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Posts Tagged ‘Primary Sector’

China stops subsidising farmers

August 2, 2017 Leave a comment

In 2000 the Chinese government introduced price supports for farmers with the floors raised annually to stimulate production even when global prices fell. There were three reasons for price supports:

  1. ensure production of key commodities
  2. provide a degree of food security
  3. improve the well-being of farmers

China starts to abolish minimum prices

The last three years has seen the Chinese authorities start to abolish minimum prices for the following commodities – cotton, soybeans, corn and sugar. Without the minimum price the supply on the domestic market has dropped – grain production fell for the first time in 13 years. Remember with the minimum price being above the equilibrium it encourages producers to supply more but the demand will drop at the higher price.

When the minimum price was in operation the Chinese authorities had been stockpiling significant amounts of food and have been able to compensate for the reduction in supply from the farming community. However once these stockpiles have been diminished the only other alternative will be to import food which will be a positive for farmers from Brazil, US and Thailand. This might be sooner than later as the Chinese government is facing capacity challenges as warehouses and silos are overflowing but still China is not able to meet its domestic needs. According to the US Department of Agriculture, China is sitting on 54% of the world’s cotton stocks, 45% of the world’s corn and 22% of the world’s sugar reserves, but many analysts think that a lot of this stock is starting to perish.

Self-sufficiency in feeding the Chinese population still remains a priority for Beijing but after 2014 authorities have stated that they need to make rational use of the global agricultural market and import various food products. However China still spends a lot on supporting its agricultural sector:

2016 – $246.9 billion = 2.2% of GDP. Four times the average of OECD countries.

Although money is still spent on price supports a growing share is going into ways to improve productivity with R&D etc. China is in a position that they could revert back to the price supports if they feel the pain of reform is too great, but analysts think that they will be more accepting of global supply.

Source: China Cut Agricultural Subsidies and American Farmers Have a Lot to Gain


EU example

This policy of subsidising farmers is not unlike that of the European Union – see previous blog post ‘CAP reforms unlikely to benefit New Zealand farmers.’ – with the introduction of the Common Agricultural Policy (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 fluctuations that often occur in the price of agricultural 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:

CAP Int Price1. 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.


 

 

 

European Farmers expanding output

April 3, 2016 Leave a comment

Living in a rural area you tend to get a lot of free newspapers with a agricultural bent. Skimming the pages of NZ Farmer (March 28 2016) I came across a very informative article by Keith Woodford about European farmers expanding their value-add dairy production and its impact on New Zealand.

Up toCAP Int Price April 2015 European farmers were protected by production quotas and the Common Agricultural Policy (CAP) which provided large production subsidies which led to over-production. 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.

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 opposite. 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.

Production quotas in Europe were eliminated in April 2015 and from April to November European milk production increased by 4% with a 6% increase in December from the previous year. However, as with the reduction in subsidies in New Zealand in 1984, they will be a lot of pain for European farmers as their ‘safety net’ has now been taken away.

The Europeans are producing as much cheese, butter, infant formula and cream as they can, with cheese being more important than liquid milk.  The Europeans are also selling increasing quantities of UHT and infant formula to China.  With both products, they are out-marketing New Zealand.

Chinese infant formula statistics for 2015 show European countries with 78 per cent market share of imported product, compared to New Zealand at 8 per cent.

#1 – Holland – 34%

#2 – Ireland – 15%

The Europeans would like to decrease their production skim milk powder (SMP), but with butter and cream being profitable, they keep producing the SMP as a by-product.   However, the European production of whole milk powder (WMP) has been drifting down in response to low prices.

The European producers have protection from some of the Global Dairy Auction process through their reliance on value-add products.  Also, apart from Ireland, all European dairy systems are 12-month-a-year production systems.  These 12 month production systems can lead to higher production costs, but they also lead to lower processing costs through better utilisation of processing infrastructure. This then feeds back into higher farm-gate prices.

Buffer Stocks

The Europeans have been putting limited quantities of skim milk powder (SMP) into what are called intervention stocks. At the end of January 2016, there were about 50,000 tonnes of SMP in a public intervention store. The intervention quantities could reach a new limit of 218,000 tonnes over coming months. The main benefit of the SMP intervention is a smoothing of commodity prices. So if the price is too high stocks are released into the market and when they are too low authorities buy stock in order to reduce supply and therefore increase the price to a specific level.

European Farmers and the future

There is a good chance that in the longer term European milk production will further increase, as some farms become bigger and fewer in number.  Poland has become one of the largest milk producers in the EU become a major milk producer with its flat terrain, very fertile soil, low feed and labour costs. Furthermore compared to other EU members it doesn’t have the pressure on land for residential use. Since joining the EU in 2004, the informal dairy sector is also still considerable in Poland, but the 2015 quota lift has seen these farms absorbed into the formal sector which in turn are expected to expand quickly without quota impediments.

Conclusion

For this longer term, the Europeans are not going to try and compete with New Zealand with WMP.  Europeans regard WMP as an outlet for product with no other immediate use. And they know that, in low-priced volatile commodity markets for long-life products, they lack competitive advantage relative to New Zealand. 

Global Dairy Trade – how it works?

March 21, 2016 Leave a comment

While milk production in New Zealand is lower this summer the global milk supply over the last year is strong with a 2.2% growth in Europe and 1.2% in the USA. This strong supply growth and the reduction in demand from China has led to downward pressure on prices.

New Zealand Federated Farmers Dairy chairman Andrew Hoggard said the disappointingly weak GDT result would put more pressure on Fonterra’s “poor” forecast payout of $4.60 a kilogram of milksolids.

 “With another poor result I expect various people might try to jump on the bandwagon and try to the lay the blame somewhere, this is simply economics 101, supply is too high and demand is weak. … If we want to look at anything to blame, then the answer lies offshore with subsidised production in other countries hiding economic realities from farmers offshore who keep increasing production despite the market telling them the opposite.”

These prices are generated by the GlobalDairyTrade which is an auction platform for internationally traded commodity dairy products. How does it work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

Bidders cannot join a trading event part way through: they must participate in round 1 and can only maintain or decrease their total bid quantities from that point. Products can be purchased over different delivery time periods, known as contract periods.

Click below for more information.

GlobalDairyTrade

Categories: Growth Tags: ,

New Zealand milksolids production

November 29, 2015 Leave a comment

Below is a useful graphic from the BNZ and some commentary on the New Zealand milk production forecasts.

Looking ahead, we continue to anticipate international price improvement into 2016 as a strong El Nino weather pattern dents NZ production and pushes up the global price of wheat. The BNZ forecast a 6% fall in NZ milk production for the 2015/16. This anticipated weather effect is expected to amplify a decline in NZ production already in train via fewer cows and low milk prices discouraging supplementary feeding. A large hit to NZ production could see prices rise swiftly. But, with EU production quotas now removed, more EU product would be expected to prevent prices from swinging as sharply higher as we have seen in previous years when NZ production was restricted.

NZ Milk Production

Categories: Uncategorized Tags: ,

Removal of subsidies and tariffs to boost NZ farm incomes

August 6, 2015 1 comment

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

Categories: Trade Tags: , ,

New Zealand – Resource Curse in reverse with falling dairy prices

July 7, 2015 Leave a comment

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

March 3, 2015 Leave a comment

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.

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