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Bill English’s groundhog decades

Written By: - Date published: 9:14 am, July 6th, 2015 - 45 comments
Categories: bill english, exports, farming, national, same old national - Tags: ,

Bill English talking about dairy and recession on Q&A yesterday..

“It’s about 5 to 6 per cent of the whole economy. It’s only 20 per cent of our exports. The other 80 per cent will be starting to enjoy the benefits of the lower exchange rate, and the lower exchange rate will help cushion the impact on dairy of their lower prices.”

Essentially he is just lying with numbers by not looking at the effects and spending his ‘thinking’ time inside his favourite delusions.

The NZ economy isn’t one that produces most of its own goods. So we import them and a pile of services from offshore. We pay for them mostly by selling goods offshore. The rest of the economy runs on the income from that plus some tourism and and a bit from inwards migration.

So last year dairy was about 25% of the goods that we sold by value. It was the only sector that grew by more than a few percent.

But more importantly over the last 5 years dairy exports accounted for something like half of our export profits when you count in the returns back to the farm gate and beyond.

Just how dramatic the impact of dairy has been on our economy can be seen in this graph from a speech given about dairy exports and their effect on our economy by the Reserve Bank governor Graeme Wheeler last year.

Dairy exports in NZ dollar terms to the end of 2013

Dairy exports in NZ dollar terms to the end of 2013

Most of the change in export returns for dairy derived directly or indirectly from a single set of products and a single market. Whole milk powder being sold into the burgeoning Chinese market in recent years. This was coupled with a shortage of production due to various weather events world wide gave this interesting price spike in 2013 and 2014.

5 years of Whole Milk Powder Prices to July 1st 2015

5 years of Whole Milk Powder Prices to July 1st 2015 from GlobalDairyTrade.info

Milk production systems worldwide were in the process of responding to the earlier demand with the USD3000-4000/MT prices from the 2011 and 2012 when this price signal hit in 2013. So as usual for markets they responded harder. Which is why the global price for this product is now down around the USD2000 level, and in my view likely to stay there.

Now the effects were ameliorated by the exchange rate, in part caused by the very success of selling dairy. That is what this chart from Wheeler shows.

ANZ Commodity price index in world and NZ price terms

So now the dairy price is going down, so is our currency. Which will both shows the horrendous effect of recent dairy prices on the rest of our economy (especially manufacturing) and will also limit some of the effect on the dairy payouts to farmers which are done in local currency.

Now none of this is news to anyone who has been watching this government pushing this particular commodity over the last 5 years.

National traditionally has this horrible habit of trying to run with economic prescriptions from the past. Chief of which is that they seem to adore leaving NZ exposed to the vagaries of prices in the international markets for barely processed commodities – mainly farm products and mining.

Bill English is one of the worst exponents of it. This was obvious pre-election back in 2008. As Rob Oram pointed out then, National on the two previous recessions in the early and late 1990s had cut spending drastically (and attempted to provide stimulus from tax cuts). It didn’t work on either of those occasions and didn’t after the 2008 election either. These following words could have been written about the fiscal strategy after the 2008.

And once again, National’s fiscal strategy was blown off course. In particular, government debt rose sharply rather than falling as promised.

These dynamics of the New Zealand economy are well known. They stem from the tiny size of the economy, its exposure to global commodity and financial markets and the government’s relatively large share of activity.

When we head into a recession, government revenues fall and spending on the likes of unemployment benefits rise. The reverse happens when we head into boom times but this positive impact is relatively smaller than the negative impact during recessions.

But he also pointed out the skimpy weakness of National’s economic thinking.

So, that is pretty much all we know so far about National economic policies. It’s a rerun of the party’s 1990 mantras about less tax, spending and regulation. That’s no surprise at one level. English, National’s chief policy developer and economic manager, learnt them from the master of budget micro-management, Bill Birch.

“I make no apologies for the simplicity of National’s plan,” English said in his conference speech last weekend. He ridiculed the current government for spending so much time and effort working with key industries on strategies, taskforces and other efforts to deal with the great complexities of the global economy and New Zealand’s search for greater engagement and greater wealth.

She’ll be right, he reckons. We’ll sell more food to Indians and Chinese at higher prices. That was the only vision of New Zealand’s economic future he offered delegates.

Indeed, it would be nice if life were so simple. But, as his own farming constituents would tell him, it’s not. At home, they face distinct physical limits to expanding volumes and financial limits from rising land, fertiliser and other costs. Abroad, they face growing competition from foreign farmers.

