Dairy's role in sustaining New Zealand - Fonterra
Dairy's role in sustaining New Zealand - Fonterra
Dairy's role in sustaining New Zealand - Fonterra
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Dairy’s <strong>role</strong><br />
<strong>in</strong> susta<strong>in</strong><strong>in</strong>g<br />
<strong>New</strong> <strong>Zealand</strong><br />
- the sector’s contribution to<br />
the economy<br />
REPORT TO FONTERRA AND DAIRY NZ<br />
December 2010
About NZIER<br />
NZIER is a specialist consult<strong>in</strong>g firm that uses applied economic research and analysis<br />
to provide a wide range of strategic advice to clients <strong>in</strong> the public and private sectors,<br />
throughout <strong>New</strong> <strong>Zealand</strong> and Australia, and further afield.<br />
NZIER is also known for its long-established Quarterly Survey of Bus<strong>in</strong>ess Op<strong>in</strong>ion and<br />
Quarterly Predictions.<br />
Our aim is to be the premier centre of applied economic research <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>. We pride<br />
ourselves on our reputation for <strong>in</strong>dependence and deliver<strong>in</strong>g quality analysis <strong>in</strong> the right<br />
form, and at the right time, for our clients. We ensure quality through teamwork on <strong>in</strong>dividual<br />
projects, critical review at <strong>in</strong>ternal sem<strong>in</strong>ars, and by peer review at various stages through a<br />
project by a senior staff member otherwise not <strong>in</strong>volved <strong>in</strong> the project.<br />
NZIER was established <strong>in</strong> 1958.<br />
Authorship<br />
Prepared by: Chris Schill<strong>in</strong>g, James Zuccollo and Chris Nixon<br />
Quality approved by: John Ball<strong>in</strong>gall<br />
Date: 15/11/2010 3:49 PM<br />
Version: F<strong>in</strong>al<br />
Acknowledgements:
Key po<strong>in</strong>ts<br />
Dairy makes a very strong direct contribution to the NZ economy<br />
• The dairy sector directly accounts for 2.8% of GDP, or $5 billion. This contribution is:<br />
o greater than the GDP contribution of the fish<strong>in</strong>g, forestry and m<strong>in</strong><strong>in</strong>g sectors<br />
comb<strong>in</strong>ed<br />
o around 10 times as large as the GDP of the w<strong>in</strong>e sector<br />
o about 3 times as large as the forestry and logg<strong>in</strong>g sector<br />
o over a third of the GDP contribution of the entire primary sector (dairy and meat<br />
farm<strong>in</strong>g and process<strong>in</strong>g, horticulture, fish<strong>in</strong>g, forestry, m<strong>in</strong><strong>in</strong>g)<br />
o 40% larger than the entire utilities sector (electricity, gas and water)<br />
o 2/3 as large as the entire construction sector<br />
o 15% of the total GDP of the goods produc<strong>in</strong>g <strong>in</strong>dustries and<br />
o provides 26% of <strong>New</strong> <strong>Zealand</strong>’s total goods exports.<br />
And contributes to the health of the NZ economy <strong>in</strong> many ways<br />
• But the sector’s <strong>in</strong>fluence extends well beyond its direct impacts. Dairy is closely<br />
<strong>in</strong>tertw<strong>in</strong>ed with the rest of the economy. This <strong>in</strong>cludes the jobs it delivers, the <strong>in</strong>come<br />
that these workers earn, its l<strong>in</strong>ks to supply<strong>in</strong>g firms, the effects of rural economic growth<br />
on urban centres, the tax revenue it provides and the public services that can be funded<br />
from this tax revenue. These l<strong>in</strong>ks are shown <strong>in</strong> the figure at the end of this section.<br />
• Of the $10.4 billion of dairy products exported <strong>in</strong> 2009,<br />
o $7.5 billion is used to purchase raw milk from the dairy farm<strong>in</strong>g sector.<br />
o $1.5 billion is reta<strong>in</strong>ed as returns to labour and capital (i.e. wages and rate of return).<br />
o $625 million is spent on <strong>in</strong>termediate <strong>in</strong>puts from <strong>New</strong> <strong>Zealand</strong>. This <strong>in</strong>cludes $85<br />
million of plastic conta<strong>in</strong>ers, $45 million on electricity and $22.5 million on f<strong>in</strong>ancial<br />
services.<br />
o Imported <strong>in</strong>termediate <strong>in</strong>puts account for $310 million – largely plastic conta<strong>in</strong>ers<br />
($182 million) and other food products to be used <strong>in</strong> process<strong>in</strong>g ($30 million).<br />
o $730 million is spent on retail<strong>in</strong>g/wholesal<strong>in</strong>g costs that get the dairy products from<br />
the plant to market.<br />
• Of the $7.5 billion value of raw milk output, $3.0 billion is reta<strong>in</strong>ed as returns to land,<br />
labour and capital. A further $3.6 billion is spent on domestically produced <strong>in</strong>termediate<br />
<strong>in</strong>puts, such as fertilizer ($447 million), feed ($723 million), agricultural services ($446<br />
million), f<strong>in</strong>ancial services<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
C
D Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
It generates jobs<br />
• The dairy sector employs around 35,000 workers, exclud<strong>in</strong>g those who are self-employed<br />
(which could be up to 10,000 people). The sector will <strong>in</strong>directly support many more jobs<br />
<strong>in</strong> <strong>in</strong>dustries that supply dairy, and that experience the benefits of additional <strong>in</strong>come<br />
flow<strong>in</strong>g <strong>in</strong>to the region due to dairy volume and/or price growth.<br />
• It provides more jobs than each of the f<strong>in</strong>ance and accommodation sectors; around 65%<br />
more than the sheep and beef farm<strong>in</strong>g sector; 75% more than the fruit grow<strong>in</strong>g sector<br />
and double the jobs <strong>in</strong> the wood process<strong>in</strong>g sector.<br />
• In districts such as South Taranaki, Waimate, Otorohanga and Matamata-Piako, the dairy<br />
sector directly accounts for between 1 <strong>in</strong> 4 and 1 <strong>in</strong> 5 of the total number of jobs <strong>in</strong> the<br />
region.<br />
• A $1 per kg payout <strong>in</strong>crease results <strong>in</strong> the wealthier dairy sector and upstream and<br />
downstream <strong>in</strong>dustries employ<strong>in</strong>g approximately 4,600 more full time equivalent workers.<br />
It creates export earn<strong>in</strong>gs that improve Kiwis’ standard of liv<strong>in</strong>g<br />
• Dairy exports were $10.4 billion <strong>in</strong> calendar year 2009, account<strong>in</strong>g for around 26% of NZ’s<br />
total goods exports.<br />
• This contribution far outstrips that of any other goods export sector. Dairy exports are<br />
twice those of the meat sector, over 6 times larger than all fruit exports, n<strong>in</strong>e times larger<br />
than w<strong>in</strong>e exports, twelve times larger than alum<strong>in</strong>ium exports and 17 times larger than<br />
wool exports.<br />
• In fact, dairy exports are about the same as the sum of the next four largest export<br />
sectors: meat, wood, m<strong>in</strong>eral fuels (oil) and fruit & nuts.<br />
• Through its export earn<strong>in</strong>gs, the dairy sector makes a positive contribution to narrow<strong>in</strong>g<br />
the current account deficit. Without this export growth, <strong>New</strong> <strong>Zealand</strong> would have had to<br />
face <strong>in</strong>creased foreign liabilities and <strong>in</strong>terest on foreign debt.<br />
• A smaller deficit reduces <strong>New</strong> <strong>Zealand</strong>’s country risk premium on mortgage and other<br />
borrow<strong>in</strong>g costs, which benefits all households and firms that are borrowers.<br />
• The volume growth <strong>in</strong> the dairy sector over the last decade has resulted <strong>in</strong> <strong>New</strong> <strong>Zealand</strong><br />
households be<strong>in</strong>g a cumulative $6.4 billion better off than if dairy activity had stagnated<br />
at 1999 levels.<br />
• A $1 dairy payout <strong>in</strong>crease delivers additional <strong>in</strong>come of over $270 per year of additional<br />
spend<strong>in</strong>g per man, woman and child <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>. This year’s <strong>in</strong>crease of $1.17 per kg<br />
will generate an extra $316 per person <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>.<br />
It fills the tax coffers<br />
• The dairy sector generates a substantial amount of tax revenue for the government,<br />
through the <strong>in</strong>come taxes of farmers, corporate taxes of processors, and the GST and<br />
other taxes on the <strong>in</strong>come and spend<strong>in</strong>g that dairy stimulates <strong>in</strong> the rest of the economy.<br />
• And because the sector has raised taxation revenue, benefits flow not just to the dairy<strong>in</strong>g<br />
districts but across the country as a whole.<br />
• Increased tax revenue com<strong>in</strong>g <strong>in</strong> means more money to spend on essential services such<br />
as schools, hospitals and police. In 2009, these sectors are 0.7%, 0.6% and 0.2% better off<br />
because of the growth <strong>in</strong> the dairy sector over the past decade.
It drives many rural economies: “when dairy farmers are smil<strong>in</strong>g, the whole<br />
region smiles”<br />
• Dairy production is hugely important for many regional economies. It <strong>in</strong>jected over $700<br />
million <strong>in</strong>to the Southland economy <strong>in</strong> 2009, with South Taranaki and Matamata-Piako<br />
both receiv<strong>in</strong>g well over half a billion dollars.<br />
• For smaller district economies such as Ashburton ($471 million), Waipa ($361 million)<br />
and Selwyn ($270 million), the value of dairy production, relative to the total size of the<br />
economy, is likely to be significant.<br />
• As noted above, as many as 1 <strong>in</strong> 4 jobs <strong>in</strong> some rural areas are <strong>in</strong> the dairy farm<strong>in</strong>g and<br />
process<strong>in</strong>g sectors.<br />
• The dairy volume expansion over the past decade has delivered an additional $650 of<br />
<strong>in</strong>come per person <strong>in</strong> the Southland region and $590 per person <strong>in</strong> the Canterbury region<br />
above what would otherwise have happened. Northland ($110 per person) and the<br />
Waikato ($270) have also been major w<strong>in</strong>ners.<br />
• A $1/kg <strong>in</strong>crease <strong>in</strong> milk solid prices delivers $170 per person of additional <strong>in</strong>come <strong>in</strong><br />
Northland and Taranaki, $130 per person <strong>in</strong> the Waikato and $140 <strong>in</strong> the Manawatu-<br />
Wanganui region.<br />
It benefits urban consumers too<br />
• Firms benefit from sell<strong>in</strong>g goods and services to the dairy sector. The average dairy<br />
farmer spends well over half of their <strong>in</strong>come on goods and services to support on-farm<br />
operations. Many of these goods will come from urban areas.<br />
• Households benefit from the additional government spend<strong>in</strong>g that is facilitated by the<br />
tax revenue generated by the dairy sector.<br />
• They also pay lower mortgage and bus<strong>in</strong>ess borrow<strong>in</strong>g costs due to the reduction <strong>in</strong> the<br />
current account deficit (and thus the <strong>in</strong>terest rate premium on overseas funds) due to<br />
dairy export revenue.<br />
• The dairy sector’s strong export growth over the last decade has improved <strong>New</strong> <strong>Zealand</strong>’s<br />
balance of trade, and allowed for <strong>in</strong>creased consumption spend<strong>in</strong>g. This export growth<br />
reduced <strong>New</strong> <strong>Zealand</strong>’s net foreign liabilities to GDP ratio by over 1%. Together with the<br />
exchange rate appreciation, this has saved households a cumulative $1.2 billion <strong>in</strong> <strong>in</strong>terest<br />
repayments on foreign debt over the past decade.<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
E
Figure 1<br />
F Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth
Contents<br />
1. The current contribution of dairy 1<br />
1.1 Purpose of report 1<br />
1.2 Direct contribution to GDP 1<br />
1.3 Contribution to regional <strong>in</strong>comes 2<br />
1.4 Contribution to export performance 2<br />
1.5 Contribution to Balance of Payments 4<br />
1.6 Contribution to employment 4<br />
1.7 Contribution to other sectors’performance 5<br />
1.7.1 Supply cha<strong>in</strong> 5<br />
1.7.2 Dairy farm<strong>in</strong>g 6<br />
1.7.3 Dairy process<strong>in</strong>g 7<br />
2. Modell<strong>in</strong>g dairy’s economic contribution over the past decade 9<br />
2.1 Objective of modell<strong>in</strong>g 9<br />
2.2 Modell<strong>in</strong>g technique 9<br />
2.3 Advantages of CGE modell<strong>in</strong>g 9<br />
2.4 Modell<strong>in</strong>g scenarios 10<br />
2.4.1 Scenario 1: The price of milk solids 10<br />
2.4.2 Scenario 2: The growth of dairy<strong>in</strong>g over the past decade 11<br />
2.5 How we analyse the modell<strong>in</strong>g results 12<br />
3. Milk solids price spike 13<br />
3.1 Headl<strong>in</strong>e results 13<br />
3.2 Detailed results 13<br />
3.2.1 Direct effects: the dairy sector 13<br />
3.2.2 Indirect impact on other <strong>in</strong>dustries 16<br />
3.2.3 Macroeconomic effects 17<br />
3.2.4 Regional impacts 18<br />
4. Production growth over the last decade 19<br />
4.1 Headl<strong>in</strong>e results 19<br />
4.2 Detailed results 20<br />
4.2.1 Direct impacts 20<br />
4.2.2 Indirect impacts on other <strong>in</strong>dustries 20<br />
4.2.3 Macroeconomic effects 21<br />
4.2.4 Regional impacts 22<br />
5. Conclusion 24<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
G
Appendices<br />
Figures<br />
Tables<br />
H Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Appendix A CGE modell<strong>in</strong>g framework 25<br />
A.1 The MONASH-<strong>New</strong> <strong>Zealand</strong> CGE model: overview 25<br />
A.2 Dynamics of the MONASH-NZ model 26<br />
