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Posts Tagged ‘Primary Sector’

CAP reforms unlikely to benefit New Zealand farmers.

July 1, 2013 Leave a comment

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.

March 23, 2013 2 comments

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

February 19, 2013 Leave a comment

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.

Categories: Growth Tags: ,

New Zealand’s White Gold

November 13, 2012 Leave a comment

Fonterra got a mention in the Business section of The Economist recently. Some significant facts about the Dairy industry in New Zealand and the co-operative Fonterra:

* Dairy produces 25% of export revenue in NZ
* It makes up 33% of the world dairy industry
* Fonterra makes up 90% of the dairy industry in NZ
* Fonterra’s annual revenue = NZ$20 billion
* Fonterra opeates in 100 countries and has 10,500 farmer owners.
* 20% of New Zealand Dairy products go to China

Recently Fonterra had made it clear that it is prepared to let non-farmer investors buy in for the first time – they intend to raise NZ$500m with the issue. Why are they looking to non-farmer investor? Although they have made shrewd investments in Asia and Latin America, in more developed markets health worries and higher prices have cut demand. Countries like China are a threat to the Fonterra’s standing on world markets. Furthermore with milk prices down 20% from last year farmers are concerned that non-farming ownership will cut their return further and that there will be a move away from a farmer-owned co-operative.

Productive debt – Agriculture not Housing

October 29, 2012 Leave a comment

Brian Gaynor in the Saturday NZ Herald reinforced the belief that borrowing in New Zealand must be in an area that is going to generate growth. He presented the lending figures over the last 10 years for Agriculture, Business and Individuals and made the following points:

1. Export revenue from agriculture has increased from $7.3bn in 2001/02 to $16.7bn 2011/12.
2. Agricultural debt has made a positive contribution to the economy
3. There are very limited benefits of $102.7bn of residential mortgage debt over the past ten years.
4. Additional individual borrowings have been mainly used to push up prices of existing houses, rather than building new homes
5. Additional debt has to be shifted away from existing housing and into the productive sector – agriculture and house construction
6. The government needs to develop policies with regard to overseas ownership of land.

New Zealand has the potential to be the bread basket of the Asia Pacific region and the financial returns to the economy are significant. However there has to be an increase in investment and lending to the agricultural sector if it is to be successful.

New Zealand agricultural sector – lowest subsidies amongst OECD

October 6, 2012 Leave a comment

Having just taught the Developing Economies topic at the UNITEC A2 revision course I couldn’t help noticing this graph that was in The Economist last week. This was extremely useful when you look at how developing nations are locked out of the trading system by the subsidies given to those developed nations agricultural sectors. For years the World Bank and the IMF have forced developing nations to stop subsidising their agricultural sector.

Government support for agriculture in the mostly rich countries of the OECD amounted to $252 billion in 2011, or 19% of total farm receipts. Although there is a move away from support linked directly to production, it is still about half of the total. The general trend is downwards: compared with the second half of the 1990s subsidies fell in all countries. But levels of support vary widely. In Norway, Switzerland and Japan, more than half of gross farm receipts in 2009-11 came from support policies; for producers in Australia, Chile and New Zealand, it was less than 5%. Commodity prices will stay high for some time, suggests the OECD, so markets will provide the farm income that many governments have tried to prop up.

High NZ$ expected to reduce lamb & beef revenues by 11% for 2012-2013 season

September 26, 2012 Leave a comment

The New Zealand Farmers Weekly had an interesting piece on the future prospects of farm revenues over the next year. The outlook is not looking rosy mainly because of the high NZ dollar. A NZ$ value of US$0.90 for a full season would slash farm profit to $46,400 according to the Beef & Lamb NZ Economic Service. However the crucial time for the exchange rate is when the vast majority of produce is actually exported namely between November and June.

With regard to destinations for NZ beef they are the following:

– 50% of beef goes to North America
– 9% Japan
– 8% South Korea
– 6% Taiwan

Below are some of the figures that are estimated from the Beef & Lamb NZ Economic Service

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