The primary sector has a great future, as do many other sectors. But rerunning their 1990s’ strategies won’t deliver that future. The world has already changed hugely since National was last in power and is changing even more radically before our very eyes.

Key told this columnist in an interview in March that National was working on a “stunning” set of economic policies. But judging by what it has delivered so far, National has spent the past nine years in opposition ignoring a changing world.

So in the last seven years we have had National and Bill English guiding us towards a “Brighter Future” of selling more commodity farming products. They did this while accumulating lots of government debt because they “stimulated” the economy with taxcuts that had no observable effect on economic performance, and cut government spending which had a detrimental effect. Talk about a groundhog day – this was the exactly the same economic stupidity that they performed in 1990s.

On the way through, they cut virtually all government spending on developing startup companies, removed almost all R&D tax incentives for larger companies to do it themselves, and pushed a small proportion back in as Callaghan grants to companies who could have done it themselves. They did the same for farming by decreasing the spending on R&D in that area.

Similarly over the last 7 years Trade and Industry has gone from being barely functional in helping NZ companies getting out into the world markets, to being useless for anyone outside of the dairy sector.

So when Bill English says

“I think he’s stretching it a wee bit here. I think there’s a bit more resilience than that in the economy,” he said.

“If you pick out all the bits that are going badly, you can paint a bad picture.

“Most of it’s actually going okay – migration numbers are up, households will be pleased to see interest rates dropping, our exporters are all seeing a big drop in the exchange rate.”

Sure there is “resilience”. But it is a survival resilience. Most parts of the export economy have nothing much to build with.

The survivors have long since moved to areas that are not dependent on exchange rates so a dropping exchange rate, while welcome for profit, does little for increasing their markets. They have no new ideas that are ready to push into the global market place because the government hasn’t been interested in those for the last 7 years and the available capital goes into “safe” investments like the negative sum game of buying property.

Certainly there is nothing to fill the vast hole that having whole milk powder at below USD 2000 / MT for several years is going knock inot our balance of trade. And by all indications, we look to be heading into a global recession with debt and nothing new to sell.

Bill English is clearly being the beltway idiot that he has always been. Perhaps he should try looking at what makes exports actually work…

45 comments on “Bill English’s groundhog decades ”

  1. dukeofurl 1

    “National traditionally has this horrible habit of trying to run with economic prescriptions from the past.”

    Aint that the truth. Remember when in opposition Key was pushing NZ to borrow more , much much more ( before the GFC) and another one of his bright ideas was we become a global financial hub ( before the GFC).

    His latest bright idea is …. well he doesnt have any yet that he can run up a flagpole

  2. ianmac 2

    As I am a financial illiterate I thank you Mr Prentice for putting it all in perspective. A bit scary though looking ahead. Don’t like the idea of jumping off cliffs.

    • lprent 2.1

      I think that a better analogy than jumping off a cliff (like Rodger Douglas and Ruth Richardson did) would be that Bill English is more like Muldoon.

      Sitting on their duffs sipping gin admiring the sunset, while trying to ignore the crashing waves eroding the cliff face, as it advances towards them and undercuts their dream.

      • mac1 2.1.1

        Lprent’s vision of Muldoon sitting on the cliff’s edge while the sea undercut his perch reminded me of Dun Aengus on Inishmore in the Aran Islands of Ireland. This cliff fort was undercut in this way over the millennia. Interestingly, googling Muldoon (originally O’Maolduin) gives the meaning of ‘the fortress’.

        The original builders of Dun Aonghasa no doubt were Muldoonist, too.

        Muldoonism in this sense is as old as history, yet we’ve not yet learned, whether the topic be climate change or the economy, banks, money lenders, or ruling elites.

      • Paul Campbell 2.1.2

        I think that’s a bit unfair – it makes Muldoon look naive – Muldoon was very aware of the very deep hole he had dug for us and had largely hidden from us up until then …. it was after all the real reason he called an early election …. the whole nuclear warship thing was just a smoke screen so as to get him re-elected before it all came crashing down

        I’m sure English equally understands the damage he’s done to NZ over the past decade

        • lprent

          Ah – that is a nice way of damning with a faint defense. 🙂

          What gets me is that we were doing a pretty good job of diversifying our economy through the noughts. It didn’t cost a lot compared to the big costs like superannuation or hidden subsidies for urban sprawl. But National shut the whole exercise down in 2008 in exactly the same stupid way that they did back in 1992.

          Instead they started to do crony grants and loans to companies who either didn’t need it, or who actually need to fall over (mediaworks for instance).

