certainly had a good time. The impact is bound to be significantly greater this year with numbers of supporters up to around 20,000. However as with the 2005 tour there will significant infrastructure problems in meeting this demand.

After the win in Australia four years ago maybe the Lions could pull off a series win – the last time was 1971.

Cobweb Theory – The New Zealand dairy market

Agricultural markets are particularly vulnerable to price fluctuations. many agricultural products have inelastic demand and inelastic supply. This means that any change in demand or supply has more of an impact on price than on quantity. Price fluctuations can also arise due to the time lag between planning agricultural production and selling the produce. The cobweb theory (so-called because of the appearance of the diagram) suggests that price can fluctuate around the equilibrium for some time, or even move away from the equilibrium. Dairy farmers base their production decisions on the price prevailing in the previous time period.

The supply of dairy products in New Zealand fits this assumption – farmers make their production decisions today, but the dairy cooperatives (Fonterra, Westland, etc.) don’t make a final decision on the price farmers will receive until close to the end of the season. However the New Zealand dairy industry faces a severe test over the next year. World price for dairy products have reached their lowest levels since late 2002. Last seasons low milk price $4.40/kg is to be followed by a payment of $3.70/kg.

Cobweb theory

So, what has happened? At the start of the milking season, farmers’ expected price was $7.00 per kg of milk solids (unless they had prescience), so they based their production plans on that price. In the diagram below, say that D0 and S0 are the initial demand and supply curves, respectively, with demand for dairy products relatively high. Farmers, who expect the price P0 ($7.00), produce Q0 units of dairy products (this is the quantity supplied on the supply curve S0, with the price P0). By the end of the season though, demand has fallen to D1. When the farmer cooperative tries to sell Q0 dairy products, the price falls to P1 ($4.50; this is the price where the quantity demanded, from the demand curve D1, is exactly equal to Q0).

Now, going into the next season farmers observe the low price P1 ($4.50) and expecting that low price to persist, they produce Q1 units of dairy products (this is the quantity supplied on the supply curve S1, with the price P1). Come the end of the season, the farmer cooperative finds that they can sell the Q1 dairy products for the much higher price P2 (this is the price where the quantity demanded, from the demand curve D2, is exactly equal to Q1). Now the price is high, farmers produce more but at the end of the season, the price falls… and so on. Essentially, the market follows the red line (which makes it look like a cobweb – hence the name of the model), and eventually the market gets back to long-run equilibrium (price P*, quantity Q*).

Source: Michael Cameron University of Waikato.

Price fluctuations can drive some dairy farmers who would make a profit in the long run form the industry and discourage other farmers from entering the industry. Farmers may also leave the industry as a result of the tendency for the price of dairy products to fall. This is because demand does not tend to increase at the same rate as supply. Demand for most agricultural products is income inelastic, so that demand rises relatively slowly.

New Zealand – Resource Curse in reverse with falling dairy prices

nz dairyI have mentioned the resource curse in previous posts especially those countries with natural resources. Below is an extract from a previous post.

Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

For New Zealand it seems to be working in reverse. New Zealand’s biggest export earner is dairy and with prices dropping by 23% since last year and the outlook of continued monetary easing from the RBNZ the dollar has dropped from US$0.77 on 27th April to US$0.67 today – a level not seen since 2010.

However, going against what the resource curse suggests, the weaker exchange rate will provide extra revenue for exports like the tourism industry which has been enjoying high numbers especially from Asia. Furthermore, there have been suggestions that it could surpass the dairy industry as the biggest earner of export receipts. There are further benefits for domestic companies competing against imports as the weaker dollar makes competing overseas goods more expensive relative to those produced in New Zealand.

Lower milk payout a concern for Reserve Bank.

The Reserve Bank in its November Financial Stability Report noted four key risks that New Zealand’s financial system faces:

* high levels of indebtedness in the dairy sector
* the imbalances in the housing market,
* the potential effects of a slowdown in the Chinese economy,
* the banking systems reliance upon offshore funding.

