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New Zealand’s Perverse Economy

Written By: - Date published: 7:28 am, May 29th, 2021 - 37 comments
Categories: China, Economy, Environment, farming, Free Trade, trade - Tags:

At a forecast farm gate milk price of between NZ$7.25 and NZ$8.75 per kilo of milk solid, Fonterra is going to fill up its milk tankers, drive back to their suppliers with cash and pump it straight back into the farmhouse like we haven’t seen in a decade.

Around 10,000 farmer suppliers would receive about $12 billion. That is a pumping economy right there.

Every policy setting we have says do the opposite: diversify away from high mass bulk exports and towards higher-end value-added exports.

With tourism not ever again likely to regain its dominant place in our economy, New Zealand’s big exporting sectors are dairy, horticulture including wine, and health tech and software.

For dairy, far and away our dominant export industry and largely reliant on China, there are real environmental limits to be faced which are only going to get harder. Future growth must be encouraged from a shift to products with higher value added. With so many of our non-Fonterra dairy companies in serious trouble, it’s not yet evident that the state has many direct instruments to encourage Fonterra to do this, and with demand for their existing product lines in China so strong there’s not huge incentive either.

Dairy is the most perverse part of the New Zealand economy.

It’s not the same with horticulture, since Zespri is an anchor firm that generates and protects intangible assets and actively seeks to be at the global frontier of value moreso than volume. The longstanding relationship between CRI Plant & Food (and predecessor entities) have been instrumental in developing innovative and high value new fruit varieties. It’s really set the benchmark for government-industry export relationships as an entire innovation ecosystem.

Even timber  – together with its government partner CRI Scion – is not to be outdone, hitting record price levels as you will find if you have to do house repairs, extensions, or whole builds.

It’s very hard to predict whether slowing growth in China will be offset by further Biden-fulled growth booms in the United States, or the malign reverse where the fiscal stimulus in the United States fades later this year just as China hits the bottom of its deleveraging cycle. But foods generally, even in their bulk form, aren’t as vulnerable to such cycles as construction materials like steel and coal. So we are sitting pretty, even if we remain vulnerable to China.

And frankly who the hell knows which way the Senate’s anti-China legislation will fall in the next month. Productivity increases be damned, because in the meantime we are generating the stuff our customers want. Period.

Trade tectonic plates may well be pulling apart with force between China and the United States, but it’s appearing, perversely, to make New Zealand’s economy all the hotter.

37 comments on “New Zealand’s Perverse Economy ”

  1. dv 1

    12 billion /10000 = 1.25 million each

    Is that right?

    • Peter chch 1.1

      Gross income, before expenses and tax though.

      Also not correct as you just averaged it. Some farmers will get many times that, others much less.

      • dv 1.1.1

        I just used the figs in the OP.

        • Peter chch 1.1.1.1

          Yep, Advantage did a great article, but the 12 billion is a little misleading. But he is correct that it will be 12 billion injection to NZ economy.

          Surprisingly, Fonterra dairy farmers do not earn a lot. More a capital appreciation game than an income one. A few years of mismanagement did not help. They got badly scalped in China.

          • ghostwhowalksnz 1.1.1.1.1

            " do not earn a lot."

            Thats because any excess income after expenses is often used to borrow more money and buy another farm.

            The really really weird part is because Fonterra 'Group' is a cooperative it doesnt pay any tax – supposedly the tax is paid by the farmers ( yeah right). The non coop part of Fonterra actually gets a $200 mill refund of GST. ( from exports)

            So we effectively have a $20 bill per year revenue business which is 'tax free' and we worry about the tech giants ?
            And dont let me start on the government/taxpayer funding the dairy industrys ‘carbon costs’

            • Peter chch 1.1.1.1.1.1

              The shell (the co-op) is tax free. The suppliers would be very hard pressed to not pay tax on that income. Unless they are prepared to go to prison for tax evasion. It is not under the table earnings. Hard to hide!

              If Fonterra were a company and paid tax, the tax credits would be passed to the suppliers via imputation credits. Same difference.

              The GST rfund on the exports is because exports are zero rated. Really cannot see what the problem there is. GST is ultimately only paid on supplies made within NZ.

              • ghostwhowalksnz

                Any company has suppliers and still pays tax on its 'surplus' income or profit under IRD rules. A coop at this size should be treated as a normal company without the coop twist that would have applied with little cheese factorys we once had and close connection to local suppliers

                Just the sheer scale in this case with no tax paid at all, not even nominal $ billion or so.

