Tag Archives: Primary Sector

New Zealand is Milking It

Got this graph from the BNZ which shows the potential revenue of the Dairy industry this year. Like last year there have been concerns over the lack rainfall especially in the North Island and how it is impacting on milk volumes. However the sector is benefiting from the high export prices – in January there were annual increases of 56% in the value of milk powder, butter, and cheese exports and 37% for casein. Combined with an expected 9% increase in milk production this could lead to a $5.6bn increase in revenue from last year which equates to 2.6% of GDP.

Milk Rev NZ

Furthermore with a significant amount of milk products going to China this increase in prices has seen China become New Zealand’s number one trading partner with regard to revenue. This has traditionally been NZ’s neighbours Australia. Notice the increase in importance of China since the signing of the free trade deal.

NZ Share of trade by country

China’s Policies and their impact on the Global Economy

Over the last decade the policies implemented by the Chinese authorities have had an unrivaled short-term impact on the global economy. These effects include: very high mineral and oil prices; significant amounts of foreign reserves; deals with countries in Africa to secure resources; pollution levels that are unparalleled by any time in history.
China’s Policies

Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. For instance the Chinese authorities have artificially created growth – as well as building ghost cities –
in that a seven year old bridge (built to last for 40 years) was blown up and rebuilt. This generates jobs for construction industry, including contractors for different aspects of the bridge.
Market for Global Commodities

Impact on the Global Economy
As an economy of 1.35bn people (approximately 20% of world population) rapidly industrialises and urbanises it requires a vast amounts of food and non-food commodities. The global market for bulk commodities shows the enormous consumption levels of China and ultimately this led to global commodity prices to treble. (See table above). Another impact is the size of China’s foreign reserve assets and their relationship with the value of China’s currency – the renminbi. China has abandoned its pre-2005 practice of fixing the renminbi against the US dollar, but now uses a flexible peg against where its value is allowed to change. Although there has been some appreciation of the renminbi it is still seen as undervalued against the major currencies – Euro, Yen and US dollar.

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The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

The Journey of the Indian Onion – A diseconomies of scale story

No doubt you have come across the movie documentary “Black Gold” which looks at the global coffee industry focusing on the plight of coffee farmers in Southern Ethiopia. The Indian onion market has similar characteristics and it is the farmers that lose out the most. Here are some of the issues that they have encountered:

* Higher rural wages have pushed up farmer’s costs
* Farms are small and therefore lack potential economies of scale
* The supply chain involves 5 middlemen who take their cut on the way through
* The onion is loaded, sorted or repacked at least 4 times
* Retail prices are double what farmers get
* Poor quality onions get dumped as there is no modern food-processing industry in India where they could be put to use.
* Little stock of onions is held in reserve so prices can vary greatly

Foreign food companies, including Walmart, Carrefour and Tesco, have been keen to make inroads into the Indian market. This would undoubtedly reduce the number of middlemen who take their cut on the way through and the development of modern storage facilites would assist in stabilising onion prices.

Economies Diseconomies

Aussies still looking at strong export sector

The graph from National Australia Bank below shows the components of Australian GDP from 2007-2013 with forecasts for 2014 and 2015. GDP consists of C+I+G+(X-M) so from the graph you can see that:

C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports

Note:
* There is anticipated an increase in non-mining investment with investment in the mining sector slowing down as completion nears.
* An increase in private consumption as well as net exports holding its own.
* The relationship between business investment and the increase in net exports
* Pace of growth is below the trend over 2014-2015 which means that that population growth will be greater than the number of new jobs created.

Aussie Resource

New Zealand’s Trade with China

Here are some charts and commentary from the BNZ which are particularly useful for New Zealand Trade and the potential growth of the agricultural sector.
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NZ’s most significant exports to China are dairy products (39% of total), forestry (24%), tourism (12%), and meat (10%). With the possible exception of forestry, all of these sectors stand to benefit from ongoing urbanisation in China, the continued rise of the middle class, and rising household income and consumption levels. Not only is Chinese demand expected to strengthen further, but domestic production in many cases will fall well short of consumption. Exports from NZ will have a big opportunity in helping make up the shortfall.

NZ exports to China


Chinese protein demand soaring

There is a strong and well proven link between rising incomes and changes in diet (see chart below). The gradual westernisation of the Chinese diet has seen per- capita consumption of protein soar over the past decade or so. In contrast, per capita consumption of traditional foods such as rice is in decline.

China Protein Cons

Urbanisation has further stepped up Chinese demand for protein. Compared with the less diversified diets of rural communities, city dwellers have a varied diet richer in animal proteins and fats, and characterised by higher consumption of meat, poultry, milk and other dairy products.