Since the Financial Stability Report was published, risks in the dairy sector have increased due to the reduction in the current season’s forecast payout. International dairy prices are about a third less than they were a year ago, as a result forecast sector returns for the 2014/15 season are much less than the previous season. Fonterra’s latest Global Dairy Trade auction undertaken in early May reported a further 3.5 percent fall in international dairy prices on a trade weighted basis. The Reserve Bank warns that forced sales of farms could rise if dairy payouts remain low, though farmers would go to great lengths to keep paying their loans. Many highly indebted farmers are facing negative cash flow and lower milk prices will only accentuate the problem.

The graph below shows the actual milk price payouts for the largest New Zealand dairy companies for the last five seasons, along with the forecast payout figure for the current season.

Milk price payouts for the largest New Zealand dairy companies – $ per kgMS

Dairy Payout NZ Firms

Source: Monthly Economic Review May 2015 – NZ Parliamentary Review

World Dairy Prices and New Zealand Droughts

WDP NZ droughtsHere is an image from the recent Westpac Economic Overview. As New Zealand is the world’s largest exporter of dairy products any disruption in the supply from New Zealand can impact on the global dairy prices. The last few droughts saw world dairy prices increase considerably as milk supply from the rest of the world was unable to adjust to market conditions. However supply capacity in the US and the EU has increased and with Russia’s import ban there is a much greater supply on the global market. Nevertheless, this doesn’t disprove the possibility that prices rise when supply falls short. The overall signs are that supply and demand are coming into line as Chinese buyers run down stocks. The drought in New Zealand will further boost prices from current low levels. Westpac expect the milk price to rise to $6.40/kg for the next season. Below is a useful video clip from Dominick Stephens – Chief Economist at Westpac – about the primary sector in New Zealand. It is very good on fundamentals – supply and demand.

Aussie v NZ – Iron Ore v Dairy

Both Australia and New Zealand face the worrying prospect of the impact of lower commodity prices. For Australia it is iron ore whilst across the Tasman it is the dairy industry. So how will each economy be affected by this?

NZ Dairy

The whole milk price has fallen from:

US$4999/tonne on 18th February 2014 to US$2270/tonne on the 16th December – a 54.6% decrease.

This downturn in prices will have a significant impact on the rural economy of NZ. The lower prices will not only reduce dairy farmers’ incomes, but there will be a knock on effect in other parts of the local economies as farmers and contractors will be less inclined to spend or invest in anything but necessities.

Short-term credit facilities will be able to help farmers with their costs but permanent lower returns would cause a rethink regarding production capacity and economies of scale.

Aussie Iron Ore

For Australian the iron ore prices have fallen from US$136 a tonne December 2013 to US$68 a tonne December 2014. This will have a major effect on their economy for the following reasons:

Iron ore represents 25.5% of exports from Australia
Iron ore producers are significant tax payers to the Australian Government. The drop in prices = AUS$18 billion loss of revenue
Lower prices mean less investment in capital – this sector has been a major part of the Aussie economy over the last few years

Who will take the biggest hit?

It is expected that Aussie will take the biggest hit mainly because of the tax revenue lost through lower iron ore prices. In NZ dairy farmers are not big tax payers and the NZ government are not expecting a big fall in tax revenue. Furthermore overall economic activity is largely unaffected as milk production is likely to continue in the short-term. However the falling unemployment rate in NZ and a rising level in its Trans Tasman neighbours suggests NZ is in a much better state to weather the storm. Other indicators below favour NZ. These include GDP growth and consumer confidence as well as having the ammunition of being able to cut interest rates further, a situation that Australia might find difficult.

Aus v NZ Commod

 

 

 

 

 

 

 

 

Source: NZ Herald December 20, 2014

Infographic – New Zealand Dairy Exports – 1992-2012

Here is a cool graphic that I picked up from the Government Economics Network (GEN). It has been produced by Statistics NZ and shows New Zealand’s changing country-composition for dairy exports over the last 20 years. The size of circles is proportionate to dairy exports to that country as a percentage of total dairy exports; the white circle in 1992 and the black circle in 2012. It emphasizes the massive drop in relative importance of the UK, and increase of China. You can find other graphics from Statistics NZ by clicking the link below:

Statistics New Zealand – Inforgraphics

NZ Dairy 1992-2012

Lower dairy prices will put drag on NZ economy

NZ Exports 2013With the dairy industry accounting for approximately 25% of NZ’s export market, a reduction of dairy prices by 46% from last year will definitely slow growth over the next year. Lower prices will also mean a deterioration in the terms of trade and a bigger current account deficit.