                The GST arrangements are also perverse, its surely not how it was all intended. We already know the banks have twisted the GST system for their advantage as they have gotten the rules changed so that Mortgage brokers 'service' is zero rated so the banks dont have a GST bill to pay ( the vast bulk of their operations dont accumulate much GST as they are financial transactions).

                • Peter chch

                  With the greatest of respect, your understanding of taxation is a little off.

                  scenario 1: the tax is paid at a company level (by say Fonterra Ltd) and then that tax paid is passed down to suppliers as an imputation credit which the individual offsets against their individual earnings.

                  Scenario 2: Fonterra co-op pays no tax. It passes its earning down to individual suppliers (with no imputation credit but less withholding tax). These individual suppliers pay tax at their company or individual rate.

                  SAME RESULT!

                  And yes, this is EXACTLY how GST was intended to work. Logically and legally it would make no sense to pay GST on supplies made outside NZ. Would also lead to a bizarre double taxation in many jurisdictions. Zero rating exports also provides a powerful incentive to export, which our economy depends on.

                  The size of Fonterra is completely irrelevant.

                  • ghostwhowalksnz

                    What withholding tax ? If you supply the right IR certificate, you are exempt. However they arent 'labour contractors' but businesses of their own supply or product – milk in this case

                    Your claim doesnt align with what IRD says

                    They get paid monthly 60% of that months milk payments and a make up later in year. For a product not labour.

                    When my business was operating, for a different industry, we never paid withholding tax for any suppliers. They werent labour contractors either.

                    • Peter chch

                      These are not 'suppliers' in the usual sense. They are 'shareholder suppliers'. They pay very large amounts to buy into the co-op based upon their milk production levels.

                      To get an exemption certificate would be unusual, but would make zero difference to the end result anyway. Tax still be assessed at the individual level at year end, so no change.

                      I really cannot make it any simpler. Whether a co-op or a company, the end result is identical. Just a different mechanism at play.

                      No such thing as a free lunch in the tax world. The IRD are not a charity.

                      Take a look at the payments advice from Fonterra to supplier-shareholders. They have tax withheld.

                      And my claim to knowledge? Chartered accountant for 30 years, 5 of those in a farm accounting practice.

                      End of discussion. I really cannot be bothered trying to further explain to you something that clearly you lack the knowledge or training to understand.

                    • ghostwhowalksnz

                      So now the withholding tax thing was a diversion of yours

                      'Tax still be assessed at the individual level at year end, so no change.'

                      You alluded to the 'not profitable' thing earlier and the land banking thing ,and as I said its because they increase their expenses by borrowing for another farm. The end result again is no or little tax paid by the dairy farmers.

                      Real estate agents and mortgage brokers work the same way, in the years they are 'creaming it', they buy property so the interest expense fills their excess income, so no tax paid…. the brightline tests moved the goalposts but they could still reduce taxable income and increase untaxable capital gain. Just like dairy farmers, both know that buying houses or farms supports and grows the price of their 'asset'

                      We have a ‘thin capitalisation’ tax rule for overseas owned companies who deliberately suck profits out of NZ by over gearing.
                      Same should apply to dairy farmers, with over gearing for the size of the income not allowed

                    • Peter chch []

                      You really have a total and complete lack of understanding of the tax system.

                      As well, you clearly have little or no direct knowledge of the industry. Ideology seems to be the sole factor underpining your posts. Very sad, I suggest you do a little reading and learn a little before spouting ignorant ideas about taxation.

                    • ghostwhowalksnz

                      So you got 'owned' peddling the withholding payments nonsense, so throw your gumboots in the air.

                      All those things are how the tax system is gamed.

                    • Peter chch []

                      No. Payments from fonterra to suppliers have tax deducted.

                      As a ca for 30 years, I have seen precious little 'gaming'.

                      When you have spent 4 years in uni, 3 years as a provisional accountant under supervision, attended professional accounting school, passed professional competency exams 1 and 2, spent 30 years in public practice and company accounting, come back and speak from a position of knowledge. Until then, bye bye.

                      Ps. Not replying to a hostile ignorant person is not 'throwing my gum boots in the air'.