          They decried picking winners and started instead to pick the noisiest lobbyists. FFS that was why I was planning on leaving NZ back in 1984. We’re back there again?

  3. Rob 3

    They must have got together and decided to all sing the same song
    They forget that dairy has a much greater flow on tha being merely 5%

  4. wyndham 4

    Key, Joyce and English all on the same mantra over the weekend – – – “dairy is really only a small %age of export receipts. The economy is going really well, for instance tourism, wine, beef and sheep,kiwifruit etc.” The uniformity of their response was quite remarkable. These clowns must sit around and agree on a line of bulldust for public consumption.
    Recently I’ve been reminded of the Romans – – – decadence and circuses whilst their empire collapsed about them. It’s happening all around us; the vital news at the moment revolves around Highlanders vs Hurricanes or the upcoming game against Samoa. And the purveyors of alcohol thrive whilst society picks up the related anti-social costs.

    • Draco T Bastard 4.1

      These clowns must sit around and agree on a line of bulldust for public consumption.

      Of course they don’t. They pay Crosby/Textor large amounts to do that for them while they drink PM labelled wine.

    • b waghorn 4.2

      Re the Samoa test key was crowing about using a air force plane to get there and back .

  5. DH 5

    I wonder if a big part of the problem is we’ve all been indoctrinated to believe that markets react to ‘news’. Market reports are always offering a reason why a price rises or falls and once people accept those reasons we (generally) accept that reasons will move markets.

    Modern economic thinking seems corrupted by a logic bomb of self-fulfilling prophesy; we largely determine our economic future by what we say rather than what we do. English seems a subscriber to this kind of irrationality, he probably believes that if he, as Minister of Finance, agrees with the doomsayers then doom will naturally follow.

    On the other hand he could be just out of his depth. I find the man hard to read, only thing he’s consistent with is his uselessness.

    I don’t know enough about dairy to make any informed opinion on the true impact of low dairy prices but I will make a comment about general economics. From what I’ve read a serious issue is the re-use of land. High dairy prices drove mass land conversion to dairy which in turn drove up the price of that land considerably. Now it’s uneconomic to convert that land back to say sheep, cattle or forestry because the alternate uses of the land no longer support the cost of the land.

    Some time back I browsed a report on the big irrigation scheme in Canterbury. It gave the irrigation cost per hectare of the scheme and also noted the earnings per hectare of each type of farming activity. Dairy was the only one that was economic and that was when dairy prices were high, it may not be financially viable at all now. Does anyone know the latest numbers on that one?

  6. Adrian 6

    DH, I think a new conversion needs close to $5.50 kg/mf to break even.
    Some farmers last week were saying they had been told to expect “in the 3s ”
    And wine is down 30% in production, about $500 million earnings, yet the dipstick troika ( Key, Joyce, English ) say it’s going well.

    • lprent 6.1

      I don’t think that they will get to the “3s” because the conversion rate between NZ and USD will probably cushion the fall.

      Our currency has been significantly overvalued for some time. Part of that was the “quantitative easing” (inflation) that a number of major countries were doing. But a large part in NZ was the effect of the high pricing since 2009/10 of dairy.

      It hurt other exporters a lot. To the point that any manufacturer, forestry, or farmer who was reliant on a lower exchange rate has pretty well dropped out of business.

      But that same high exchange rate depressed the return in NZ dollars to dairy farmers and increased decreased their import costs for overseas produced equipment like tractors.

      Now the decreasing returns on dairy (along with overseas QA usage being reduced) will drop our currency exchange rate against USD. That will reduce the effects of the drop in return for dairy in US dollars, and decrease increase their imported costs.

      Nett effect is that they are more likely to windup with payouts in the lower 4s than the 3s., but also have less more costs. I suspect that it means that more recent conversion dairy farms are likely to avoid bankruptcy than you’d anticipate.

      But I’m pretty sure that there will be a lot of financial pain for many as the banks tighten up on the over-extended ones.

      [lprent: Edited the comment to get rid of an embarrassing maths mistake.
      I should not try to write text when writing code.
      I should not try to write text when writing code.
      … ]

      • wyndham 6.1.1

        “But that same high exchange rate depressed the return in NZ dollars to dairy farmers and increased their import costs for overseas produced equipment like tractors.”
        Lyn, excuse my economic ignorance but doesn’t a high exchange rate mean cheaper imports ? Or am I more confused than usual ? !

        • Lanthanide

          Yeah, Lynn’s got it backwards.