A.3 Database structure 26<br />
A.4 Production structure (Horridge, 2008b) 28<br />
A.5 Regional extension 29<br />
Appendix B CGE and multiplier analysis 30<br />
Appendix C Limitations of analysis 32<br />
Appendix D References 33<br />
Appendix E Dairy employment statistics 34<br />
Appendix F Value of regional dairy production 38<br />
Appendix G Chang<strong>in</strong>g dairy export markets 39<br />
Figure 1 Impacts of dairy growth on the rest of the economy F<br />
Figure 2 Growth <strong>in</strong> dairy exports over past decades 4<br />
Figure 3 Importance of dairy to regional employment 5<br />
Figure 4 Model structure of the sector 6<br />
Figure 5 Change <strong>in</strong> milk solids price: 1998-2009 11<br />
Figure 6 Processed milk solids 11<br />
Figure 7 Gross regional product impacts 17<br />
Figure 8 Dairy ga<strong>in</strong>s s<strong>in</strong>ce 1998/99 21<br />
Figure 9 2009 Gross regional product impacts 23<br />
Figure 10 Components of a CGE model 25<br />
Figure 11 The MONASH-NZ database 27<br />
Figure 12 Production structure 28<br />
Figure 13 Chang<strong>in</strong>g markets for <strong>New</strong> <strong>Zealand</strong>’s dairy exports 39<br />
Table 1 Value of regional dairy production 2<br />
Table 2 Export values 3<br />
Table 3 Farm<strong>in</strong>g <strong>in</strong>dustry structure 7<br />
Table 4 Dairy process<strong>in</strong>g <strong>in</strong>dustry structure 7<br />
Table 5 Indirect impacts 2010 15<br />
Table 6 National results 16<br />
Table 7 Increase <strong>in</strong> gross regional product 17<br />
Table 8 Average Cap Farm Cashflow 18<br />
Table 9 Indirect impacts 2008/09 21<br />
Table 10 National results 2009 22<br />
Table 11 Increase <strong>in</strong> gross regional product 23<br />
Table 12 IO vs. CGE multipliers 31
1. The current contribution of dairy<br />
1.1 Purpose of report<br />
This report identifies the dairy sector’s current contribution to the <strong>New</strong> <strong>Zealand</strong> economy<br />
and looks at how changes <strong>in</strong> the dairy sector over the past decade have benefited districts<br />
and households <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>.<br />
1.2 Direct contribution to GDP<br />
The dairy sector, compris<strong>in</strong>g farmers and dairy processors, directly contributed around $5.0<br />
billion of value added (or GDP) to the <strong>New</strong> <strong>Zealand</strong> economy <strong>in</strong> 2010, around 2.8% of the<br />
total GDP figure 1 . By way of comparison, dairy GDP:<br />
• is greater than the GDP contribution of the fish<strong>in</strong>g, forestry and m<strong>in</strong><strong>in</strong>g sectors comb<strong>in</strong>ed<br />
• is around 10 times as large as the GDP of the w<strong>in</strong>e sector<br />
• is about 3 times as large as the forestry and logg<strong>in</strong>g sector<br />
• accounts for over a third of the GDP contribution of the entire primary sector (dairy and<br />
meat farm<strong>in</strong>g and process<strong>in</strong>g, horticulture, fish<strong>in</strong>g, forestry, m<strong>in</strong><strong>in</strong>g)<br />
• is 40% larger than the entire utilities sector (electricity, gas and water)<br />
• is 2/3 as large as the entire construction sector<br />
• accounts for 15% of the total GDP of the goods produc<strong>in</strong>g <strong>in</strong>dustries<br />
Note that these figures are the direct contributions only. They do not take <strong>in</strong>to account the<br />
l<strong>in</strong>ks that the dairy sector has with the wider economy. In reality, the dairy sector also has<br />
<strong>in</strong>direct and <strong>in</strong>duced effects on the <strong>New</strong> <strong>Zealand</strong> economy. The <strong>in</strong>direct effects accrue via<br />
the <strong>in</strong>dustries support<strong>in</strong>g the dairy sector (fertiliser, agricultural services, transport, etc). When<br />
the dairy sector grows, these support<strong>in</strong>g <strong>in</strong>dustries will also grow. The <strong>in</strong>duced effects are<br />
attributable to the additional spend<strong>in</strong>g of dairy sector farmers and workers follow<strong>in</strong>g a boost<br />
<strong>in</strong> dairy returns. This spend<strong>in</strong>g will be directed <strong>in</strong>to sectors such as hous<strong>in</strong>g, cloth<strong>in</strong>g, bars and<br />
cafes, enterta<strong>in</strong>ment, etc. Some of these l<strong>in</strong>kages are discussed <strong>in</strong> section 1.7 below. 2<br />
1. Calculated from Statistics <strong>New</strong> <strong>Zealand</strong> SNA GDP by <strong>in</strong>dustry data and NZIER’s <strong>in</strong>dustry database. Measured <strong>in</strong> 2010 prices.<br />
2. Unless one uses an unrealistic and non-credible methodology, it is not possible to calculate the total (direct plus <strong>in</strong>direct<br />
and <strong>in</strong>duced) GDP contribution of dairy. See section 2.3 and Appendix B for further explanation<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
1
2 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
1.3 Contribution to regional <strong>in</strong>comes<br />
In many rural areas, the contribution of the dairy sector to the local economy is far greater<br />
than the national average of 2.8% mentioned above. The dairy sector pumps hundreds of<br />
millions of dollars of revenue <strong>in</strong>to regional economies each year. Table 1 shows the 15 highest<br />
revenue generat<strong>in</strong>g dairy districts <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>.<br />
Dairy production <strong>in</strong>jected over $700 million <strong>in</strong>to the Southland district economy <strong>in</strong> 2009, with<br />
South Taranaki and Matamata-Piako both receiv<strong>in</strong>g well over half a billion dollars. For smaller<br />
district economies such as Ashburton ($471 million), Waipa ($361 million) and Selwyn ($270<br />
million), the value of dairy production, relative to the total size of the district economy, is likely<br />
to be significant 3 . Also see Box story 1.<br />
Table 1 Value of regional dairy production<br />
$ millions, 2009<br />
Region Dairy revenue<br />
Southland 710.35<br />
South Taranaki 616.56<br />
Matamata-Piako 552.12<br />
Ashburton 471.11<br />
Waikato 389.91<br />
Waipa 361.00<br />
Selwyn 269.91<br />
South Waikato 262.53<br />
Rotorua 253.55<br />
Otorohanga 234.54<br />
<strong>New</strong> Plymouth 206.31<br />
Hauraki 196.40<br />
Tararua 188.28<br />
Timaru 185.13<br />
Clutha 181.72<br />
Notes: (1) Based on $5.50 price per Kg MS, 35c per Kg MS for stock sales and 4c per Kg of MS for other <strong>in</strong>come<br />
Source: Dairy <strong>New</strong> <strong>Zealand</strong>, <strong>Fonterra</strong>, NZIER<br />
1.4 Contribution to export performance<br />
Dairy exports were $10.4 billion <strong>in</strong> calendar year 2009, account<strong>in</strong>g for around 26% of NZ’s<br />
total goods exports. As Table 2 shows, this contribution far outstrips that of any other goods<br />
export sector. The third column <strong>in</strong> the table shows that dairy exports are twice those of the<br />
meat sector, over 6 times larger than all fruit exports, n<strong>in</strong>e times larger than w<strong>in</strong>e exports,<br />
twelve times larger than alum<strong>in</strong>ium exports and 17 times larger than wool exports.<br />
In fact, dairy exports are about the same as the sum of the next four largest export sectors:<br />
meat, wood, m<strong>in</strong>eral fuels (oil) and fruit & nuts.<br />
3. Regional GDP <strong>in</strong>formation at this level of detail is not available from Statistics <strong>New</strong> <strong>Zealand</strong>, so the shares cannot be<br />
calculated.
Table 2 Export values<br />
$ millions, 2009<br />
Sector Export value How many times dairy<br />
exports are larger than<br />
sector’s<br />
Dairy products 10,398<br />
Meat products 5,142 2.0<br />
Wood products 2,316 4.5<br />
M<strong>in</strong>eral fuels 1,891 5.6<br />
Fruit & nuts 1,597 6.6<br />
Mach<strong>in</strong>ery parts 1,294 8.1<br />
Fish 1,260 8.3<br />
Miscellaneous 1,211 8.7<br />
W<strong>in</strong>e & other beverages 1,183 8.9<br />
Alum<strong>in</strong>ium 880 11.9<br />
Electrical mach<strong>in</strong>ery 826 12.7<br />
Precious metals & stones 764 13.7<br />
Wool 637 16.5<br />
Wood pulp 610 17.2<br />
Iron & steel 565 18.6<br />
Optical & medical equipment 546 19.2<br />
Paper & paperboard 526 20.0<br />
Vegetables 405 25.9<br />
Plastics 401 26.2<br />
Hides & sk<strong>in</strong>s 375 28.0<br />
Notes: (1)<br />
Source: Dairy NZ, <strong>Fonterra</strong>, NZIER<br />
F<strong>in</strong>al report - 16 November 2010<br />
Over the past decade, dairy export values have grown by more than 8% per year. Dairy has<br />
grown more rapidly than most primary sectors, and has become an <strong>in</strong>creas<strong>in</strong>gly important<br />
contributor to <strong>New</strong> <strong>Zealand</strong>’s total food and beverages and overall merchandise trade.<br />
Figure 2 Growth <strong>in</strong> dairy exports over past decades<br />
Figure Annual average 2 Growth growth <strong>in</strong> <strong>in</strong> dairy export exports values, 1999-2009 over past decades<br />
Annual average growth <strong>in</strong> export values, 1999-2009<br />
Source: Statistics <strong>New</strong> <strong>Zealand</strong>, NZIER<br />
Source: Statistics <strong>New</strong> <strong>Zealand</strong>, NZIER<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Export growth has been driven by a comb<strong>in</strong>ation of strong global <strong>in</strong>come growth for<br />
3
4 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Export growth has been driven by a comb<strong>in</strong>ation of strong global <strong>in</strong>come growth for the<br />
majority of the decade, as well as a change <strong>in</strong> the composition of the markets that we sell to.<br />
As economies such as Ch<strong>in</strong>a and other parts of Asia experience higher liv<strong>in</strong>g standards, their<br />
tastes and preferences change, and staples such as rice, lentil and beans are replaced with<br />
higher prote<strong>in</strong> foods. The chang<strong>in</strong>g composition of <strong>New</strong> <strong>Zealand</strong>’s dairy markets is shown<br />
<strong>in</strong> Figure 13 <strong>in</strong> Appendix G. Ch<strong>in</strong>a, for example, accounted for 0.4% of <strong>New</strong> <strong>Zealand</strong>’s dairy<br />
exports <strong>in</strong> 1989 and now takes over 12%. The relative importance of major markets such as<br />
the UK, Japan and Mexico has dropped over this period.<br />
1.5 Contribution to Balance of Payments<br />
The strong export growth from the dairy sector has been a key factor <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>’s<br />
current account deficit (CAD) narrow<strong>in</strong>g <strong>in</strong> recent years. This is important because as the CAD<br />
rises as a proportion of GDP, foreign <strong>in</strong>vestors and rat<strong>in</strong>gs agencies start to have concerns<br />
over the ability of the <strong>New</strong> <strong>Zealand</strong> economy to withstand any unexpected negative<br />
economic shock (such as a global pandemic or f<strong>in</strong>ancial crisis). These concerns translate <strong>in</strong>to<br />
<strong>New</strong> <strong>Zealand</strong> hav<strong>in</strong>g a higher risk premium attached to it on foreign borrow<strong>in</strong>gs – that is, it<br />
becomes more expensive for <strong>New</strong> <strong>Zealand</strong> firms, households and the government to borrow<br />
on <strong>in</strong>ternational markets. The most obvious channel would be through higher household<br />
mortgage repayments.<br />
The strength of the dairy sector has been very evident as <strong>New</strong> <strong>Zealand</strong> recovers from the<br />
global f<strong>in</strong>ancial crisis and domestic recession. With domestic demand cont<strong>in</strong>u<strong>in</strong>g to be<br />
anaemic, it is the export side of the economy that is be<strong>in</strong>g relied on to generate economic<br />
growth. It has recently been noted that dairy’s growth has resulted <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>’s trade<br />
surplus be<strong>in</strong>g at its highest level for eight years.<br />
1.6 Contribution to employment<br />
National<br />
The dairy sector <strong>in</strong> <strong>New</strong> <strong>Zealand</strong> is a major employer, and is vital for a number of districts.<br />
On-farm employment is around 24,000 nationwide, with dairy process<strong>in</strong>g provid<strong>in</strong>g another<br />
10,000 jobs. These figures do not <strong>in</strong>clude those dairy farmers who are registered as selfemployed.<br />
Although dairy employment does not reach the employment levels present <strong>in</strong> a number of<br />
services sectors (for example, there are 110,000 workers <strong>in</strong> pre-school and school education<br />
alone), it provides more jobs than each of the f<strong>in</strong>ance and accommodation sectors (both<br />
around 32,000); around 65% more than the sheep and beef farm<strong>in</strong>g sector (20,500); 75% more<br />
than the fruit grow<strong>in</strong>g sector (19,300) and double the jobs <strong>in</strong> the wood process<strong>in</strong>g sector.<br />
Regional<br />
In districts such as South Taranaki, Waimate, Otorohanga and Matamata-Piako, the dairy sector<br />
directly accounts for between 1 <strong>in</strong> 4 and 1 <strong>in</strong> 5 of the total number of jobs <strong>in</strong> the region.<br />
The sector will <strong>in</strong>directly support many more jobs <strong>in</strong> <strong>in</strong>dustries that supply dairy, and that<br />
experience the benefits of additional <strong>in</strong>come flow<strong>in</strong>g <strong>in</strong>to the region due to dairy volume<br />
and/or price growth.<br />
4. Department of Labour (DoL), ‘Regional Industry Tool 2009’http://www.dol.govt.nz/services/LMI/tools/regional-<strong>in</strong>dustry-tool.asp<br />
5. There is no official count of self-employed dairy farmers, but the figure has been estimated by Dairy NZ at around 10,000 based on<br />
owner-operator and sharemilker numbers.
