web analytics

Losing money

Written By: - Date published: 7:32 am, December 2nd, 2014 - 26 comments
Categories: Economy, exports, farming, trade - Tags: , ,

I am always intrigued by the kind of upbeat bullshit that we get out of our cowed public services these days. For instance the press release on the provisional Overseas Trade Index for the September 2014 quarter

The merchandise (goods) terms of trade fell 4.4 percent in the September 2014 quarter, due to export prices falling more than import prices, Statistics New Zealand said today.

The price of exported goods fell 4.5 percent, led by dairy and forestry products. Excluding dairy, the fall in export prices was about 0.9 percent. High meat prices partly offset the fall in dairy prices.

Huh? Talk about a false equivalence. Looking at the June 2014 Goods and Services spreadsheet, milk powder butter and cheese accounted for 23.3% of our exports by FOB value. Meat and edible offal was 8.3%. Logs and wood 5.9%. So a relatively small rise in beef prices is worth mentioning against a pretty massive fall in dairy prices which account for about a quarter of our exports?

But I guess that allows room for the government to get those nice headlines. Like James Weir in the Herald. “Beef boom partly offsets dairy dive“. Spinning under a National government we get good news first, bad news later. It starts like this…

Diving dairy prices have pulled New Zealand’s terms of trade off a 40-year high, statistics released today show.

But export beef prices hitting their highest levels in 12 years helped limit the impact.

Again, a peanut contribution from rising beef prices is somehow equivalent to a frigging disaster of a fall in dairy – exactly what National’s spin doctors ordered.

What is failed to be mentioned is that we are now heading for a record low in terms of trade. Looking over the last decade we see that we have had a very good first part of the year and a bad second half. THis year it will be an excellent first half and a catastrophic second half. Exactly as I anticipated last year. Next year it will just be catastrophic all year.

Essentially the dairy boom that National has been riding has dissipated in increased production world wide and a glut of inventory both offshore and here.

Terms of Trade 2004-2014

As for the “40 year high”… does anyone think that the Herald will be trumpeting the 40 year low. Look at the trade balance over the last 40 years and at the end of that graph. That really doesn’t look good for next year does it?

Terms of Trade 1974-2014

And it gets worse when you start looking through the details. For instance the Overseas Merchandise Trade for October.  That shows that while our income has now flattened (and is likely to fall), our demand for imports has kept increasing.

Merchandise trade values for October months

Fortunately there is always Brian Fallow in the Herald with his understated “Terms of trade picked to fall further“. He seldom repeats press releases so he starts with the picture of reality..

Falling dairy prices have begun to undermine one of the foundations of the economic upswing, rising national income from the most favourable terms of trade for more than 40 years.

The terms of trade fell 4.4 per cent in the September quarter as a 4.5 per cent drop in export prices swamped the benefit from a 0.1 per cent fall in import prices.

It was the first decline in the terms of trade – a measure of the quantity of imports which can be funded by a fixed quantity of exports – since December 2012. It took the terms of trade back to its level a year ago, though that was a 40-year high then.

Economists see the latest decline as just the beginning, however.

Four-fifths of the September quarter’s fall in export prices is explained by an 11 per cent drop in dairy prices.

But less than a third of the slump recorded by Fonterra’s global dairy auctions since February has flowed through to the terms of trade data so far. The terms of trade data use the contract prices agreed before goods are shipped in or out of the country.

Then he gets on to the few minor bits of bright news. But at the end points out the short term view to next year.

Bank of New Zealand economist Craig Ebert said most forecasters including the Reserve Bank had long forecast a decline of around 10 per cent in the terms of trade by 2015.

“This still looks to be in the ballpark, even with the surprisingly big hit from dairy prices we’ve since come to know about.”

Surprising? That has been bloody obvious for years as being highly likely to happen. Given a really big market, good prices and a competitive international market – what did they think would happen? It invariably goes from good times to glut very very fast. As soon as it does, people start dumping their inventory for whatever they can get. Prices plummet like a rock.

If you want to get really depressed about the economy then look at Jamie Gray writing on the Fonterra dairy payout “Payout below $5 a kg picked

Tomorrow will see the last GlobalDairyTrade auction before Fonterra releases its revised farmgate milk price forecast for 2014/15, and indications are that product prices will remain flat at best, say economists.