The BNZ have identified 3 factors that have influenced the global dairy market:

1. Ongoing very strong growth in global milk supply – lagged response to previous high prices, favourable weather, and low grain prices. Low grain prices mean that feed for farmers is cheaper and relative to milk prices makes it worthwhile to produce even more milk;
2. Disruption caused by the Russian trade ban on dairy products from the EU, US among others;
3. Question marks around Chinese demand amid reports of high inventory levels.

The graph below suggests that there will be $5.5bn less revenue coming into the economy – 2.3% GDP.

NZ Dairy Revenue 2014

Triple whammy for New Zealand Dairy Farmers?

New Zealand Dairy farmers are bracing themselves for some tough times ahead with 3 pieces of bad news. There are as follows:

1. Last week saw a 8.9% drop in the Global Dairy Trade (see graph below) which has meant that prices have dropped 35% since February – their lowest level since December 2012. Farmers can expect revised payout forecasts of less than $6 a kilogram of milksolids to follow the 35% fall.To give you an idea of how the lower payout will influence the rural economy – a forecast of a $6.25/kilogram of milksolids would take $3 billion out of dairy incomes – Con Williams ANZ Bank.

2. The high NZ$ is still hindering farmers revenue. With the latest drop in the GDT you would expect some sort of relief to farmers with a fall in the value of the NZ$. However the NZ$ only fell from US$0.88 to US$0.87

3. On Thursday RBNZ Governor is making an announcement on the OCR (Official Cash Rate) and famers are hoping that Graeme Wheeler will not hike interest rates as originally indicated in the June Monetary Policy Statement. Inflation has been somewhat benign but interest rates seem to be influenced more by Auckland house prices and the Christchurch rebuild.

GDT - 2014

Why have prices dropped?

There has been a world supply shock especially in Europe. It is estimated that if Europe’s 27 milk-producing countries maintained their current volume increase this could knock New Zealand off the perch of top dairy exporter. Below are some supply figures which show that approximately 16bn litres will be added to the market:

New Zealand – 2013 production up 2bn litres
Europe – with the removal of milk quotas, European milk production is forecast to be 7.5bn litres more
China – Milk production is said to have recovered and could be up 15% this year which adds 4.5bn litres to the market
USA – higher milk prices and lower feeds costs are said to add another 2bn litres this year.

Therefore big surpluses accompanied by weaker demand would hit NZ dairy export earning considerably.
Source: The NZ Farmers Weekly July 21, 2014

NZ Lamb and Dairy Outlook 2013/14

Bayleys Real Estate Country magazine included an article on the outlook for New Zealand’s agricultural sector which was written by NZX Agrifax.

Dairy Sector

NZ DairyWith regard to the Dairy Industry the effect of the drought in the latter part of 2012/13 season slowed production. This was also the case with other countries as the domestic market seems to have absorbed their output. So this lack of supply combined with a steady growth on demand has resulted in high dairy prices for a sustained period of time. With prices remaining high there is now the chance that milk production will increase especially in the US where their elasticity of supply of milk is fairly elastic. New Zealand is forecast to have a good milk production season as pastures have recovered from the drought. See graph below for forecasted milk prices.


Lamb Sector

NZ DairyThe recovery in lamb prices has mainly been down to the increasing demand from the Chinese market. During the first 10 months of the season, over 80,000 tonnes of lamb was exported there which accounts for 29% of NZ’s total lamb exports. That’s up from 44,000 tonnes over the same period last year. There has been in particular an increase in demand for higher value items such as legs and shoulders. This led to an increase in price as supplies to traditional markets was now reduced.