Figure 3 Importance of dairy to regional employment<br />
Dairy farm and process<strong>in</strong>g jobs as % of total <strong>in</strong> region<br />
Figure 3 Importance of dairy to regional employment<br />
Dairy farm and process<strong>in</strong>g jobs as % of total <strong>in</strong> region<br />
Source: DoL, NZIER<br />
A complete<br />
A complete<br />
table<br />
table<br />
of<br />
of<br />
dairy employment<br />
employment<br />
statistics<br />
statistics<br />
for each<br />
for<br />
of <strong>New</strong><br />
each<br />
<strong>Zealand</strong>’s<br />
of <strong>New</strong><br />
74 Territorial<br />
<strong>Zealand</strong>’s<br />
Local<br />
74<br />
Authorities is conta<strong>in</strong>ed <strong>in</strong> Appendix E.<br />
Territorial Local Authorities is conta<strong>in</strong>ed <strong>in</strong> Appendix E.<br />
1.7 Contribution to other sectors’ performance<br />
F<strong>in</strong>al report - 16 November 2010<br />
Of course, the dairy farm<strong>in</strong>g and process<strong>in</strong>g sector do not operate <strong>in</strong> isolation. They have<br />
strong upstream and downstream l<strong>in</strong>ks to other parts of the <strong>New</strong> <strong>Zealand</strong> economy.<br />
1.7 Contribution to other sectors’ performance<br />
1.7.1 Supply cha<strong>in</strong><br />
Of course, the dairy farm<strong>in</strong>g and process<strong>in</strong>g sector do not operate <strong>in</strong> isolation. They<br />
The dairy sector can conceptually be broken <strong>in</strong>to a dairy farm<strong>in</strong>g <strong>in</strong>dustry and a dairy<br />
have strong<br />
process<strong>in</strong>g<br />
upstream<br />
<strong>in</strong>dustry. Dairy<br />
and<br />
farm<strong>in</strong>g<br />
downstream<br />
generates<br />
l<strong>in</strong>ks<br />
the raw<br />
to<br />
milk<br />
other<br />
that the<br />
parts<br />
dairy<br />
of<br />
process<strong>in</strong>g<br />
the <strong>New</strong><br />
<strong>in</strong>dustry<br />
<strong>Zealand</strong><br />
economy. uses as an <strong>in</strong>put, and produces processed dairy products for sale to domestic consumers,<br />
export markets and other <strong>in</strong>dustries.<br />
1.7.1 Supply cha<strong>in</strong><br />
The dairy sector can conceptually be broken <strong>in</strong>to a dairy farm<strong>in</strong>g <strong>in</strong>dustry and a dairy<br />
process<strong>in</strong>g <strong>in</strong>dustry. Dairy farm<strong>in</strong>g generates the raw milk that the dairy process<strong>in</strong>g<br />
<strong>in</strong>dustry uses as an <strong>in</strong>put, and produces processed dairy products 6 for sale to<br />
domestic consumers, export markets and other <strong>in</strong>dustries.<br />
6<br />
In our model, we have a variety of processed dairy products, but for simplification for this work,<br />
we consider one generic processed dairy product. Similarly, farm <strong>in</strong>come from other sources than<br />
just milk 6. In (e.g. our model, stock we have and a variety other of processed sales) dairy is <strong>in</strong>cluded products, but <strong>in</strong> for the simplification modell<strong>in</strong>g for this but work, not we consider s<strong>in</strong>gled one generic out <strong>in</strong> processed the<br />
report<strong>in</strong>g.<br />
dairy product. Similarly, farm <strong>in</strong>come from other sources than just milk (e.g. stock and other sales) is <strong>in</strong>cluded <strong>in</strong> the modell<strong>in</strong>g but<br />
not s<strong>in</strong>gled out <strong>in</strong> the report<strong>in</strong>g.<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
6<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
5
Figure 4 Model structure of the sector<br />
Figure 4 Model structure of the sector<br />
Source: NZIER<br />
At each stage of production there is also labour, capital and other <strong>in</strong>termediate employment.<br />
At each stage of production there is also labour, capital and other <strong>in</strong>termediate<br />
employment. 1.7.2 Dairy farm<strong>in</strong>g<br />
The structure of the farm<strong>in</strong>g <strong>in</strong>dustry is shown <strong>in</strong> Table 3. The farm<strong>in</strong>g sector produced around<br />
1.7.2 $7.5 Dairy billion farm<strong>in</strong>g worth of raw milk <strong>in</strong> the 2009/10 production year for sale to the process<strong>in</strong>g<br />
operations. As expected, farm<strong>in</strong>g uses a lot of land and the labour is not a large part of the<br />
The structure of the farm<strong>in</strong>g <strong>in</strong>dustry is shown <strong>in</strong> Table 3. The farm<strong>in</strong>g sector<br />
farm’s costs. The on-farm sector employs around 24,000 full time equivalent (FTE) workers. The<br />
produced around $7.5 billion worth of raw milk <strong>in</strong> the 2009/10 production year for sale<br />
primary cashflow costs for farmers are fertiliser for the land and feed for the animals. These<br />
to the process<strong>in</strong>g two <strong>in</strong>dustries operations. are heavily affected As expected, by movements farm<strong>in</strong>g <strong>in</strong> demand uses for a milk lot of products. land and the labour<br />
is not a large part of the farm’s costs. The on-farm sector employs around 24,000 full<br />
We can break down the $7.5 billion of raw milk <strong>in</strong>to the follow<strong>in</strong>g parts:<br />
time equivalent (FTE) workers. The primary cashflow costs for farmers are fertiliser<br />
for the • land $3.0and billion feed is reta<strong>in</strong>ed for the as returns animals. to land, These labour two and<strong>in</strong>dustries capital. are heavily affected by<br />
movements • $3.6 <strong>in</strong> billion demand is spent for on milk domestically products. produced <strong>in</strong>termediate <strong>in</strong>puts, such as fertilizer ($447<br />
million), straw and feed ($723 million), agricultural services ($446 million), f<strong>in</strong>ancial services<br />
We can break ($341down million), the mach<strong>in</strong>ery $7.5 billion repairs of ($198 raw million) milk <strong>in</strong>to andthe petrol/diesel follow<strong>in</strong>g ($80 parts: million).<br />
• $3.0 • billion $440 million is reta<strong>in</strong>ed is spent as onreturns imported to <strong>in</strong>puts land, such labour as fertilizer and capital. ($138 million), pharmaceuticals<br />
($111 million), feed ($31 million), agricultural equipment ($26 million) and pesticides ($16<br />
• $3.6 billion million). is spent on domestically produced <strong>in</strong>termediate <strong>in</strong>puts, such as<br />
fertilizer ($447 million), straw and feed ($723 million), agricultural services ($446<br />
• $290 million is spent on marg<strong>in</strong> services such as transport.<br />
million), f<strong>in</strong>ancial services ($341 million), mach<strong>in</strong>ery repairs ($198 million) and<br />
petrol/diesel ($80 million).<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
6 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
F<strong>in</strong>al report - 16 November 2010<br />
• $440 million is spent on imported <strong>in</strong>puts such as fertilizer ($138 million),<br />
pharmaceuticals ($111 million), feed ($31 million), agricultural equipment ($26<br />
million) and pesticides ($16 million).<br />
• $290 million is spent on marg<strong>in</strong> services such as transport.<br />
7
Table 3 Farm<strong>in</strong>g <strong>in</strong>dustry structure<br />
Input Dairy farm<strong>in</strong>g Comment<br />
Land 21% Includes Gross Marg<strong>in</strong><br />
Capital 15%<br />
Labour 5%<br />
Domestic <strong>in</strong>termediates 47% Ag services, feed, fertilizer<br />
Imported <strong>in</strong>termediates 8% Fertilizer, pharmaceuticals,<br />
feed<br />
Marg<strong>in</strong>s 4% Transport<br />
Source: NZIER<br />
1.7.3 Dairy process<strong>in</strong>g<br />
The dairy process<strong>in</strong>g <strong>in</strong>dustry takes the raw milk and turns it <strong>in</strong> to products that can be sold to<br />
customers and consumers. The <strong>in</strong>dustry produces a wide range of dairy products, from milk<br />
and cheese to ice cream and butter.<br />
The vast majority of the <strong>in</strong>dustry’s <strong>in</strong>put costs are the purchase of the raw milk, which<br />
accounts for 70% of the <strong>in</strong>dustry’s costs. In addition, the process<strong>in</strong>g <strong>in</strong>dustry uses about $1.1<br />
billion of capital and employs close to 10,000 FTE employees.<br />
Of the $10.4 billion exported by our model’s dairy process<strong>in</strong>g sector:<br />
• $7.5 billion is used to purchase raw milk from the dairy farm<strong>in</strong>g sector.<br />
• $1.5 billion is reta<strong>in</strong>ed as returns to labour and capital (i.e. wages and rate of return).<br />
• $625 million is spent on <strong>in</strong>termediate <strong>in</strong>puts from <strong>New</strong> <strong>Zealand</strong>. This <strong>in</strong>cludes $85 million<br />
of plastic conta<strong>in</strong>ers, $45 million on electricity and $22.5 million on f<strong>in</strong>ancial services.<br />
• Imported <strong>in</strong>termediate <strong>in</strong>puts account for $310 million – largely plastic conta<strong>in</strong>ers ($182<br />
million) and other food products to be used <strong>in</strong> process<strong>in</strong>g ($30 million).<br />
• $730 million is spent on retail<strong>in</strong>g/wholesal<strong>in</strong>g costs that get the dairy products from the<br />
plant to market.<br />
Table 4 Dairy process<strong>in</strong>g <strong>in</strong>dustry structure<br />
Input Share Comment<br />
Capital 7% Includes Gross Marg<strong>in</strong><br />
Labour 7%<br />
Raw milk 66%<br />
Other <strong>in</strong>termediates 12% Other farm <strong>in</strong>puts<br />
Other imported <strong>in</strong>termediates 6% Mostly plastic – packag<strong>in</strong>g<br />
Marg<strong>in</strong>s 2% Retail<strong>in</strong>g and wholesal<strong>in</strong>g<br />
costs<br />
Source: NZIER<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
7
8 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Dairy exports and rural livelihoods<br />
Any <strong>in</strong>quiry <strong>in</strong>to the <strong>New</strong> <strong>Zealand</strong> economy and its work<strong>in</strong>gs has to at some po<strong>in</strong>t focus<br />
on the central driv<strong>in</strong>g force of economic growth: trade. Trade is important because over<br />
time <strong>New</strong> <strong>Zealand</strong>’s spend<strong>in</strong>g must equal its <strong>in</strong>come. Without <strong>in</strong>ternational trade the<br />
<strong>in</strong>come of <strong>New</strong> <strong>Zealand</strong> bus<strong>in</strong>esses is limited by domestic spend<strong>in</strong>g. International trade<br />
removes this limit.<br />
With dairy exports at 26% of goods exports, the impact of the dairy <strong>in</strong>dustry on<br />
economic activity is considerable. The money that farmers spend <strong>in</strong> their communities<br />
and <strong>in</strong> other parts of the country drives further economic activity – the more they earn<br />
on <strong>in</strong>ternational markets the more they spend <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>. Dairy farmers’success is<br />