Fonterra’s board is set to meet early next week and bank economists expect the co-operative dairy giant to revise its current $5.30 per kg of milksolids forecast for 2014/15 to sub $5 levels.

Prices have fallen by close to 50 per cent since February, driven mostly by excess supply.

The payout peaked at $8.50/kg last season. Now we are looking at something like $4.85/kg for the coming season. Ouch.

This is why the National party policy of favouring rentiers, extractive industries and commodity sales in NZ is and will be a long-term economic failure for the bulk of the population (ie people who don’t contribute anonymously to National’s donations).

We need productive export jobs using our most sustainable resource – our people.

26 comments on “Losing money ”

  1. hoom 1

    Rockstar Economy

  2. Macro 2

    Excellent analysis LPrent. Way better than what any can read in NBR or the daily rags. What anyone with any sense has been saying for the past 6 years or more is about to come to pass. The consequences are not going to be good for anyone. Hopefully the people will finally awaken to the fact that they have been lied to consistently by those who govern them. But just what the outcome will be in the long term is anyones guess. I live in hope for a just government. But who knows.

    • lprent 2.1

      I was a bit constrained by blog post length. I think that I have another couple of posts on related topics.

      But as you say, pretty damn obvious where an repeated over expansion into a commodity based extractive economy would lead to – yet again.

      • Colonial Rawshark 2.1.1

        And as massive dairy returns fail, the underlying massive dairy debt persists…

  3. Poission 3

    The terms of trade data use the contract prices agreed before goods are shipped in or out of the country.

    The hedged price also constrains imports,in the q3 data oil and petroleum prices increased by 2.7 %.

  4. tricledrown 4

    Lprent Beef prices are steady have gone off peak prices already!

    • lprent 4.1

      I didn’t even bother looking at them as they always yoyo, and in the terms of the effect on the overall economy the change in price is a pittance.

  5. adam 5

    There was a time when the last place for outright spin was missing or at least obvious in the press – the business pages. It was the place we’re those running the country knew they’d better not tell porkies, or the whole system might be put in trouble.

    Come 2014, and even that part of the press is now in spin mode. I know many people in the middle of NZ politics think the left whinge – a lot, and are prone to hyperbole. But, sorry folks, in the sphere of economics it’s simple – you’re being lied to. It is worse than you think, and having a positive attitude, just won’t cut it.

    If an economic conservative like lprent, is pointing out this fiscal decline in stark terms, I’d be worried middle NZ – maybe some of the so called hyperbole wasn’t so rampantly off the mark in the first place.

    • linda 7.1

      we are in the housing bubble ,society is loaded with debt and it will be game over sooner or later there is going to be a lot of tears I fear. since 2008 I paid down all my debt and got rid of the credit cards .2008 was a wake up call but and sadly this John key government has not learned its lesson national has mortgaged the future by favouring speculation over production it will all come to a sad end and right fast.

  6. Saarbo 9

    The media seem to get most of their information from the banks who are feeding them their version of things (Westpac and ASB bullish while Rabo/ANZ more pessimistic). This time of the year is when 80% to 90% of the dairy farms are sold and consequently banks are competing very hard for farmers debt, to the point that we have seen huge price increases in the sale prices of dairy farms in the Waikato http://www.stuff.co.nz/business/farming/dairy/63472936/waikato-farm-sales-at-record-highs .

    The main problem is that Dairy farmers are driven by what they think that they can afford when purchasing a farm, not by the economics of the investment. The banks are encouraging the high prices but ultimately it is the farmers that are paying these absurd prices.

    The big question for New Zealand is whether the current downturn is cyclical or structural. Most banks are claiming that it is cyclical despite new milk powder capacity destined for the Chinese market being built by Dairy farmers of America in Nevada and Kansas, Glanbia Ingredient’s in Ireland, Arla Foods in Denmark, Sodiaal in France and Freisland Campina in Holland. Many of these Dairy Manufacturers have joined forces with Chinese dairy companies because they don’t want to be too reliant on New Zealand supply.