          Effectively the increase in the NZ $ meant the farmers weren’t all that better off for buying stuff that were wholly produced in NZ, but anything that was imported would be cheaper. Since NZ by-and-large imports everything, it made farmers wealthier on the world stage, and similarly everyone else who still held NZ $ wealthier as well.

        • lprent

          Yeah sorry. This is why I hate writing comments while I am coding.

          My brain is half offline holding the code I am working on. Bad idea to comment until I have some coffee and a bit of time away from the code.

          Ummm so maybe the “4s”, but with a higher capital cost component.

      • Ad 6.1.2

        Bill English would argue that the NZ$ fall is a predictable and natural market correction not only for the currency, and for Dairy.

        While I agree with your post, I’m not confident that an alternative government 2008-2015 would have tried to stop the dairy conversion boom.

        The state can still do one of two things about the dairy industry:

        1. Form a water regulator for all industrial water use – price and regulate it, like the Electricity Commission regulates electricity companies. This is the proxy for dairy conversion regulation.

        2. Review Fonterra’s monopoly in the longer term interests of New Zealand. One of the results of which is to commit to further reviews, pushing them every electoral term hard up the value-added chain.

        • lprent

          …I’m not confident that an alternative government 2008-2015 would have tried to stop the dairy conversion boom

          I wasn’t saying that. It would have happened regardless.

          Probably with a bit less of the cowboy act like the irrigation coup in Canterbury. I suspect that Labour would have had political problems dealing with the housing bubble in Auckland as well that sucks up available capital.

          However Labour et al would have been very unlikely to have dumped all of the R&D support, offshore marketing support or gutted the effectiveness of Trade & Industry and MFAT the way that National did in their first 6 months and afterwards.

          The drop in the dairy market would have happened. But we would have had a whole pile of more small companies out in the world market with way to keep building a “resilient” export sector.

          Instead we have a 7 year shortage of smaller export startups starting to grow across all sectors. We also have virtually nothing in the agricultural sector that gives us any competitive advantage.

          • Ad

            Fully agree with that point re smaller startups.

            Has been hilarious to se Joyce, Bridges and Key trumpeting oil exploration and mining as the great hope for a whole term … only to be led predictably into yet another commodity slump making international investment stop or pull out.

            They aren’t praising oil exploration quite so much now.

            And yet MBIE are quite happy to show super-fast growth in petroleum as a massive spike in higher paid-salaries.

            MBIE aren’t showing any nerve with bold policy to their Ministers – in fact other than merge a few useful Departments, MBIE have been a spectacular failure.

    • DH 6.2

      “DH, I think a new conversion needs close to $5.50 kg/mf to break even.”

      Thanks. I was thinking about the usual reaction to low prices in one sector; an oversupply of dairy has invariably led to a shortage of beef & lamb, wool etc. Some farmers just see out the cycles & stay with the same stock whereas others follow the higher yields.

      I only have a broad picture of farming but I don’t think I’m wrong in saying farmers were always pretty flexible and the cost of land for beef, sheep & dairy wasn’t that much different.

      Now they seem to driven down a one way street with land for dairying driven so high in price it can’t be converted back to beef or sheep without bankrupting the farmer.

    • b waghorn 6.3

      Ad to that somethings up with lamb prices ,usually they are starting to lift buy now but the schedule s still stubbornly flat lining.

  7. Keith 7

    There is another issue. Although Dairy makes up close to a third of our exports the value of these exports has been in steady decline, because the product sold is so basic. So even before plummeting milk powder prices there were clouds forming.

    To quote David Parker in 2014 but supported elsewhere by other commentators; “National has been saying since 2008 that its goal is to increase the ratio of exports to GDP to 40% by 2025. It’s now 2014 and exports have remained static as a percentage of GDP (at about 33% now and projected to drop to 30%). Exports have further narrowed towards increasing reliance on dairy exports – in particular milk powder sales to China”. Huge fail National. Worse I believe they may go as low as into the 20’s.

    Still, Bill is looking at selling land and houses to the highest bidder for “Social housing” or whatever the catch phrase is to keep the wolf from the door. Because quite simply and sadly he knows nothing else!

  8. Tracey 8

    This is what happens when you make a career bureaucrat Minister of Finance in the Shadow of a career currency trader

    • Bob 8.1

      “This is what happens when you make a career bureaucrat Minister of Finance”
      And the alternative is….Grant Robertson, a career bureaucrat

      • One Anonymous Bloke 8.1.1

        If Labour’s economic track record were as comparatively poor as Bill English’s (or National’s in general) you’d have a point, and it isn’t, so you don’t.