mirrored not only <strong>in</strong> their local communities but also <strong>in</strong> the cities of <strong>New</strong> <strong>Zealand</strong> which<br />
produce the goods and services that are bought by farmers. Even imports have a local<br />
component s<strong>in</strong>ce they have to be transported to the po<strong>in</strong>t of sale.<br />
Nobody understands this more than the mayors of the districts, regions and cities of <strong>New</strong><br />
<strong>Zealand</strong>. Peter Tennent, Mayor of <strong>New</strong> Plymouth, says that “while the dairy <strong>in</strong>dustry <strong>in</strong> his<br />
region only makes up 2% of the workforce, 100% of the community are the benefactors<br />
of their efforts. When dairy farmers are smil<strong>in</strong>g, the region smiles”. Hugh Vercoe, Mayor of<br />
the Matamata Piako District, also knows how important dairy is to his district: “not only<br />
are we reliant on the dairy [farm<strong>in</strong>g] <strong>in</strong>dustry, we have five dairy process<strong>in</strong>g plants and<br />
very active sale yards. This helps to ma<strong>in</strong>ta<strong>in</strong> a vibrant community”. David Adamson, CEO<br />
of the Southland District Council says that the dairy <strong>in</strong>dustry has “changed the face of<br />
Southland”. He adds that “its economy has weathered the recession well, ma<strong>in</strong>ly because<br />
of the <strong>in</strong>fluence of the dairy <strong>in</strong>dustry”.<br />
In the first <strong>in</strong>stance farmers spend their <strong>in</strong>comes on <strong>in</strong>dustries that directly support<br />
their activities. They buy more cows, upgrade equipment, buy fertilizer, repay debt and<br />
make land improvements. David Adamson suggests that this is the most visible sign<br />
of the impact of dairy growth on the Southland region: “most of the money earned by<br />
farmers is spun out <strong>in</strong>to the community”. S<strong>in</strong>ce most of the goods and services come<br />
from outside of the prov<strong>in</strong>ces, other communities benefit as well. In work done by<br />
NZIER (2003) it is shown that it takes about 18 months for this economic ‘ripple’effect of<br />
additional export revenue to fully work through the <strong>New</strong> <strong>Zealand</strong> economy, all of which<br />
leads to stronger household spend<strong>in</strong>g and bus<strong>in</strong>ess <strong>in</strong>vestment.<br />
What would <strong>New</strong> <strong>Zealand</strong> look like without the dairy <strong>in</strong>dustry? Peter Tennent f<strong>in</strong>ds it<br />
difficult to imag<strong>in</strong>e this situation but one th<strong>in</strong>g he does know is that “<strong>New</strong> Plymouth<br />
would not have been judged the best place to live on the planet by the United Nations<br />
backed Liv.com Awards without the dairy <strong>in</strong>dustry … we’d still be smil<strong>in</strong>g but not as<br />
wide … and there’d be far fewer bus<strong>in</strong>esses here”. Similar sentiments are echoed by<br />
David Adamson and Hugh Vercoe. Both said there would be fewer bus<strong>in</strong>esses, less<br />
vibrant community, and fewer job opportunities. Not only would there be fewer job<br />
opportunities and <strong>in</strong>creased movement of people to the cities, those cities would also be<br />
poorer.<br />
The dairy <strong>in</strong>dustry has had a major impact on <strong>New</strong> <strong>Zealand</strong> society and economy for<br />
over 130 years. Those <strong>in</strong>volved <strong>in</strong> runn<strong>in</strong>g districts and cities closest to the dairy <strong>in</strong>dustry<br />
well understand the positive impact of dairy<strong>in</strong>g, not just on their regions and cities but<br />
on the rest of <strong>New</strong> <strong>Zealand</strong>.
2. Modell<strong>in</strong>g dairy’s economic contribution<br />
over the past decade<br />
2.1 Objective of modell<strong>in</strong>g<br />
The section above has shown that the dairy sector has witnessed significant growth over the<br />
past decade. A key question is: how has this growth benefited the rest of the economy? In<br />
particular, we are <strong>in</strong>terested <strong>in</strong> two aspects of this growth:<br />
• The short term impacts of milk solids payout <strong>in</strong>creases<br />
• The longer term impacts of volume growth <strong>in</strong> the sector over the last 10 years.<br />
We exam<strong>in</strong>e these two aspects us<strong>in</strong>g a relatively newly developed economic model of the<br />
<strong>New</strong> <strong>Zealand</strong> economy.<br />
2.2 Modell<strong>in</strong>g technique<br />
The dairy sector <strong>in</strong>teracts with the rest of the economy by generat<strong>in</strong>g exports and<br />
employment, us<strong>in</strong>g <strong>in</strong>termediate <strong>in</strong>puts such as fertilizer, and compet<strong>in</strong>g for use of land,<br />
labour and <strong>in</strong>vestment. In order to get a sense of how the <strong>New</strong> <strong>Zealand</strong> economy as a whole<br />
might be impacted by production and price changes <strong>in</strong> the dairy sector, we need to use<br />
an economic model that takes these <strong>in</strong>teractions <strong>in</strong>to account. We use NZIER’s dynamic<br />
Computable General Equilibrium (CGE) model of the <strong>New</strong> <strong>Zealand</strong> economy to evaluate the<br />
impacts of the price and volume growth <strong>in</strong> the dairy sector.<br />
2.3 Advantages of CGE modell<strong>in</strong>g<br />
Our dynamic CGE model is a more robust framework than alternatives approaches for<br />
estimat<strong>in</strong>g the contribution of the dairy sector to the <strong>New</strong> <strong>Zealand</strong> economy. The most<br />
commonly used alternative is <strong>in</strong>put-output (IO) or ‘multiplier’analysis. IO or multiplier analysis<br />
has two significant limitations:<br />
• It does not adequately consider the reallocation of resources follow<strong>in</strong>g a ‘shock’to the<br />
economy, such as a surge <strong>in</strong> demand for dairy exports. In particular, multiplier analysis<br />
assumes that resources (land, labour, capital, energy, <strong>in</strong>termediate <strong>in</strong>puts) are available<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
9
10 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
<strong>in</strong> unlimited quantities for the expansion of a sector. It does not consider how those<br />
resources might otherwise have been used <strong>in</strong> the economy – their opportunity cost. In<br />
reality, resources are scarce and any additional resources used <strong>in</strong> the dairy sector must<br />
be diverted from other <strong>in</strong>dustries. The output of these <strong>in</strong>dustries must therefore fall. The<br />
overall macroeconomic impact of the <strong>in</strong>crease <strong>in</strong> demand <strong>in</strong> one sector should take <strong>in</strong>to<br />
account these losses elsewhere <strong>in</strong> the economy.<br />
• It does not account for relative price changes. For example, it assumes that wage rates<br />
do not change as the demand for labour rises or falls, and that the prices of <strong>in</strong>termediate<br />
goods such as transport and bus<strong>in</strong>ess services do not change <strong>in</strong> response to shifts <strong>in</strong><br />
demand. In reality, if there is additional demand for workers <strong>in</strong> the dairy sector, this will<br />
place upward pressure on wages across the economy. Even though this wage pressure<br />
might be relatively small, it will still have a negative impact on <strong>in</strong>put costs for other firms<br />
<strong>in</strong> the economy, and could lead to a drop <strong>in</strong> output. A similar story is true for <strong>in</strong>termediate<br />
<strong>in</strong>puts. As the dairy sector demands more of these <strong>in</strong>puts, their price rises for all other<br />
firms <strong>in</strong> the economy, caus<strong>in</strong>g their output to fall.<br />
Multiplier analysis therefore tends to vastly overstate the economic impacts of changes<br />
<strong>in</strong> demand <strong>in</strong> a specific sector. These unrealistically large impacts are thus not particularly<br />
<strong>in</strong>formative for policy makers or firms.<br />
CGE models explicitly address both resource allocation and relative price shifts, allow<strong>in</strong>g for<br />
a more credible, richer analysis of economic contribution. These models tend to produce<br />
more conservative estimates of impacts, but are more consistent with economic theory and<br />
practice. See Appendix B for a fuller discussion.<br />
2.4 Modell<strong>in</strong>g scenarios<br />
We <strong>in</strong>vestigate the impact of the dairy sector with two historical scenarios to show how real<br />
changes <strong>in</strong> the dairy sector translate <strong>in</strong>to benefits for the rest of the economy. The historical<br />
scenarios exam<strong>in</strong>e the benefits that have accrued over the past decade:<br />
• milk solids payout <strong>in</strong>creases<br />
• growth <strong>in</strong> the sector over the last 10 years.<br />
These two scenarios jo<strong>in</strong>tly capture both the benefits to the economy of the long term<br />
growth <strong>in</strong> the sector and the short-run wealth ga<strong>in</strong>s from <strong>in</strong>creased milk solids payouts.<br />
• milk solids payout <strong>in</strong>creases<br />
• growth <strong>in</strong> the sector over the last 10 years.<br />
These two scenarios jo<strong>in</strong>tly capture both the benefits to the economy of the long term<br />
growth <strong>in</strong> the sector and the short-run wealth ga<strong>in</strong>s from <strong>in</strong>creased milk solids payouts.<br />
2.4.1 Scenario 1: The price of milk solids<br />
The world price of milk solids has a significant impact on the dairy <strong>in</strong>dustry and the wider<br />
<strong>New</strong> <strong>Zealand</strong> economy. It has also been fairly volatile of late, as can be seen from Figure 5.<br />
This first scenario assesses the effects on the economy of changes <strong>in</strong> the milk solids price paid<br />
to farmers. In order to generate higher prices for milk solids we assume that the world price<br />
has risen due to <strong>in</strong>creased world demand for dairy produce. Increased world demand for<br />
<strong>New</strong> <strong>Zealand</strong>’s dairy produce leads to rises <strong>in</strong> both milk prices for <strong>New</strong> <strong>Zealand</strong> dairy farmers<br />
and over a susta<strong>in</strong>ed period a rise <strong>in</strong> the quantity of milk solids produced domestically.<br />
We calibrate the price <strong>in</strong>creases <strong>in</strong> this simulation to be ± $1/kg milk solids <strong>in</strong> <strong>Fonterra</strong>’s<br />
payout. So we are ask<strong>in</strong>g: what are the flow-on impacts for the <strong>New</strong> <strong>Zealand</strong> economy from a<br />
$1 <strong>in</strong>crease or decrease <strong>in</strong> the <strong>Fonterra</strong> payout?