    But I think the biggest threat to NZ’s place at the bottom of the cost curve is the new Mega dairies in the US. http://www.stuff.co.nz/business/farming/dairy/63591509/us-mega-dairies-a-threat . This is what could turn the current downturn from cyclical to structural (and if that’s the case then this could be economically devastating). In Mondays “The NZ farmers Weekly” on pg 15 (Pay walled online) is an article quoting ANZ’s Ross Verry

    …total NZ dairy farm costs including a capital charge were about $6.70-$7.50 /Kg ms against the Mega Dairies $7.40 – $8.20…

    So when a capital charge is included, the US Mega Dairies are very close to New Zealand because although the US operational costs are higher, when we add in Capital costs (our over inflated cost of our dairy farms combined with our over leveraged farms ) NZ has no cost advantage over the US farms. This is potentially a major problem that must require a political solution. Currently the only farmers who are purchasing these over inflated farms are large multi farm owners. These farmers actually have a vested interest in overpaying for farms as it actually increases their equity on the 10 other farms that they own and the Banks equity is protected in a similar way. Buts its actually nothing more than a Ponzi scheme that will unravel if this payout stays under $6.00 for more than 2 years. Ross Verry reckons that the average breakeven on a NZ dairy farm is $6.80 (when you include capital costs)…which surprised me but if this payout stays subdued we could see what we saw in 2008/09 but much worse.

    • lprent 9.1

      Most banks are claiming that it is cyclical despite new milk powder capacity…

      That was what struck me as well. I know of major expansions of milk production and milk powder capacity in quite a few countries including China, the US, Denmark and others because of the high prices (the current ‘low’ prices are historically high as well).

      But the banks have been consistently running that “its almost bottomed out” line since prices started dropping early in the year. You have to ask how deeply their fingers are into those farms, and are they trying to retain their asset values up to get their money out.

      • Saarbo 9.1.1

        Exactly right. Most rural bankers own dairy farms, I know a dozen rural bankers and every single one of them owns a dairy farm or an interest in one. These people have serious conformation bias issues, they also have short memories…people forget quickly how serious 2008/2009 was. In 2008/09 payout was $5.20…and this caused immense pain, imagine what a sub $5 payout will do.

    • Colonial Rawshark 9.2

      Buts its actually nothing more than a Ponzi scheme that will unravel if this payout stays under $6.00 for more than 2 years. Ross Verry reckons that the average breakeven on a NZ dairy farm is $6.80 (when you include capital costs)…which surprised me but if this payout stays subdued we could see what we saw in 2008/09 but much worse.

      The majority of dairy debt is owned by the most indebted bottom 20% of farms. There will be definite winners and losers in our local industry if the market stays this low.

      • Saarbo 9.2.1

        Yep, I think it was the Reserve Bank Governer who said something like 10% of farmers have 50% of the dairy debt.

    • Jimmy 9.3

      Hi, I know this is an older post, but Im interested in your point about the new mega dairies in the US being a threat to NZ dairy.
      Specifically if you think the mega dairies who must bring in grains as feed for cows, can compete with a grass/pasture only based NZ system (not talking about PKE and other NZ bought in supplements).
      Because at the end of the day the profit is made by having the cheapest feed available.
      I see the American corn harvest for them last season was spectacular and the cheaper corn available for american cows has increased their production.
      But if they suffer a drought next corn harvest, or just return to more normal feed prices, how do you think a NZ grass based system would fare?

  7. miravox 10

    Groser is spinning low monthly trade figures as ‘noise’ not ‘data’


  8. nadis 11

    try $4.25 not $4.85

  9. nadis 12

    $4.85 is based on a 20% recovery of WMP plus a sub 75 cent USD

  10. nadis 13

    A few other bits I’d add. Some of the trade graphs are reflective of the currency – with a 10% drop in currency (so far) you’ll see a reduction in the import value and an increase in the export value which will whipsaw some of those graphs in a more favourable direction.

    The dairy industry’s real problem is that Fonterra is an engineering and logistics company and hasn’t got a clue on how to add serious innovative value to milk. Fonterra is very, very good at building a newer, more productive shiny building that can produce Whole Milk Powder 2% cheaper than the last factory they built, but when it comes to being a Nestle, an Danone or a biotech company they are worse than useless. Nothing wrong with betting large on milk – after all we are the most efficient in the world at producing it – but we have never been able to do what every other developed country does, shift the value from commodity to value add.