                    • ghostwhowalksnz

                      Another form of tax dodge is when a good sized dairy farm is owned by a partnership of high income earners who dont participate in the running the farm. Any profits are are of course passed tax free to the individuals who can usually have other property investments with taxable income reduction benefits . Forestry used to be one of those.

              • Foreign waka

                Then there should be no issue with charging those milk powder exporters for carbon like everybody else, is there?

                • ghostwhowalksnz

                  primary production is from existing atmospheric carbon and photosynthesis, by definition. thats what primary means when it refers to farms, forests, horticulture etc. Unless I missed something

  2. Peter chch 2

    Fonterra is a dinosaur in its dying gasps.

    It is a cooperative, and the relatively few shares publicly listed are likely to be compulsory acquired by the co-op in November. That will increasingly leave Fonterra starved of capital and inward looking. The old protected species of farmers just don't get it. Its not the 1980s anymore. Closed shops don’t work now.

    The likes of Synlait and Westland Milk Products are fast moving away from bulk milk and towards value added products, which is where the future lies. Fonterra much less so.

    From a supplier point of view, they are more attractive as no need to buy co-op shares, as is required with Fonterra.

    Also, Fonterra was badly burned in China, and its big push now is India, and unfortunately India economy will have been badly damaged by Covid this year.

    • ghostwhowalksnz 2.1

      "Synlait and Westland Milk Products are fast moving away from bulk milk and towards value added products,"

      With small volumes, it can 'look fast' but NZ without a large captive home market for its higher margin products like they have in Europe , US , China even they have to stick with their base product for the volumes they produce. Try getting cheese and other dairy products into those markets ?

      After raw milk has a shelf life of a few days ,and every day the tankers do the rounds again with more milk. Milk powder can be quickly produced from raw milk with basic processing and be stored for a long time.

  3. gsays 3

    The $12 B comes at what cost?

    The impact on roads, pollution from tyres and the air quality from the truck fleet.

    The damage to our fresh water ways with run-off, and the degradation of the underground aquifers with the 'taking' of water, in this water intense industry.

    Without going into the plethora of single-use plastic this industry generates.

    Cows standing in bare unsheltered paddocks in the extremes of summer and winter.

    But, hey, they are just externalities, someone and something else pays for that impact.

    • Peter chch 3.1

      True, but dairy makes up almost 30% of our exports, with meat farming being the next biggest at 14%.

      Many of the things you describe can be and slowly are being mitigated.

      Scrap dairy and do what? The money for our welfare, health, education and so on has to come from somewhere.

      https://www.worldstopexports.com/new-zealands-top-10-exports/

      • Pat 3.1.1

        More importantly 'money' for manufactured goods, pharmaceuticals and the like that our lifestyles depend upon has to come from a currency supported by exports.

        • greywarshark 3.1.1.1

          We are killing ourselves and our country with our desires for things that can only be afforded by amoral methods in other words.

          And Peter chch what a wet answer – things are being mitigated. That they happen at all, ie cows standing in mud in winter etc. is shocking. It isn't something that someone should get round to doing a little about just to say they are making improvements. If nz GOVT had any standards and heft they would have stepped in and put on hefty fines and banned the farmers from participating in our dairy industry. /sarc

          • Pat 3.1.1.1.1

            "We are killing ourselves and our country with our desires for things that can only be afforded by amoral methods in other words."

            Currently, however it need not be so (or at least not to the same degree)…..unless we perform a miracle of autarky.

            The real question should be what do we agree we need and what is disposable….there are likely 5 million different opinions.

          • Peter chch 3.1.1.1.2

            Grey. Re cows standing in the open in mud with no shelter belt. 100% agree. No excuse for that whatsoever. Should be prosecuted under animal welfare laws. Now.

            • greywarshark 3.1.1.1.2.1

              I had thought that would be how you feel Peter chch. It's good to know who the thinkers around here directing towards the morally doable important things.

        • gsays 3.1.1.2

          "..pharmaceuticals and the like that our lifestyles depend upon.."

          I've often thought the dependence on medicines from off shore is a weakness and a great opportunity.