Figure 5 Change <strong>in</strong> milk solids price: 1998-2009<br />
$ per kg, 2008-09 prices<br />
Figure 5 Change <strong>in</strong> milk solids price: 1998-2009<br />
$ per kg, 2008-09 prices<br />
Figure 5 Change <strong>in</strong> milk solids price: 1998-2009<br />
$ per kg, 2008-09 prices<br />
Source: Dairy NZ<br />
F<strong>in</strong>al report - 16 November 2010<br />
2.4.2 Scenario Source: 2: Dairy The NZ growth of dairy<strong>in</strong>g over the past decade<br />
Over the 2.4.2 last Scenario 10 years 2: The the growth dairy of sector dairy<strong>in</strong>g has over grown the past significantly, decade <strong>in</strong>creas<strong>in</strong>g milk solid<br />
production 2.4.2 Scenario<br />
Over the<br />
by<br />
last<br />
58% 2:<br />
10 years<br />
between The growth<br />
the dairy<br />
1998/89 of<br />
sector has<br />
and dairy<strong>in</strong>g<br />
grown<br />
2008/09. over<br />
significantly,<br />
In the this<br />
<strong>in</strong>creas<strong>in</strong>g<br />
case past<br />
milk<br />
study, decade<br />
solid<br />
we ask the<br />
questions: Over the production last ‘what 10 by if years 58% it hadn’t between the dairy grown’? 1998/89 sector and has 2008/09. ‘what grown would In this significantly, case the study, economy we<strong>in</strong>creas<strong>in</strong>g askhave the questions: missed milk solid out<br />
on production if dairy ‘what had if by it hadn’t stagnated 58% grown’? between at and 1999 1998/89 ‘what production wouldand the economy 2008/09. levels’? have In missed this case out onstudy, if dairywe had ask the<br />
questions: stagnated ‘what at 1999 if it hadn’t production grown’? levels’? and ‘what would the economy have missed out<br />
The factual is the actual volume path as it occurred; the counterfactual is volumes<br />
on if dairy The factual had stagnated is the actualat volume 1999 path production as it occurred; levels’? the counterfactual is volumes rema<strong>in</strong><strong>in</strong>g<br />
rema<strong>in</strong><strong>in</strong>g at 1998/99 levels, as per Figure 6.<br />
at 1998/99 levels, as per Figure 6.<br />
The factual is the actual volume path as it occurred; the counterfactual is volumes<br />
rema<strong>in</strong><strong>in</strong>g Figure at 1998/99 6 6 Processed levels, milk as milk solids per Figure solids 6.<br />
Million kgs<br />
Figure 6 Processed milk solids<br />
Million kgs<br />
Source: Dairy Statistics 2008/09<br />
Source: Dairy Statistics 2008/09<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
12<br />
12<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
11
12 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
2.5 How we analyse the modell<strong>in</strong>g results<br />
In analys<strong>in</strong>g the modell<strong>in</strong>g results we take a systematic approach of track<strong>in</strong>g the impacts as<br />
they flow through the economy, beg<strong>in</strong>n<strong>in</strong>g with the direct impacts on the dairy sector itself.<br />
We look at the export and domestic markets, and how the sector responds to growth with<br />
<strong>in</strong>creased employment and <strong>in</strong>vestment.<br />
We then analyse the flow-on or <strong>in</strong>direct impacts on other <strong>in</strong>dustries. We split <strong>in</strong>direct impacts<br />
<strong>in</strong>to the follow<strong>in</strong>g <strong>in</strong>dustry categories:<br />
• Supply<strong>in</strong>g <strong>in</strong>dustries – <strong>in</strong>dustries that supply dairy with <strong>in</strong>termediate <strong>in</strong>puts are likely to<br />
benefit from a stronger dairy sector. These are <strong>in</strong>dustries such as agricultural services and<br />
the fertilizer <strong>in</strong>dustry.<br />
• Household expenditure <strong>in</strong>dustries – <strong>in</strong>dustries that households spend money on are<br />
likely to benefit from <strong>in</strong>creased <strong>in</strong>come that comes through higher employment and<br />
wages, and <strong>in</strong>creased returns to capital from a grow<strong>in</strong>g dairy sector.<br />
• Government <strong>in</strong>dustries – <strong>in</strong>dustries that rely on government fund<strong>in</strong>g are positively<br />
impacted by a stronger economy and bigger tax takes, as this <strong>in</strong>creases the money<br />
available for the government to spend.<br />
• Compet<strong>in</strong>g export <strong>in</strong>dustries – <strong>in</strong>dustries that compete for resources (such as land and<br />
labour) with the dairy sector lose from dairy’s growth.<br />
F<strong>in</strong>ally, we exam<strong>in</strong>e the macroeconomic effects. Here we report both value-add (GDP) and<br />
Net Economic Benefit/welfare (private and public consumption) measures.<br />
There are two ways to th<strong>in</strong>k about the way that export growth will affect GDP:<br />
(i) GDP is the sum of the value of expenditure on goods and services made <strong>in</strong> <strong>New</strong><br />
<strong>Zealand</strong> and exports are a component of that expenditure, so a change <strong>in</strong> exports<br />
directly affects the level of GDP. The change <strong>in</strong> exports will then have flow-on effects<br />
on other parts of the economy, as described <strong>in</strong> our results section.<br />
(ii) GDP is also the sum of the value of resources utilised <strong>in</strong> the economy. Increased dairy<br />
exports are generated, <strong>in</strong> part, by ga<strong>in</strong>s <strong>in</strong> productivity. Greater productivity allows<br />
the same resources – capital, land and labour – to generate greater value, so GDP<br />
<strong>in</strong>creases as productivity rises. Thus we expect export growth to have a direct impact<br />
on GDP and, <strong>in</strong> the long run, a positive impact.<br />
Although GDP is the most commonly used measure of economic performance, it does<br />
not capture necessarily how ‘well off’we are as a country. GDP is essentially a measure of<br />
how many goods and services <strong>New</strong> <strong>Zealand</strong> produces – it shows the size of the economy.<br />
Consumption shows how much household and government spend<strong>in</strong>g <strong>in</strong>creases follow<strong>in</strong>g<br />
a change <strong>in</strong> the economy. It is more appropriate than GDP as a measure of welfare (see<br />
Coleman, 2008), particularly <strong>in</strong> cases where we expect changes <strong>in</strong> the terms of trade 7 .<br />
Ultimately, the objective of an economic development is to raise the liv<strong>in</strong>g standards of the<br />
population. Liv<strong>in</strong>g standards are better proxied by household and government spend<strong>in</strong>g<br />
ability than by GDP. Thus our preferred NEB/welfare measure is consumption. Our CGE model<br />
allows us to determ<strong>in</strong>e, once all <strong>in</strong>ter-<strong>in</strong>dustry effects and factor price changes have occurred,<br />
the additional boost to <strong>New</strong> <strong>Zealand</strong>’s GDP and NEB/welfare result<strong>in</strong>g from a price change<br />
<strong>in</strong> the milk solids payout or volume growth <strong>in</strong> the sector. In addition, we also report other<br />
macroeconomic <strong>in</strong>dicators such as wages and employment.<br />
7. We use the term ‘welfare’here not <strong>in</strong> the technical economic sense but merely as a synonym for ‘wellbe<strong>in</strong>g’. The claim is merely that<br />
changes <strong>in</strong> consumption better proxy changes <strong>in</strong> welfare than do changes <strong>in</strong> GDP. We do not claim to actually measure welfare <strong>in</strong><br />
the technical sense.
3. Milk solids price spike<br />
3.1 Headl<strong>in</strong>e results<br />
A short term <strong>in</strong>crease <strong>in</strong> the price of milk solids generates immediate benefits for the national<br />
economy. The national benefit of an <strong>in</strong>crease of $1/kg <strong>in</strong> the <strong>Fonterra</strong> payout is a welfare<br />
ga<strong>in</strong> of $1.2 billion, as proxied by private and public consumption. In addition, national GDP<br />
is expected to rise by $400 million 8 . The richer dairy sector would generate employment of<br />
approximately 4,600 more FTEs and wages would later start to rise 9 .<br />
The welfare ga<strong>in</strong> is larger than the GDP ga<strong>in</strong> due to the impact of exchange rate movements:<br />
• the improved terms of trade allows us to consume more of our GDP (i.e. we have to<br />
export less to pay for a given amount of imports – mak<strong>in</strong>g the country better off as a<br />
whole)<br />
• the currency appreciation leads to a reduction <strong>in</strong> the value of <strong>New</strong> <strong>Zealand</strong>’s foreign debt.<br />
Both effects improve <strong>New</strong> <strong>Zealand</strong>ers’household purchas<strong>in</strong>g power and allow greater<br />
consumption of goods and services.<br />
3.2 Detailed results<br />
3.2.1 Direct effects: the dairy sector<br />
In the first simulation the <strong>in</strong>creased world demand for dairy products drives up both the price<br />
and volume of dairy exports. That is passed on down the supply cha<strong>in</strong> and results <strong>in</strong> a $1<br />
per kilogram of milk solids <strong>in</strong>crease <strong>in</strong> payments to dairy farmers. The <strong>in</strong>creased payout and<br />
volumes cause the dairy sector grows strongly to generate the extra production.<br />
The <strong>in</strong>creased payout causes <strong>in</strong>vestment <strong>in</strong> the farm<strong>in</strong>g <strong>in</strong>dustry to grow by 44%, and<br />
employment by 20%. Investment <strong>in</strong> the process<strong>in</strong>g component of the <strong>in</strong>dustry grows by<br />
14% and employment by 5.5%, relative to what would otherwise have occurred. Investment<br />
growth is higher than employment growth because capital accumulation tends to lag beh<strong>in</strong>d<br />
employment growth. The farm<strong>in</strong>g component of the sector grows more strongly because<br />
we have assumed that the benefits of higher world prices will be passed on to farmers. If<br />
dairy processors were to <strong>in</strong>crease their profit marg<strong>in</strong>s <strong>in</strong>stead then the differences would<br />
dim<strong>in</strong>ish 10 .<br />
8. This is on top of the <strong>in</strong>come generated by the ‘base’price. That is, if the 2011 price (say) is $5 and the 2012 payout is $6, our results<br />
look just at the additional <strong>in</strong>come generated by the $1 price <strong>in</strong>crease.<br />
9. The direct impact on the economy of a $1 <strong>in</strong>crease <strong>in</strong> the milk solids price is a $1.3 billion <strong>in</strong>crease <strong>in</strong> gross output. That gross<br />
output generates about $590 million of GDP once the cost of <strong>in</strong>termediate <strong>in</strong>puts is subtracted. Furthermore, the effect of the<br />
<strong>in</strong>creased dairy output is to <strong>in</strong>crease the price of resources to other <strong>in</strong>dustries and thus reduce their output. The net effect on GDP<br />
of the $1.3 billion <strong>in</strong>jection, once all these effects have been taken <strong>in</strong> to account, is the $400 million we report.<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
13
14 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
3.2.2 Indirect impact on other <strong>in</strong>dustries<br />
The <strong>in</strong>direct impacts can be broken down <strong>in</strong>to the <strong>in</strong>dustry categories described <strong>in</strong> section<br />
2.5. The numerical results are summarised <strong>in</strong> Table 5.<br />
• Supply<strong>in</strong>g <strong>in</strong>dustries – <strong>in</strong>dustries that supply dairy with <strong>in</strong>termediate <strong>in</strong>puts are likely<br />
to benefit from a stronger dairy sector. However, the fertilizer <strong>in</strong>dustry loses 0.2% of its<br />
sales. That counter<strong>in</strong>tuitive result arises from the movements <strong>in</strong> the exchange rate, which<br />
will be discussed further <strong>in</strong> the next section. As exports rise, imports become relatively<br />
cheaper and that causes primary producers to switch away from domestically produced<br />
fertiliser <strong>in</strong> favour of imported fertilisers.<br />
• Government expenditure <strong>in</strong>dustries – as expected, the <strong>in</strong>creased <strong>in</strong>comes from the<br />
higher milk solids payout boost tax revenues and enable the government to spend more<br />
provid<strong>in</strong>g services such as education, health, and law and order.<br />
• Household expenditure <strong>in</strong>dustries – <strong>in</strong>dustries that households spend money on<br />
are likely to benefit from <strong>in</strong>creased <strong>in</strong>comes generated <strong>in</strong> the dairy sector through<br />
employment and wage <strong>in</strong>creases, and <strong>in</strong>creased returns to capital. Such <strong>in</strong>dustries<br />
<strong>in</strong>clude hous<strong>in</strong>g and real estate (which takes a large share of households’budget), and<br />
consumption goods from the retail trade sector.<br />
• Compet<strong>in</strong>g export <strong>in</strong>dustries – <strong>in</strong>dustries that compete for resources with the dairy<br />
sector suffer from the dairy sector’s <strong>in</strong>creased spend<strong>in</strong>g power. That is particularly so<br />
for the sheep and beef sector, which uses many of the same resources. In addition,<br />
the appreciation of the <strong>New</strong> <strong>Zealand</strong> dollar that results from <strong>in</strong>creased exports of<br />
dairy products hurts all exporters, as seen by the drop <strong>in</strong> production of the textile and<br />
horticulture sectors.<br />
10. The second simulation with a $1 per kilogram price decrease shows near identical effects <strong>in</strong> the opposite direction. In the <strong>in</strong>terests<br />
of brevity we report only the results for the price <strong>in</strong>crease here.
