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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.

Fruit fly could knock 8% off NZ exports.

February 26, 2015 Leave a comment

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

Categories: Trade Tags: ,

Aussie v NZ – Iron Ore v Dairy

January 6, 2015 1 comment

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

October 24, 2014 Leave a comment

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?

July 22, 2014 Leave a comment

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

May 29, 2014 Leave a comment

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.

Categories: Trade Tags: ,

Changing of the guard on world exports of NZ sheep

April 7, 2014 Leave a comment

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

Categories: Growth, Trade Tags: ,

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

April 1, 2014 Leave a comment

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

New Zealand is Milking It

March 4, 2014 Leave a comment

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

Categories: Growth, Trade Tags: ,

China’s Policies and their impact on the Global Economy

January 23, 2014 Leave a comment

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

January 6, 2014 Leave a comment

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

December 18, 2013 1 comment

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

Categories: Growth, Trade Tags: , ,

Milk Production vs Profit vs Risk

December 11, 2013 Leave a comment

Here is graph from a presentation at the University of Waikato Teachers Day. It shows the milk volume, the profit, and the risk involved. Notice the minimum risk and maximum profit points as well as a social optimum

Milk Production

New Zealand’s Trade with China

November 11, 2013 Leave a comment

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.

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