Tag Archives: Primary Sector

Removal of subsidies and tariffs to boost NZ farm incomes

With most of the attention has been focused on the TPP the 161 countries of the World Trade Organisation had set a deadline of the end of July to agree on a “work programme” to substantially complete the Doha round of global trade talks later this year.

Launched in 2001, the Doha round was to pick up where the Uruguay round of global trade liberalisation left off six years earlier. The deadlock in negotiations is ultimately down to a belief that the EU and the US and the large developing countries of China, Brazil and India have each given up more than its fair share in liberalising agricultural trade and the other side should do more.

Subsidies are still a problem.
Although subsidies have been used sparingly by governments in the past few years as international commodity prices rode high, they were used by the US and the EU during the depths of the global financial crisis in 2009 when prices fell sharply before rebounding. China, in its most recent reporting to the WTO, also indicated it had increased trade-distorting agricultural subsidies to a record $18 billion in 2010.

There is still no rule in the WTO that export subsidies are illegal. The main objective is reforming people’s legal obligations so you have much fairer and open agricultural trading regime. Frustrated with the lack of progress at the WTO many countries have in recent years have looked to bilateral or regional trade talks for gains from trade. These deals have tended to bring about bigger tariff cuts in key trading partners’ markets more quickly than had they waited for consensus to be reached among the 161 countries of the WTO. However as far as the Doha Round is concerned it has broken the momentum of negotiations even though it does offer a more inclusive liberalisation of international trade.

The effect of an intervention price on the income of EU farmers is shown on the graph below. The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.

Throughout most of its four decades of existence, the Common Agricultural Policy (CAP) has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU.

CAP Int Price

What is the WTO?
The World Trade Organisation is the rule-maker for trade between nations and the policeman for those rules. Comprising 161 countries, the Geneva-based body is the successor to the General Agreement on Trade and Tariffs (GATT) set up in the aftermath of World War II with the purpose of limiting the sorts of trade barriers which prolonged the Depression of the 1930s.

The GATT was replaced by the WTO in the mid-1990s after the Uruguay round of global trade reforms. A Government report in 2002 estimated the Uruguay round would have added $9 billion to NZ farmers’ incomes in its first decade, mainly through improved access for exports of lamb, dairy and beef to the European Union and the United States.

The WTO was set up in 1995 to finish off the work of the Uruguay round in eliminating trade barriers although the Doha round, through which this was to be achieved, was not launched until 2001 and has made little in the way of breakthroughs.
As the global trading system’s policeman the WTO also adjudicates on trade disputes and has been used by NZ to get access to the Australian market for apples, South Korea for beef and Canada for dairy products.

Source: Farmers Weekly in New Zealand – 30th July 2015

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.

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.

Fruit fly could knock 8% off NZ exports.

This is the fourth time Queensland fruit fly has been found in New Zealand since 2012. The Queensland fruit fly is one of the most worrying as it infests more than 100 species of fruit and vegetables – including commercial crops such as avocado, citrus, feijoa, grape, peppers, persimmon, pip fruit, and stone fruit. If establish, it would have serious consequences for New Zealand’s horticultural industry which accounts for around 7% to 8% of NZ merchandise exports. So, while a risk seemingly as small as the fruit fly itself, it needs to be taken seriously for the impacts it could potentially have, as a very worst case scenario.

NZ Trade June 2014

Source: BNZ Markets Outlook

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

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

Not so ‘Free’ Trade

nz dairyOn 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognise China as a “market economy”. But has there been any benefit to the New Zealand’s dairy industry?

Since 2012 New Zealand dairy farmers have benefitted little from the reduced tariffs negotiated in the New Zealand – China free-trade agreement. Special protection, allowed under the 2008 deal, has meant that China can now increase tariffs to pre-agreement levels for the rest of 2014. This is designed to protect Chinese farmers from being exposed to cheaper NZ dairy products and the higher tariff is implemented when diary products from NZ exceed levels agreed in the negotiations. However the higher tariff has been introduced every year since the deal was signed in 2008. This year the higher tariff was activated when 127,309 tonnes of NZ milk powder was exported into China. As with any free trade agreement there is no sudden removal of tariffs and quotas from the participant countries as there is usually a weaning off process so that industry can adjust to an environment with no trade restrictions. Under the agreement between China and NZ the tariff on milk powder was scheduled to fall from 5% of export value to 4.2% this year. However by exceeding the allowed volume of milk powder in January the tariff will rise to 10% for the rest of the year.

Cost to NZ Dairy Farmers
It is difficult to estimate the cost to NZ farmers as either some of the Chinese importers will pass on the cost to the Chinese consumers or NZ exporters will pay for it themselves absorbing the tariff as part of their business costs. An approximate value of the lost revenue for NZ dairy farmers is in the ‘tens of millions’ of dollars every year since 2008. The issue for NZ farmers is the agreed volume of milk powder before and after the 2008 agreement. Since 2008 the demand for NZ exports has increased dramatically as increased food safety regulations has seen some of the smaller Chinese producers unable to compete and this has left an opening in the market. Also the local Chinese consumer has lost faith in the Chinese producer with the contamination of milk and milk products which caused the deaths of some infants. Its importance is shown by the fact that in 2013 milk powder accounted for $4 billion of the $10 billion of total exports to China from NZ.

Changing of the guard on world exports of NZ sheep

How things change for New Zealand lamb farmers. In 1961 86% of lamb produce went to the UK but by 2013 that figure was only 18%. The market has developed since that day and with cheaper distribution costs and more demand from South East Asia lamb farmers have looked to closer markets. Some interesting facts:

* NZ exports sheep to 120 markets
* The regulatory issues from China was not quality but paperwork
* 140,000 tonnes of sheep meat sent from NZ this year – only 3.5% of the total sheep market
* China took all the mutton from NZ farmers this season

NZ Sheep Market 1960-2013

Source: The NZ Farmers Weekly

New Zealand: Reliance on a single product and a single market?

I’ve written a lot on this blog about the resource curse and how it is an economic paradox. It refers to the fact that once countries start to export a natural resource like oil their exchange rate appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the natural resource industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports.

For New Zealand there is a similar scenario with a reliance on the dairy industry and the Chinese market for trade.

The BNZ Economy Watch reported that dairy contributed the most (63 percent) to the total exports to China, valued at $774 million, in November 2013. This is the highest value of dairy exports to China for any month. Total dairy exports were valued at $1.7 billion – also the highest for any month.

China is now our top export destination on an annual basis, just under two years after it became our top annual imports partner in December 2011, industry and labour statistics manager Louise Holmes-Oliver said. In November 2013, goods exports were valued at $4.5 billion, up $647 million (17 percent) from November 2012. Exports to China hit record levels in October 2013 and November 2013. Exports to China were valued at $1.2 billion. In 2013 China accounted for 22% of NZ’s goods exports, 17% of NZ’s goods imports and 20% of total two-way goods trade.

NZ Mrechandise Trade

The last thing New Zealand wants to become is nothing more than a milk powder exporter to China. Economic diversification is as important as investment diversification from a risk profile perspective. The answer is not to kill off existing trading relationships or reduce dairy production but to look to other sectors to play a bigger part. Furthermore if the purchaser gets too dominant they can exploit monopsony power.

Share of NZ Primary Produce going to China
Share of NZ Prim X going to Chine