Table 5 Indirect impacts 2010<br />
Percentage deviation <strong>in</strong> value added from BAU levels, selected <strong>in</strong>dustries<br />
Industry Type Impact<br />
Agricultural services Supply<strong>in</strong>g 0.09%<br />
Fertilizer Supply<strong>in</strong>g -0.2%<br />
Retail Household expenditure 0.7%<br />
Real estate Household expenditure 1.1%<br />
Residential property Household expenditure 0.03%<br />
Schools Government 1.1%<br />
Hospitals Government 1.3%<br />
Police Government 0.8%<br />
Apple and Pear Compet<strong>in</strong>g export -3.0%<br />
Sheep and Beef Compet<strong>in</strong>g export -0.4%<br />
Textiles Compet<strong>in</strong>g export -1.3%<br />
Source: NZIER<br />
3.2.3 Macroeconomic effects<br />
The national results follow naturally from the direct and <strong>in</strong>direct impacts described above. We<br />
focus on the key macroeconomic variables described <strong>in</strong> section 2.5: employment and Gross<br />
Domestic Product (GDP), as well as consumption, which is a measure of NEB (how ‘well off’<br />
we are).<br />
The NEB/welfare ga<strong>in</strong> for <strong>New</strong> <strong>Zealand</strong>, proxied by private and public consumption is an<br />
<strong>in</strong>crease of 1.2%. That represents an extra $1.2 billion of goods consumed <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>,<br />
relative to the situation if the price of milk solids had rema<strong>in</strong>ed constant. This equates to over<br />
$270 of additional spend<strong>in</strong>g per man, woman and child <strong>in</strong> <strong>New</strong> <strong>Zealand</strong> due to the $1/kg<br />
price <strong>in</strong>crease.<br />
The change <strong>in</strong> real GDP of 0.24%, or $395 million, represents the <strong>in</strong>crease <strong>in</strong> the value of<br />
goods and services produced <strong>in</strong> the economy. The benefits arise from the <strong>in</strong>creased flows of<br />
<strong>in</strong>come to farmers be<strong>in</strong>g distributed throughout the economy via supply<strong>in</strong>g <strong>in</strong>dustries and<br />
government and household spend<strong>in</strong>g.<br />
The NEB ga<strong>in</strong> is larger than the GDP ga<strong>in</strong> for two reasons:<br />
• An <strong>in</strong>crease <strong>in</strong> the price of dairy exports improves <strong>New</strong> <strong>Zealand</strong>’s terms of trade. An<br />
<strong>in</strong>crease <strong>in</strong> the terms of trade allows us to consume more of our GDP.<br />
• The assumed <strong>in</strong>crease <strong>in</strong> demand for dairy exports causes a currency appreciation that<br />
leads to a reduction <strong>in</strong> the domestic currency value of <strong>New</strong> <strong>Zealand</strong>’s <strong>in</strong>terest repayments<br />
on foreign debt. This improves <strong>New</strong> <strong>Zealand</strong>ers’household purchas<strong>in</strong>g power and allows<br />
greater consumption of goods and services. Under different assumptions about the<br />
mechanisms of foreign <strong>in</strong>vestment, this contribution is dampened (see Appendix C).<br />
Overall, the <strong>in</strong>creased milk solids price draws wealth <strong>in</strong>to the country via dairy exports and<br />
that leads to an <strong>in</strong>crease <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>’s wealth and, thus, our liv<strong>in</strong>g standards.<br />
The impact on export compet<strong>in</strong>g <strong>in</strong>dustries is negative because of the appreciation of our<br />
currency. However, that same appreciation allows us to buy more from overseas as can be<br />
seen by the rise <strong>in</strong> imports and private consumption (see Table 6).<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
15
16 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
The <strong>in</strong>creased production <strong>in</strong> dairy draws <strong>in</strong> more labour, which is shown by the rise <strong>in</strong><br />
employment. Note however that, <strong>in</strong> our modell<strong>in</strong>g, employment is assumed to vary much<br />
more quickly than wages. In the short timeframe of this simulation we would not expect to<br />
see much impact on wages because they have not had time to adjust. Similarly, while the<br />
rate of return on dairy capital has risen, the level of capital <strong>in</strong> the <strong>in</strong>dustry has not yet had<br />
time to accumulate.<br />
Table 6 National results<br />
Real percentage deviation from BAU levels<br />
Indicator Percentage change Levels change,<br />
$ millions<br />
GDP 0.24% $400<br />
Private Consumption 1.2% $1,200<br />
Public Consumption 1.2% $360<br />
Exports (volume) -1.8% -$1,000<br />
Imports (volume) 1.4% $720<br />
Employment 0.35% 4,600 FTEs<br />
Hospitals Government 1.3%<br />
Police Government 0.8%<br />
Apple and Pear Compet<strong>in</strong>g export -3.0%<br />
Sheep and Beef Compet<strong>in</strong>g export -0.4%<br />
Textiles Compet<strong>in</strong>g export -1.3%<br />
Source: NZIER<br />
3.2.4 Regional impacts<br />
The impact on the districts is <strong>in</strong> proportion to the importance of the dairy <strong>in</strong>dustry to the<br />
region. The majority of <strong>New</strong> <strong>Zealand</strong>’s dairy<strong>in</strong>g is <strong>in</strong> the central North Island and that is<br />
reflected <strong>in</strong> the strong growth of Taranaki, Waikato and the Manawatu. However, dairy is<br />
also very important to the small Northland economy, which is why the large ga<strong>in</strong>s are seen<br />
there. Districts that have strong red meat <strong>in</strong>dustries, such as Canterbury, suffer due to the<br />
competition for resources from the grow<strong>in</strong>g dairy sector <strong>in</strong> this simulation. Similarly, districts<br />
that depend on exports, such as Tasman’s w<strong>in</strong>e and Auckland’s manufactur<strong>in</strong>g, see low<br />
growth due to the costs imposed by the appreciation of the exchange rate.<br />
The impacts of a $1/kg price <strong>in</strong>crease on per person consumption or liv<strong>in</strong>g standards <strong>in</strong> each<br />
region are shown <strong>in</strong> Table 7.
Figure 7 Gross regional product impacts<br />
Real Figure percentage 7 Gross deviation regional from BAU product levels impacts<br />
Real percentage deviation from BAU levels<br />
Source: NZIER<br />
Source: NZIER<br />
Table 7 Increase <strong>in</strong> gross regional product<br />
Table 7 Increase <strong>in</strong> gross regional product<br />
Region Northland $170 Per person <strong>in</strong>crease <strong>in</strong> GRP<br />
Northland<br />
Auckland -$4<br />
$170<br />
Auckland<br />
Waikato $130<br />
-$4<br />
Waikato<br />
Bay Of Plenty<br />
Bay Of Plenty<br />
Gisborne<br />
Gisborne<br />
$66<br />
$100<br />
$130<br />
$66<br />
$100<br />
Hawkes Bay<br />
Hawkes Bay<br />
$39<br />
$39<br />
Taranaki<br />
Taranaki $160<br />
$160<br />
Manawatu-Wanganui $140<br />
$140<br />
Well<strong>in</strong>gton $140<br />
$140<br />
Tasman-Nelson $12<br />
$12<br />
Marlborough $54<br />
$54<br />
West West Coast Coast $69<br />
$69<br />
Canterbury<br />
Canterbury $41<br />
$41<br />
Otago<br />
Otago<br />
Southland<br />
Southland<br />
Source: NZIER<br />
Source: NZIER<br />
$82<br />
$68<br />
$82<br />
$68<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Region Per person <strong>in</strong>crease <strong>in</strong> GRP<br />
F<strong>in</strong>al report - 16 November 2010<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g 19 growth<br />
17
18 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Where the money goes<br />
To illustrate the impact of dairy farmer spend<strong>in</strong>g <strong>in</strong> the <strong>New</strong> <strong>Zealand</strong> economy, Table 8 sets<br />
out the key cash flow items for an average dairy farm operation for the current 2010/11 June<br />
year. In the current year Dairy NZ expects the average dairy farm to produce around 130,000<br />
kg of milksolids. The cash <strong>in</strong>come is the dollar amount received for milksolids sold to the<br />
factory (i.e. <strong>Fonterra</strong>) and also <strong>in</strong>cludes net livestock sales.<br />
Table 8: Average farm cashflow<br />
$ per farm, $ per kg MS<br />
2010/11<br />
$ per kg MS<br />
2010/11<br />
$ per kg MS<br />
Cash Income 840,000 6.80<br />
Less farm work<strong>in</strong>g expenses 475,000 3.60<br />
Cash Operat<strong>in</strong>g Surplus 365,000 3.20<br />
Less<br />
Interest and rent 185,000 1.50<br />
Tax 35,000 0.25<br />
Draw<strong>in</strong>gs 85,000 0.70<br />
Cash available for development/<br />
<strong>in</strong>vestment/debt repayment<br />
60,000 0.75<br />
Apple and Pear Compet<strong>in</strong>g export -3.0%<br />
Sheep and Beef Compet<strong>in</strong>g export -0.4%<br />
Textiles Compet<strong>in</strong>g export -1.3%<br />
Note: Figures are rounded so do not exactly add up<br />
Source: Dairy <strong>New</strong> <strong>Zealand</strong> 2010<br />
A substantial part of farmers’expenses are the farm work<strong>in</strong>g expenses. Farm work<strong>in</strong>g<br />
expenses typically <strong>in</strong>clude wages, animal health and breed<strong>in</strong>g, feed made and purchased,<br />
stock graz<strong>in</strong>g fertiliser, expenditure on remov<strong>in</strong>g weed and pests, repairs and ma<strong>in</strong>tenance,<br />
fuel, vehicle charges, adm<strong>in</strong>istration, <strong>in</strong>surance, ACC, and rates.<br />
This leaves what is known as the cash operat<strong>in</strong>g surplus. This is less than half of the <strong>in</strong>itial<br />
cash <strong>in</strong>come. From this farmers pay off <strong>in</strong>terest and rent (this <strong>in</strong>cludes overdraft and term<br />
payments and also rent of land), tax (term<strong>in</strong>al and estimated tax), and draw<strong>in</strong>gs (family liv<strong>in</strong>g<br />
expenses). This leaves the cash available for farm development, any <strong>in</strong>vestments made and<br />
repay<strong>in</strong>g pr<strong>in</strong>cipal on debt.<br />
This demonstrates that most of the money received by farmers as their cash <strong>in</strong>come <strong>in</strong> one<br />
form or another is spent <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>. This is of fundamental importance for the <strong>New</strong><br />
<strong>Zealand</strong> economy s<strong>in</strong>ce it drives further <strong>in</strong>come generation and has a major impact on<br />
domestic economic activity.
4. Production growth over the last decade<br />
4.1 Headl<strong>in</strong>e results<br />
At the national level, the growth <strong>in</strong> the dairy sector over the last decade has resulted <strong>in</strong>:<br />
• <strong>New</strong> <strong>Zealand</strong>’s 2009 GDP <strong>in</strong>creas<strong>in</strong>g by $690 million, relative to what it would have been<br />
had the dairy sector stagnated at 1998/99 levels. While labour and land can switch to<br />
alternative uses should dairy have stagnated, productivity ga<strong>in</strong>s and capital accumulation<br />
with<strong>in</strong> the sector are net ga<strong>in</strong>s to the economy.<br />
• <strong>New</strong> <strong>Zealand</strong>’s 2009 welfare as proxied by private and public consumption be<strong>in</strong>g<br />
$1.1 billion higher than it would otherwise been. From the po<strong>in</strong>t of view of 1999, the<br />
cumulative net present value (NPV) of the decade’s consumption growth to 2009 is $6.4<br />
billion.<br />
• The dairy sector’s strong export growth over the last decade has improved <strong>New</strong> <strong>Zealand</strong>’s<br />
balance of trade, and allowed for <strong>in</strong>creased consumption spend<strong>in</strong>g. This export growth<br />
reduced <strong>New</strong> <strong>Zealand</strong>’s net foreign liabilities to GDP ratio by over 1%. Together with the<br />
exchange rate appreciation, this saved $231 million <strong>in</strong> <strong>in</strong>terest repayments on foreign<br />
debt <strong>in</strong> 2009, or cumulatively $1.2 billion from 1999.<br />
• Real wages <strong>in</strong> 2009 <strong>in</strong>creas<strong>in</strong>g by 0.9% as <strong>in</strong>creas<strong>in</strong>g <strong>in</strong>comes means <strong>in</strong>creased demand<br />
for goods and services, which <strong>in</strong> turn results <strong>in</strong> higher wages for employees.<br />
Significantly, the ga<strong>in</strong>s from the growth <strong>in</strong> the dairy sector, <strong>in</strong>clud<strong>in</strong>g wage rises, are not just<br />
felt with<strong>in</strong> the sector itself, but more widely throughout the economy:<br />
• Growth <strong>in</strong> the fertilizer and agricultural service <strong>in</strong>dustries, which supply the dairy sector<br />
with <strong>in</strong>termediate <strong>in</strong>puts, are up by 0.9% and 4.3% <strong>in</strong> 2009, relative to what they would<br />
have been if dairy stagnated.<br />
• Industries where households spend their <strong>in</strong>come, such as retail and hous<strong>in</strong>g, also benefit<br />
from the growth <strong>in</strong> the dairy sector, with activity <strong>in</strong> 2009 0.5% and 0.9% higher than had<br />
dairy not grown as experienced.<br />
• These positive flow-on impacts have further flow-on impacts to the tax-take of the<br />
government. Increased tax revenue com<strong>in</strong>g <strong>in</strong> means more money to spend on essential<br />
services such as schools, hospitals and police. In 2009, these sectors are 0.7%, 0.6% and<br />