      • lprent 8.1.2

        No question that it is a issue. On the other hand, the reason that he got that role was because David Parker didn’t want it after the leadership thing.

  9. Sable 9

    In other words they don’t have a clue what they are doing. Who would have guessed…..

  10. Stuart Munro 10

    Well we’ve had the uptick – and Bill couldn’t break even – now we’re in the downturn. Time to restore taxes to historical levels, unless you fancy declaring our 2nd world status by defaulting. No growth and no fecking idea – thanks a lot Bill.

  11. G C 11

    We’ll I won’t be buying online from the Banana Republic or Old Navy (US Clothing Stores) given the exchange rate 🙁

  12. G C 12

    The New Zealand Government would rather see ‘farmer suicides’ than sell milk products to Russia? Agree/Disagree

    Obviously we need cash before we send said ‘milk products’ – as one commentator pointed out, we don’t want a repeat of the Lada Car fiasco.

    Nation need to get their sycophantic head out of America’s big old proverbial ass. If NZ did sell milk products to Russia, this could potentially reduce the global ‘glut’ and raise the overall milk price/demand.

    I don’t have the figures, rather just the common sense. Sorry but I care more bout New Zealanders than ill-thought-out sanctions.

    It’s a shame PM John Key was so gauche towards Vladimir Putin last time they interacted – shame National.

  13. Bigdog 13

    I’ve had the impression for some time that blinglish might have suffered some ill effects from his foray into boxing,and that having him in the important position of finance minister may well be the undoing of us all!

    • lprent 14.1

      Not really. It doesn’t say that anything is improving. It simply says that at present the NZ government books aren’t getting any worse.

      Hardly a ringing endorsement of the forward look for the NZ economy. Which you may have noted was what I was talking about

      The NZ government had much better ratings well prior to National taking the treasury benches and putting in completely unsustainable and economically useless tax cuts. It meant that the government wound up borrowing something like double what they needed to do, and it will take about 4 times as long to pay off.

      Fitch merely means that they aren’t screwing up as much as they were. Bearing in mind the rapidly aging population and the pension and health issues that raises, I think that Fitch’s time horizon is a bit short.

      • Old Mickey 14.1.1

        Can you please reference the assertion “The NZ government had much better ratings well prior to National taking the treasury benches ” ?

        • lprent

          This was the first one I dug out. It was the week that two of the ratings organisation downgraded the government ratings



          You will note in the second link that the requirement from Fitch was to get back to the sustained government surpluses. I guess that they, like many of us, looked the Bill English’s GST increases / Income tax drops and his projected tax revenues and called him an outright liar for saying they would be neutral in combination. As we anticipated, relying on a investment boost from the tax cuts for the wealthy didn’t happen. The nett actual effect was a reduction in capital spending. more jobs lost, and reduced tax revenues – pushing us further away from surplus and more into debt.

          If my memory serves correctly, there was a previous downgrade back in 2009 by one or more of the rating companies after the National government massively reduced their ability to get to a surplus by cutting taxes for the wealthy and doing nothing to help those being made redundant to pay any taxes.

          Bill English is either an ideological idiot or a lying fool. He has been as long as I have observed him. The best he ever seems to get to is to be able to not increase government debt by too much. To achieve even that, he winds up selling 10’s of billions in assets to shore up his P&L while reducing our ability to command our own economy (or have assets to sell when we actually need to).

          That inability is factored into every market analysis, and obviously into rating agencies ratings.

          • Lanthanide

            “If my memory serves correctly, there was a previous downgrade back in 2009 by one or more of the rating companies after the National government massively reduced their ability to get to a surplus by cutting taxes for the wealthy and doing nothing to help those being made redundant to pay any taxes.”

            I believe what actually happened, is we were put on a credit rating “negative watch” from a neutral one. Not sure the exact reasons behind it; more likely to do with the GFC backdrop, but of National’s 2009 tax cuts wouldn’t have helped.

            We were then taken off negative watch and put back to neutral, and English and Key trumpeted about what great economic managers they were because we had a “credit rating upgrade”. Russell Norman and I believe Phil Goff objected, on the basis that the credit rating hadn’t actually changed. The speaker eventually allowed the statement and said it was not misleading.

            Some time later, we were put back on negative watch, and Norman and Goff used the previous precedent to call the government useless economic managers because they got a credit rating downgrade, which the speaker showed consistency in his ruling and allowed it.

            We then had an actual credit downgrade some time later. I believe we are now 1 notch down from when Labour were in government and on a neutral outlook.

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