    Its also easy to overestimate the size of Dairy in our economy. I have seen it described as either 3% or 8% of GDP but never more than that.

    I’d also urge people not to crow about the coming pain for some dairy farmers – the ones that struggle will likely be young, with a young family, and living on an income in the good years of less than 60k. These are the ones that will disproportionately suffer from overwork, depression, mental illness, marital break-up and suicide. So a little less triumphalism from some would be civilised.

    Alongside Lprents good review, you should read Graham Wheelers speech from May here:

    • Saarbo 13.1

      Agree. Regarding the impact of the lower price on farming, in our farming area farm workers have already been made redundant so this will be definately hitting the workers hard in the short term, but Labour still needs to push hard to ensure that the Labour Dept. are checking that farmers are sticking to the rules.

      To be fair, Fonterra’s “Turn the Wheel” strategy of slowly adding more higher value products makes sense, its easy to talk about building “brands” but incredibly hard and expensive to actually do it.

  11. millsy 14

    It will only get worse — wait till the Chinese, Russians and Mongolians start producing dairy products way cheaper than we can, railing it all into Europe.

    Why do you think the Chinese are pouring big money into our agricultural industry?

    Climate change will no doubt open up the likes of Siberia to pastoral farming, by which time Chinese and Russian producers would be able to apply New Zealand farming techniques to an area which is several times larger than our country (with a lot less restrictive labour and environmental laws).

    In 20 years, we could be buttering our bread with Chinese made butter.

  12. Saarbo 15

    Wow, read this article. Certainly no “brand” value in NZ 100% Pure anymore in China. Particularly the LAST paragraph.