0.2% better off because of the growth <strong>in</strong> the dairy sector.<br />
• Conversely, there are <strong>in</strong>dustries that have lost from growth <strong>in</strong> the dairy sector, most<br />
notably the sheep and beef sector which competes for resources. Our modell<strong>in</strong>g<br />
suggests that this <strong>in</strong>dustry would have grown by an extra 10% over the last decade,<br />
had dairy stagnated rather than grown. Similarly, other export <strong>in</strong>dustries such as textiles<br />
and apples and pears suffered from a higher exchange rate, down by -2.3% and -3.0%<br />
respectively.<br />
Regionally, the results favour those areas where dairy farm<strong>in</strong>g has grown the most:<br />
• Canterbury and Southland 2009 regional GDP levels are 1.4% and 1.3% higher than they<br />
would have been had dairy<strong>in</strong>g not <strong>in</strong>creased the economic activity with<strong>in</strong> their districts.<br />
• Hawkes Bay, with a strong dependence on fruit and horticulture, is 0.3% worse off<br />
because of the currency appreciation caused by the growth <strong>in</strong> dairy<strong>in</strong>g.<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
19
20 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
because of the currency appreciation caused by the growth <strong>in</strong> dairy<strong>in</strong>g.<br />
4.2 Detailed results<br />
4.2.1 Direct impacts<br />
4.2 Detailed results<br />
The direct<br />
4.2.1<br />
impacts<br />
Direct<br />
are<br />
impacts<br />
the ga<strong>in</strong>s of the dairy sector over the last decade. Figure 8<br />
shows that the dairy sector grew substantially between 1998/99 and 2008/09. Milk<br />
The direct impacts are the ga<strong>in</strong>s of the dairy sector over the last decade. Figure 8 shows<br />
solids output<br />
that the<br />
<strong>in</strong>creased<br />
dairy sector grew<br />
by<br />
substantially<br />
58%, use<br />
between<br />
of land<br />
1998/99<br />
grew<br />
and<br />
by<br />
2008/09.<br />
25%,<br />
Milk<br />
while<br />
solids<br />
total<br />
output<br />
factor<br />
productivity <strong>in</strong>creased rema<strong>in</strong>ed by 58%, usepositive of land grewfor by 25%, most whileof total the factordecade, productivitybefore rema<strong>in</strong>eddropp<strong>in</strong>g, positive<br />
unsurpris<strong>in</strong>gly, for most of dur<strong>in</strong>g the decade, the drought before dropp<strong>in</strong>g, seasons. unsurpris<strong>in</strong>gly, Productivity dur<strong>in</strong>g growth the drought is likely seasons. to return to<br />
positive Productivity trend levels growth now is likely that to more return‘normal’ to positiveclimatic trend levels conditions now that more have ‘normal’climatic returned. The<br />
sector’s conditions employment have grew returned. by The around sector’s 7,500 employment FTEs. grew These by around ga<strong>in</strong>s 7,500 would FTEs. have These been ga<strong>in</strong>slost<br />
if dairy rema<strong>in</strong><strong>in</strong>g would have stagnant been lost if at dairy 1998/99 rema<strong>in</strong><strong>in</strong>g levels. stagnant at 1998/99 levels.<br />
Figure 8 Dairy ga<strong>in</strong>s s<strong>in</strong>ce 1998/99<br />
Figure 8 Dairy ga<strong>in</strong>s s<strong>in</strong>ce 1998/99<br />
Source: Dairy NZ<br />
Source: NZIER<br />
4.2.2 Indirect impacts on other <strong>in</strong>dustries<br />
4.2.2 Indirect impacts on other <strong>in</strong>dustries<br />
A grow<strong>in</strong>g dairy sector <strong>in</strong>directly impacts other <strong>in</strong>dustries. These <strong>in</strong>direct impacts can be split<br />
A grow<strong>in</strong>g <strong>in</strong>to dairy the follow<strong>in</strong>g sector categories: <strong>in</strong>directly impacts other <strong>in</strong>dustries. These <strong>in</strong>direct impacts can<br />
be split <strong>in</strong>to • Supply<strong>in</strong>g the follow<strong>in</strong>g <strong>in</strong>dustries categories: – <strong>in</strong>dustries that supply dairy with <strong>in</strong>termediate <strong>in</strong>puts are likely to<br />
benefit from a stronger dairy sector. Both agricultural services and the fertilizer <strong>in</strong>dustry<br />
• Supply<strong>in</strong>g <strong>in</strong>dustries – <strong>in</strong>dustries that supply dairy with <strong>in</strong>termediate <strong>in</strong>puts are<br />
achieve significant ga<strong>in</strong>s, up 0.9% and 4.2% <strong>in</strong> 2009 versus where they would have been<br />
likely to benefit from a stronger dairy sector. Both agricultural services and the<br />
had dairy not grown over the last decade.<br />
fertilizer <strong>in</strong>dustry achieve significant ga<strong>in</strong>s, up 0.9% and 4.2% <strong>in</strong> 2009 versus<br />
where • they Household would expenditure have been <strong>in</strong>dustries had dairy – <strong>in</strong>dustries not grown that households over the last spend decade.<br />
money on are<br />
likely to benefit from <strong>in</strong>creased <strong>in</strong>come that comes through employment and wages, and<br />
<strong>in</strong>creased returns to capital from a grow<strong>in</strong>g dairy sector. Retail trade and real estate are<br />
both up: 0.5% and 0.7% respectively.<br />
• Government <strong>in</strong>dustries – <strong>in</strong>dustries that rely on government fund<strong>in</strong>g are positively<br />
NZIER – Dairy’s<br />
impacted<br />
<strong>role</strong> <strong>in</strong><br />
by<br />
generat<strong>in</strong>g<br />
a stronger economy<br />
growth<br />
22<br />
and bigger tax takes, as this <strong>in</strong>creases the money<br />
available for the government to spend. Spend<strong>in</strong>g on hospitals, schools and police are up<br />
0.6%, 0.7% and 0.2% respectively.<br />
• Compet<strong>in</strong>g export <strong>in</strong>dustries – <strong>in</strong>dustries that compete for resources (such as land and<br />
labour) with the dairy sector lose from dairy’s growth. Sheep and beef, <strong>in</strong> particular, grew<br />
by 10% less, crowded out by the growth <strong>in</strong> dairy<strong>in</strong>g. Similarly, apple and pear and the<br />
textiles <strong>in</strong>dustry both suffer from a higher currency that is a result of the growth <strong>in</strong> dairy.
Table 9 Indirect impacts 2008/09<br />
Percentage deviation from BAU levels, selected <strong>in</strong>dustries<br />
Industry Type Impact<br />
Agricultural services Supply<strong>in</strong>g 0.9%<br />
Fertilizer Supply<strong>in</strong>g 4.2%<br />
Retail Household expenditure 0.5%<br />
Real estate Household expenditure 0.7%<br />
Residential property Household expenditure 0.9%<br />
Schools Government 0.7%<br />
Hospitals Government 0.6%<br />
Police Government 0.2%<br />
Apple and Pear Compet<strong>in</strong>g export -2.3%<br />
Sheep and Beef Compet<strong>in</strong>g export -9.9%<br />
Textiles Compet<strong>in</strong>g export -3.0%<br />
Source: NZIER<br />
4.2.3 Macroeconomic effects<br />
The overall national result for the case study of the growth <strong>in</strong> the dairy sector over the last<br />
decade, relative to a case where it stagnated at 1998/99 levels, is a real GDP ga<strong>in</strong> of 0.37% by<br />
2009, or around $690 million. The result is positive for NZ Inc because of:<br />
• export, capital and productivity ga<strong>in</strong>s that accrued over the last decade with<strong>in</strong> the dairy sector<br />
• positive flow-on impacts to supply<strong>in</strong>g <strong>in</strong>dustries, household expenditure <strong>in</strong>dustries, and<br />
government funded <strong>in</strong>dustries.<br />
The NEB/welfare ga<strong>in</strong> for <strong>New</strong> <strong>Zealand</strong>, proxied by private and public consumption<br />
(household and government spend<strong>in</strong>g respectively), is an <strong>in</strong>crease of 0.8%. That represents a<br />
ga<strong>in</strong> of $1.1 billion of consumption <strong>in</strong> 2009, relative to BAU. The NEB result is greater than the<br />
GDP ga<strong>in</strong> for the same reasons given <strong>in</strong> section 3.2.3.<br />
An alternative way to th<strong>in</strong>k about the ga<strong>in</strong>s from growth <strong>in</strong> dairy production is through<br />
their cumulative effect. In each year there is an <strong>in</strong>crease <strong>in</strong> consumption that is enjoyed<br />
by consumers. So far, we have measured that by giv<strong>in</strong>g the ga<strong>in</strong> <strong>in</strong> 2009 of $1.1 billion.<br />
Exam<strong>in</strong><strong>in</strong>g <strong>in</strong>stead the net present value (NPV) of the years’consumption ga<strong>in</strong>s gives a better<br />
picture of the cumulative benefit to the nation. 11 From the po<strong>in</strong>t of view of 1999, the NPV<br />
of the decade’s consumption growth to 2009 is $6.4 billion. That is to say the ga<strong>in</strong>s realised<br />
from 1999-2009 are equivalent to the nation’s consumption <strong>in</strong>creas<strong>in</strong>g by $6.4 billion <strong>in</strong> 1999,<br />
which would have been 4.3% of 1999’s total consumption.<br />
The significant export ga<strong>in</strong>s from dairy<strong>in</strong>g reduce the ratio of <strong>New</strong> <strong>Zealand</strong>’s foreign debt to<br />
GDP by over 1%. Together with the exchange rate appreciation, this saves the country $231<br />
million <strong>in</strong> <strong>in</strong>terest repayments on foreign debt. Across the decade, the NPV of the <strong>in</strong>terest<br />
sav<strong>in</strong>gs from the viewpo<strong>in</strong>t of 1999 total $1.2 billion.<br />
These positive impacts are partially offset by crowd<strong>in</strong>g out of the sheep and beef and other<br />
export<strong>in</strong>g <strong>in</strong>dustries that suffer from a currency appreciation, and the decreased availability<br />
of resources (capital, labour and land). Our modell<strong>in</strong>g captures the fact that land or labour not<br />
be<strong>in</strong>g used by a grow<strong>in</strong>g dairy sector could have been used by other <strong>in</strong>dustries such as sheep<br />
and beef. This dampens the impact of the growth <strong>in</strong> the dairy sector, but doesn’t fully offset it. 12<br />
11. We use the Treasury’s preferred social discount rate of 8%pa.<br />
12. We do not consider Crown costs associated with the <strong>in</strong>creased greenhouse gas emissions result<strong>in</strong>g from dairy production. In our<br />
modell<strong>in</strong>g framework, if dairy had not grown s<strong>in</strong>ce 1998/99, other sectors would have soaked up the spare resources (land, labour,<br />
capital, energy, etc). These sectors would then have produced additional emissions. Ascerta<strong>in</strong><strong>in</strong>g the net effect of this shift <strong>in</strong><br />
production is difficult.<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
21
22 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
The slight reduction <strong>in</strong> overall export volumes is a result of an <strong>in</strong>creased terms of trade, which<br />
allows <strong>New</strong> <strong>Zealand</strong> to export less quantity for more value.<br />
Overall, a comb<strong>in</strong>ation of higher output and higher exports means <strong>New</strong> <strong>Zealand</strong> is<br />
fundamentally wealthier because of the growth <strong>in</strong> the dairy sector. In terms of the nation’s<br />
overall productive capacity, labour and land are able to switch to alternative uses (and<br />
therefore could have been used by alternative <strong>in</strong>dustries); however productivity and capital<br />
ga<strong>in</strong>s dur<strong>in</strong>g the growth of the dairy sector lead to an <strong>in</strong>crease <strong>in</strong> <strong>New</strong> <strong>Zealand</strong>’s GDP.<br />
Table 10 National results 2009<br />
Real percentage deviation from BAU levels<br />
Indicator Percentage change Levels change, $<br />
millions<br />
GDP 0.37 $690<br />
Private Consumption 0.77 $860<br />
Public Consumption 0.77 $290<br />
Exports (volume) -0.13 -$66<br />
Imports (volume) 0.95 $350<br />
Real wage 0.92 n/a<br />
Capital 0.61 n/a<br />
Ratio foreign liabilities to GDP -1.04 -$231 (1)<br />
Source: NZIER<br />
(1) Change <strong>in</strong> <strong>in</strong>terest repayments on foreign debt<br />
4.2.4 Regional impacts<br />
The regional results <strong>in</strong> Figure 9 show that the impacts of growth <strong>in</strong> the dairy sector are not<br />
uniformly distributed across the country. Some of the benefits are dist<strong>in</strong>ctly regional: much of<br />
the growth <strong>in</strong> dairy<strong>in</strong>g over the last decade has been <strong>in</strong> Canterbury and Southland. While this<br />
has reduced land available for sheep and beef farm<strong>in</strong>g, the <strong>in</strong>creased economic activity <strong>in</strong> the<br />
form of exports, wages and employment leads to strong growth <strong>in</strong> these districts.<br />
Northland and Waikato districts also benefit significantly from growth <strong>in</strong> the dairy <strong>in</strong>dustry.<br />
Increases <strong>in</strong> government spend<strong>in</strong>g lead to a benefit to the Well<strong>in</strong>gton regional economy,<br />
while Hawkes Bay, which is home to a large fruit and horticulture sector, has been slightly<br />
crowded out by the growth <strong>in</strong> the dairy sector.<br />
The impacts of volume growth on per person consumption or liv<strong>in</strong>g standards <strong>in</strong> each region<br />
are shown <strong>in</strong> Table 11.