      • gsays 3.1.2

        Like a lot of things, the mechanism for righting these wrongs exists, it is the will that us lacking. ie ECAN making favourable decisions since it's 'reforms' or local and regional councils having majority of similar interests around the decision making table

  4. Incognito 4

    About adding value to milk: turning animals into producers of highly expensive anti-cancer drugs.

    https://www.nzherald.co.nz/nz/how-genetically-modified-new-zealand-goats-could-help-fight-cancer/3A2XCXXQBNOI2J245QLYYZCBE4/

    • Drowsy M. Kram 4.1

      PPL Therapeutics (based in Scotland) and AgResearch started animal (sheep, cows) 'biopharming' research here in 1999, and NZ has some advantages in this field. From a lengthy 2008 report:

      Animal biopharming in New Zealand
      Animal biopharming research is occurring in New Zealand. Between 1999 and 2003, in Whakamaru, PPL Therapeutics developed a flock of transgenic sheep modified to produce recombinant human alpha-1-antitrypsin (hAAT). Since 1999, AgResearch has been producing transgenic cows modified to produce various human pharmaceutical proteins at their Hamilton-based research site, Ruakura.

      The move to therapeutic mAb production in goats is an interesting development – thanks for the link. If nothing else these applied research programmes help to keep NZ scientists up with the state of play in animal/plant transgenics and biochemistry.

  5. Tiger Mountain 5

    All Hail the Milk Powder Republic!

  6. Stuart Munro 6

    No news to those of us at the coalface. We've been hearing about the need to diversify away from primary production since highschool – but as government retreated from its responsibilities with the onset of neoliberalism, our futures were left to the insensate 'market forces' which of course chose the shortest path to immediate return, not the one with long term prospects.

    So, no building on the aquacultural work of the DSIR that gave us world leading mussel farms in the 1970s. Diversification discouraged in favour of a monoculture simple enough for even the laughably inept self-styled 'Business Round Table' to understand.

    No groundwork here, on photovoltaics or smart design to drive installations down to levels that made solar investment positive. No pharma, or sustainable fibre, or smart composites growing out of the yachting circuses, little or no robotics, limited support of local creative industries like screen and gaming. No finished wood products – raw logs or chips or framing if we're super lucky. Guess MPI thought they were being paid to sleep on the job. Not even an apposite solution to the perennial sheep shortage at Jeddah – well within NZ's extant skillsets. They market will provide – well the market hasn't and won't.

    Time to embrace the ascetic virtues guys, our leaders have us on the fast track to massive and sustained poverty.

  7. ghostwhowalksnz 7

    We would never have competitive advantage on photo-voltaics. It would be a repeat of the time when we had multiple television factories- I use to pass by one on the way to school.

    As for primary production ( yes it includes marine farming and horticulture) in 2012 the Government set a target to double the exports -to $64 bill- by 2025

    https://www.nbr.co.nz/article/nz-goal-doubling-primary-sector-exports-64b-2025-remains-stretch-target-mpi-says-b-190432

    In ecology, primary production is the synthesis of organic compounds from atmospheric or aqueous carbon dioxide. It principally occurs through the process of photosynthesis, which uses light as its source of energy, but it also occurs through chemosynthesis,….

    https://en.wikipedia.org/wiki/Primary_production

    Did someone say FROM CO2 in the atmosphere

    • Stuart Munro 7.1

      We would never have competitive advantage on photo-voltaics.

      One never knows unless one makes the attempt. The precursor materials are widespread, it is the particular combinations that are more or less efficient. Of course, if you take the view that NZ should stick to dairy farming and not try to develop in any technical field, you have the privilege of making no mistakes – and no progress.

      • ghostwhowalksnz 7.1.1

        They still would be cheaper , far far cheaper from China. Like I said when we had expensive TV sets 'made locally' ( even harder now as these a highly automated production, TV sets or PV panels)

        Anyway our competitive advantage for electric generation is in wind , hydro and geothermal not small scale solar panels for home rooftops .

        Those batteries dont even supply 1 days power in winter (13.5kWh) , even for my ultra low usage, so grid supply is still essential , worse its needed most in winter when otherwise demand elsewhere is highest.

        • Stuart Munro 7.1.1.1

          They still would be cheaper , far far cheaper from China.

          Of course – and that would be because China put in the research, and we did not. So we are price takers in the market. I saw a bit of the industry in China btw – doing insurance claims on silicon furnaces and the like.

          Half or more of the problem though, is that they are needlessly expensive. The raw inputs are far from ruinous, the step for value creation is to create a format that is more flexible and economical than panel batches – such as incorporating them in long term roofing like coloursteel, which is the logic of the Tesla tiles.

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