Recent Comments

Recent Posts

  • NZ announces a third P-3 deployment in support of UN sanctions
    The Government has deployed a Royal New Zealand Air Force P-3K2 Orion (P-3) maritime patrol aircraft to support the implementation of United Nations Security Council (UNSC) resolutions imposing sanctions against North Korea, announced Minister of Foreign Affairs Winston Peters and Minister of Defence Ron Mark. “New Zealand has long supported ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Pacific trade and development agreement a reality
    Pacific regional trade and development agreement PACER Plus will enter into force in 60 days now that the required eight countries have ratified it. Trade and Export Growth Minister David Parker welcomed the announcement that the Cook Islands is the eighth nation to ratify this landmark agreement. “The agreement represents ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Securing a pipeline of teachers
    The Government is changing its approach to teacher recruitment as COVID-19 travel restrictions continue, by boosting a range of initiatives to get more Kiwis into teaching. “When we came into Government, we were faced with a teacher supply crisis,” Education Minister Chris Hipkins said. “Over the past three years, we ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Border exceptions for a small number of international students with visas
    The Government has established a new category that will allow 250 international PhD and postgraduate students to enter New Zealand and continue their studies, in the latest set of border exceptions. “The health, safety and wellbeing of people in New Zealand remains the Government’s top priority. Tight border restrictions remain ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • First COVID-19 vaccine purchase agreement signed
    The Government has signed an agreement to purchase 1.5 million COVID-19 vaccines – enough for 750,000 people – from Pfizer and BioNTech, subject to the vaccine successfully completing all clinical trials and passing regulatory approvals in New Zealand, say Research, Science and Innovation Minister Megan Woods and Health Minister Chris Hipkins. ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • International statement – End-to-end encryption and public safety
    We, the undersigned, support strong encryption, which plays a crucial role in protecting personal data, privacy, intellectual property, trade secrets and cyber security.  It also serves a vital purpose in repressive states to protect journalists, human rights defenders and other vulnerable people, as stated in the 2017 resolution of the ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ministry of Defence Biodefence Assessment released
    The Ministry of Defence has today released a Defence Assessment examining Defence’s role across the spectrum of biological hazards and threats facing New Zealand. Biodefence: Preparing for a New Era of Biological Hazards and Threats looks at how the NZDF supports other agencies’ biodefence activities, and considers the context of ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020
    New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020 Hon David Parker’s response following Thomas Piketty and Esther Duflo. Good morning, good afternoon, and good evening, wherever in the world you might be. I first acknowledge the excellent thought provoking speeches of Thomas Piketty and Esther ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Kaipara Moana restoration takes next step
    A Memorandum of Understanding has been signed today at Waihāua Marae between the Crown, local iwi and councils to protect, restore and enhance the mauri of Kaipara Moana in Northland. Environment Minister David Parker signed the document on behalf of the Crown along with representatives from Ngā Maunga Whakahī, Ngāti ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Zealand and Uruguay unite on reducing livestock production emissions
    Agriculture Minister Damien O’Connor and Uruguayan Minister of Livestock, Agriculture and Fisheries Carlos María Uriarte have welcomed the launch of a three-year project that will underpin sustainable livestock production in Uruguay, Argentina, and Costa Rica.  The project called ‘Innovation for pasture management’ is led by Uruguay’s National Institute of Agricultural ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • 3100 jobs created through marae upgrades
    Hundreds of marae throughout the country will be upgraded through investments from the Provincial Growth Fund’s refocused post COVID-19 funding to create jobs and put money into the pockets of local tradespeople and businesses, Regional Economic Development Minister Shane Jones and Māori Development Minister Nanaia Mahuta have announced. “A total ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Health volunteers recognised in annual awards
    Health Minister Chris Hipkins has announced 9 teams and 14 individuals are the recipients of this year’s Minister of Health Volunteer Awards.  “The health volunteer awards celebrate and recognise the thousands of dedicated health sector volunteers who give many hours of their time to help other New Zealanders,” Mr Hipkins ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community COVID-19 Fund supports Pacific recovery
    The Minister for Pacific Peoples, Aupito William Sio says a total of 264 groups and individuals have successfully applied for the Pacific Aotearoa Community COVID-19 Recovery Fund, that will support Pacific communities drive their own COVID-19 recovery strategies, initiatives, and actions. “I am keen to see this Fund support Pacific ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community benefits from Māori apprenticeships
    Up to 50 Māori apprentices in Wellington will receive paid training to build houses for their local communities, thanks to a $2.75 million investment from the Māori Trades and Training Fund, announced Employment Minister Willie Jackson today. “This funding will enable Ngāti Toa Rangatira Incorporated to provide its Ngā Kaimahi ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Training fund supports Māori jobseekers
    Rapidly growing sectors will benefit from a $990,000 Māori Trades and Training Fund investment which will see Wellington jobseekers supported into work, announced Employment Minister Willie Jackson today. “This funding will enable Sapphire Consultants Ltd. to help up to 45 Māori jobseekers into paid training initiatives over two years through ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ruakura Inland Port development vital infrastructure for Waikato
    The Government is investing $40 million to develop an inland port at Ruakura which will become a freight super-hub and a future business, research and residential development for the Waikato, Urban Development and Transport Minister Phil Twyford, and Māori Development Minister Nanaia Mahuta announced today. The funding has been has ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Appointments made to Defence Expert Review Group
    Defence Minister Ron Mark announced today the establishment of an Expert Review Group to review a number of aspects of the New Zealand Defence Force’s (NZDF) structure, information management and record-keeping processes.  The Expert Review Group’s work arises out of the first recommendation from the Report of the Government’s Inquiry ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • No active community cases of COVID-19
    There are no active community cases of COVID-19 remaining in the country after the last people from the recent outbreak have recovered from the virus, Health Minister Chris Hipkins said today. “This is a big milestone. New Zealanders have once again through their collective actions squashed the virus. The systems ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Clean energy upgrade for more public buildings
    More public buildings will be supported by the Government to upgrade to run on clean energy, the Minister for Climate Change James Shaw announced today. Minister Shaw announced that Lincoln and Auckland universities will receive support through the Clean-Powered Public Service Fund to replace fossil fuel boilers. Southern, Taranaki, and ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Schools back donations scheme for the second year
    More schools have opted in to the donations scheme for 2021, compared to 2020 when the scheme was introduced. “The families of more than 447,000 students will be better off next year, with 94% of eligible schools and kura opting into the scheme,” Education Minister Chris Hipkins said. “This is ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Ruapehu cycle trails gets PGF boost
    The spectacular Mountains to Sea cycle trail in Ruapehu District will receive $4.6 million in funding from the Provincial Growth Fund for two additional trails, Regional Economic Development Minister Shane Jones announced today. “This is an exciting development for the local community, and one that will provide significant economic opportunities ...
    BeehiveBy beehive.govt.nz
    3 weeks ago