Data from the Chinese National Bureau of Statistics shows per capita consumption of dairy products (excluding butter) has climbed from 7kg/person in 1992 to 20kg/person in 2012. Meat consumption has risen from 13kg/person to 23kg/person over the same period.
Per capita protein consumption for urban households is roughly three times that of rural households.

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.

CAP reforms unlikely to benefit New Zealand farmers.

A move by the European Union to slash subsidies to farmers isn’t as big a deal as it sounds. The EU has announced cut to the subsidies it pays industrial scale farmers of up to 30% – this is part of the Common Agricultural Policy (CAP) which costs the EU tax payers 50bn a year and is 40% of the whole EU budget. This will be of little benefit to NZ farmers as they will still be denied access through tariffs and quotas on sheep, butter, cheese etc.

Objectives of CAP

At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector has been known as the common agricultural policy – CAP. The CAP was established under Article Thirty Nine of the Treaty of Rome, and its objectives – the justification for the CAP – are as follows:

1. Raise and maintain farm incomes, through the establishment of high prices for food. Such prices are often in excess of the free market equilibrium. This necessarily means support buying of surpluses and raising tariffs on cheaper imported food to give domestic preference.
2. To reduce the wide flutuations that often occur in the price of agriculutural products due to uncertain supplies.
3. To increase the mobility of resources in farming and to increase the efficiency of all units. To reduce the number of farms and farmers especially in monoculturalistic agriculture.
4. To stimulate increased production to achieve European self sufficiency to satisfy the consumption of food from our own resources.
5. To protect consumers from violent price changes and to guarantee a wide choice in the shop, without shortages.

CAP Intervention Price

An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:

1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
2. At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
3. In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
4. There is a contraction in domestic consumption to 0Qd1
Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.

CAP Int Price
Figure 1: The effect of an intervention price on the income of EU farmers.

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 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.

If only the Greeks could be like the Dutch at growing tomatoes.

Time magazine ran an interesting article on the tomato market in the Holland and Greece. The Greeks produces twice as many tomatoes than the Dutch but very little of it is sold in export markets. This is a concern in that it is a missed opportunity for the Greeks to earn income. What is more ironic is the fact that in the summer imports of tomatoes come in from Holland because the Greek farmers are still struggling to grow a crop during the hottest time of the year – Holland employs high-tech green houses and is able to produce significantly more during the summer months than Greece.
Tomato Production

However, Greece has the potential to produce tomatoes for domestic consumption as well as for export but only has two harvests a year and is at the mercy of the elements – poor weather = poor harvest. The Dutch in contrast have temperature controlled greenhouses helping to create ideal growing conditions and they can produce 70kg of tomatoes in a square metre of his greenhouse whilst the Mediterranean grower gets approximately 7kg. They can also produce all year round.

Single Currency and Productivity

With the introduction of the euro in 2002 Greece could no longer devalue its currency to control the price of its products. With a weaker currency their exports were much more competitive but this had the effect of making the Dutch work even harder to achieve more efficiency and greater economies of scale. Therefore the only way that the Greeks can now compete is by cutting costs and embracing technology.

Tomato ExportsBut it is not just the tomato market that has been hard hit. Greece’s agricultural sector’s productivity levels are 44% below the European average and labour costs have increased by approximately 90% and this is in contrast to Germany where unions agreed to a 3% rise. What is more concerning is that the acreage given over to growing tomatoes in Greece is 10 times that in Holland but they hardly export any of them. The Dutch have seen their exports increase by 30% since 2005. Some economists have laid the blame on the oligopoly market structure that controls the distribution. These middlemen pay farmers low prices and take a big mark-up on tomatoes even as they have failed to put in place a more efficient distribution system, including for exports.

The Greeks could become a thriving exporter of tomatoes once again but will need to embrace the Dutch technology and make use of its natural conditions – sunshine.

The two speed primary economy in New Zealand – Dairy and Sheep

Dairy2013 has seen the primary sector of New Zealand continuing at a dual speed. On the one hand dairy and beef prices are up, but sheep and wools prices are making it a real struggle for those farmers. The weather hasn’t helped matters and the North Island is currently very dry but for those in the South Island there has been enough moisture in the soil to maintain reasonable grass growth which ultimately keeps farmers happy.

Dairy Farmers have coped well with the mixed weather and the discovery of DCD in milk. Milk powder has increased in price by 9.8%. With the REINZ farm price index showed farm prices fell 14% from January to August 2012 Fonterra had initially forecast a substantially lower payout for the new season. However interest in farm conversions is still strong.

Sheep Farmers haven’t done as well. World lamb prices have been downward mainly because of the increase in lamb exports from Australia – increase in supply. Like New Zealand, Australia is predominately pasture-based and less affected by higher feed costs. Furthermore favourable seasonal conditions in Australia has resulted in extra stocking and it is estimated that lamb production will increase by 15% in 2013.