Figure 9 2009 Gross regional product impacts<br />
Real percentage deviation from BAU levels<br />
Figure 7 Gross regional product impacts<br />
Real percentage deviation from BAU levels<br />
Source: NZIER<br />
Source: NZIER<br />
Table 7 11 Increase <strong>in</strong> <strong>in</strong> gross regional product<br />
Region<br />
Region<br />
Per person <strong>in</strong>crease <strong>in</strong> GRP<br />
Per person <strong>in</strong>crease <strong>in</strong> GRP<br />
Northland<br />
Northland<br />
Auckland<br />
Auckland<br />
Waikato<br />
$170<br />
-$4<br />
$110<br />
$8<br />
$270<br />
Waikato<br />
Bay Of Plenty<br />
$130<br />
$84<br />
Bay Gisborne Of Plenty $66<br />
$74<br />
Gisborne Hawkes Bay $100<br />
-$100<br />
Hawkes Taranaki Bay $39<br />
$140<br />
Taranaki Manawatu-Wanganui $160<br />
$120<br />
Manawatu-Wanganui Well<strong>in</strong>gton $140<br />
$160<br />
Well<strong>in</strong>gton Tasman-Nelson $140<br />
$12<br />
Marlborough<br />
Tasman-Nelson $12<br />
-$4<br />
West Coast<br />
Marlborough<br />
Canterbury<br />
West Coast<br />
Otago<br />
$54<br />
$69<br />
$7<br />
$590<br />
$39<br />
Canterbury<br />
Southland<br />
$41<br />
$650<br />
Otago $82<br />
Source: NZIER<br />
Southland $68<br />
Source: NZIER<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
F<strong>in</strong>al report - 16 November 2010<br />
Dairy’s <strong>role</strong> <strong>in</strong> 19 generat<strong>in</strong>g growth<br />
23
24 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
5. Conclusion<br />
Our modell<strong>in</strong>g shows that the dairy sector has delivered significant and ongo<strong>in</strong>g benefits to<br />
the <strong>New</strong> <strong>Zealand</strong> economy. Two historical case studies, based on events of the last decade,<br />
illustrate how tangible and widely known changes to the dairy sector have flowed through<br />
to the rest of the economy. Volume and price growth <strong>in</strong> the sector has delivered benefits<br />
to a wide range of sectors outside of the dairy <strong>in</strong>dustry, and has generated liv<strong>in</strong>g standard<br />
improvements across <strong>New</strong> <strong>Zealand</strong>’s regional economies, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong> metropolitan areas<br />
such as Auckland and Well<strong>in</strong>gton.
Appendix A CGE modell<strong>in</strong>g framework<br />
A.1 The MONASH-<strong>New</strong> <strong>Zealand</strong> CGE model: overview<br />
The MONASH-NZ dynamic CGE model conta<strong>in</strong>s <strong>in</strong>formation on 131 <strong>in</strong>dustries and 210<br />
commodities <strong>in</strong> its basic form. CGE modell<strong>in</strong>g is a highly-respected and well-developed<br />
technique that has a rich history for assess<strong>in</strong>g policy, regional and <strong>in</strong>dustry questions. Our<br />
model was developed <strong>in</strong> close collaboration with Monash University, a global leader <strong>in</strong><br />
build<strong>in</strong>g and apply<strong>in</strong>g CGE models. It captures the various <strong>in</strong>ter-l<strong>in</strong>kages between these<br />
sectors, as well as their l<strong>in</strong>ks to households (via the labour market), the government sector,<br />
capital markets and the global economy (via imports and exports). A visual representation is<br />
shown <strong>in</strong> Figure 10 highlight<strong>in</strong>g the complex and multidirectional relationships between the<br />
various parts of an economy.<br />
For this study we have calibrated the dairy <strong>in</strong>dustry <strong>in</strong> our database to match the aggregate<br />
dairy <strong>in</strong>dustry figures provided by <strong>Fonterra</strong> and Dairy NZ. More technical detail on the model<br />
is presented below.<br />
The model also <strong>in</strong>cludes a regional component. A ‘top-down’approach is used to<br />
decompose national impacts to the regional level, us<strong>in</strong>g regional employment data as<br />
weight<strong>in</strong>g. If a region has a high share of national output, then its regional <strong>in</strong>dustry output<br />
will be proportionally affected. The exception is <strong>in</strong>dustries that produce commodities<br />
(mostly services) that are largely consumed with<strong>in</strong> a region. These are deemed to be local<br />
<strong>in</strong>dustries, and it is assumed that their output moves <strong>in</strong> l<strong>in</strong>e with the local demand for the<br />
correspond<strong>in</strong>g commodity, rather than with the national <strong>in</strong>dustry output. F<strong>in</strong>al This report captures - 16 November 2010<br />
“regional multiplier”effects: spend<strong>in</strong>g with<strong>in</strong> a region specifically benefits services with that<br />
region (Horridge, 2008).<br />
Figure 10 Components of a CGE model<br />
Figure 10 Components of a CGE model<br />
Source: NZIER<br />
A.2 Dynamics of the MONASH-NZ model<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
MONASH-NZ is a recursive dynamic CGE model based on the ORANI-NZ core. It<br />
25
26 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
A.2 Dynamics of the MONASH-NZ model<br />
MONASH-NZ is a recursive dynamic CGE model based on the ORANI-NZ core. It can be<br />
thought of as a series of static simulations l<strong>in</strong>ked by three dynamic adjustment procedures.<br />
Each year’s simulation takes the f<strong>in</strong>al database of the previous year’s simulation as its start<strong>in</strong>g<br />
po<strong>in</strong>t and applies the current period’s shocks. Because the solution for the current period<br />
depends only on the previous period’s solution and the current period’s shocks, it can be<br />
solved recursively, rather than hav<strong>in</strong>g to solve all periods simultaneously. Economists might<br />
refer to this sort of model as hav<strong>in</strong>g adaptive, rather than rational, expectations formation.<br />
In addition to solv<strong>in</strong>g a ‘static’problem <strong>in</strong> each period, the MONASH-NZ model improves<br />
upon ORANI-NZ simulations by add<strong>in</strong>g three dynamic adjustment processes:<br />
• Labour market adjustment: We assume that wages are sticky <strong>in</strong> the short run and<br />
gradually adjust over time. A mechanism <strong>in</strong> the model allows employment to first<br />
respond to <strong>in</strong>creases <strong>in</strong> aggregate demand and then return to the NAIRU over time as<br />
wages adjust.<br />
• Capital formation: An <strong>in</strong>dustry-specific capital accumulation mechanism allows <strong>in</strong>dustries<br />
to build their stock of capital over time. Capital is generated by <strong>in</strong>vestment, which <strong>in</strong> turn<br />
responds to rates of return <strong>in</strong> each <strong>in</strong>dustry.<br />
• Balance of payments adjustment: The model tracks changes <strong>in</strong> the current account and<br />
capital account over time. Changes <strong>in</strong> net foreign liabilities affect domestic consumption<br />
through the level of <strong>in</strong>terest that must be paid to service the foreign debt.<br />
A.3 Database structure<br />
The model is based on a large database conta<strong>in</strong><strong>in</strong>g the value flows of the economy, as per<br />
Figure 11. The database def<strong>in</strong>es the <strong>in</strong>itial structure of the economy, which by def<strong>in</strong>ition is<br />
assumed to be <strong>in</strong> equilibrium <strong>in</strong> all markets. The structure of the database is broadly similar<br />
to traditional <strong>in</strong>put-output tables; for example commodities may be used as <strong>in</strong>termediate<br />
<strong>in</strong>put for further production, utilised <strong>in</strong> <strong>in</strong>vestment, exported or consumed by households<br />
and the government. Industry costs <strong>in</strong>clude the cost of <strong>in</strong>termediates, marg<strong>in</strong>s, taxes and<br />
primary factor costs for labour, land and capital. As per the account<strong>in</strong>g identities <strong>in</strong> <strong>in</strong>putoutput<br />
tables, the total value sum of producers’<strong>in</strong>put costs (<strong>in</strong>clud<strong>in</strong>g marg<strong>in</strong>s, taxes, returns<br />
to factors and other costs) equates to the total value of output production (the ‘MAKE’matrix<br />
<strong>in</strong> the database).<br />
The MONASH-NZ model consists of:<br />
• 131 <strong>in</strong>dustries<br />
• 210 commodities<br />
• 14 regions<br />
• 1 household<br />
• 24 occupations<br />
The database has been sourced <strong>in</strong>itially from Statistics <strong>New</strong> <strong>Zealand</strong> 1995/96 Inter-Industry<br />
tables, updated us<strong>in</strong>g the subsequently released 2003 Supply and Use tables, and f<strong>in</strong>ally ‘upscaled’to<br />
2007 levels us<strong>in</strong>g latest Statistics <strong>New</strong> <strong>Zealand</strong> macroeconomic data.
Figure 11 The MONASH-NZ database<br />
Figure 11 The MONASH-NZ database<br />
Basic<br />
Flows<br />
Marg<strong>in</strong>s<br />
Taxes<br />
Labour<br />
Capital<br />
Land<br />
Production<br />
Tax<br />
Other<br />
Costs<br />
Source: Horridge, 2008b NZIER<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
F<strong>in</strong>al report - 16 November 2010<br />
Absorption Matrix<br />
1 2 3 4 5 6<br />
Producers Investors Household Export<br />
Change <strong>in</strong><br />
Government<br />
Inventories<br />
Size<br />
↑<br />
← I → ← I → ← 1 → ← 1 → ← 1 → ← 1 →<br />
C×S<br />
↓<br />
↑<br />
V1BAS V2BAS V3BAS V4BAS V5BAS V6BAS<br />
C×S×M<br />
↓<br />
↑<br />
V1MAR V2MAR V3MAR V4MAR V5MAR n/a<br />
C×S<br />
↓<br />
V1TAX V2TAX V3TAX V4TAX V5TAX n/a<br />
↑<br />
O V1LAB<br />
C = 210 Commodities<br />
↓<br />
I = 131 Industries<br />
↑<br />
1 V1CAP<br />
S = 2: Domestic, Imported<br />
↓<br />
O = 24 Occupation Types<br />
↑<br />
1<br />
↓<br />
↑<br />
V1LND<br />
M = 5 Commodities used as Marg<strong>in</strong>s<br />
1<br />
↓<br />
↑<br />
V1PTX<br />
1<br />
↓<br />
V1OCT<br />
Jo<strong>in</strong>t Production<br />
Matrix<br />
Import Duty<br />
Size ← I → Size ← 1 →<br />
↑<br />
C<br />
↓<br />
MAKE<br />
Source: Horridge, 2008b; NZIER<br />
↑<br />
C<br />
↓<br />
V0TAR<br />
A.4 Production structure (Horridge, 2008b)<br />
The production structure of the model is presented <strong>in</strong> Figure 12. Each <strong>in</strong>dustry can<br />
produce a number of different commodities. Production <strong>in</strong>puts are <strong>in</strong>termediate<br />
commodities, both domestic and imported, and primary factors labour, land and<br />
capital. Work<strong>in</strong>g from bottom to top, we see constant elasticity of substitution (CES)<br />
production nests for occupations, primary factors and the choice between imported<br />
and domestic commodities. In this case, an <strong>in</strong>crease <strong>in</strong> price moves sourc<strong>in</strong>g<br />
towards another <strong>in</strong>put, for example, if the price of imports <strong>in</strong>creases, more domestic<br />
commodities are demanded <strong>in</strong> the <strong>in</strong>termediate sourc<strong>in</strong>g CES nest.<br />
31<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
27
A.4 Production structure (Horridge, 2008b)<br />
The production structure of the model is presented <strong>in</strong> Figure 12. Each <strong>in</strong>dustry can produce<br />
a number of different commodities. Production <strong>in</strong>puts are <strong>in</strong>termediate commodities, both<br />
domestic and imported, and primary factors labour, land and capital. Work<strong>in</strong>g from bottom<br />
to top, we see constant elasticity of substitution (CES) production nests for occupations,<br />
primary factors and the choice between imported and domestic commodities. F<strong>in</strong>al report - In 16 this November 2010<br />
case, an <strong>in</strong>crease <strong>in</strong> price moves sourc<strong>in</strong>g towards another <strong>in</strong>put, for example, if the price of<br />
imports <strong>in</strong>creases, more domestic commodities are demanded <strong>in</strong> the <strong>in</strong>termediate sourc<strong>in</strong>g<br />
CES nest.<br />
Figure Figure 12 12 Production structure<br />
Source: Horridge, 2008<br />
Source: Horridge, 2008<br />
At the activity level, <strong>in</strong>termediate goods, primary factors and other costs are<br />
comb<strong>in</strong>ed us<strong>in</strong>g a Leontief production function. This means the proportion of<br />
production <strong>in</strong>puts does not change. On the output side, there are two further<br />
constant elasticity of transformation (CET)<br />
28 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
13 nests. The production mix of each<br />
<strong>in</strong>dustry is dependent on the relative prices of each commodity. Similarly, the export
At the activity level, <strong>in</strong>termediate goods, primary factors and other costs are comb<strong>in</strong>ed<br />
us<strong>in</strong>g a Leontief production function. This means the proportion of production <strong>in</strong>puts does<br />
not change. On the output side, there are two further constant elasticity of transformation<br />
(CET) 13 nests. The production mix of each <strong>in</strong>dustry is dependent on the relative prices of each<br />
commodity. Similarly, the export nest determ<strong>in</strong>es local and export market shares depend<strong>in</strong>g<br />
on relative prices.<br />
A.5 Regional extension<br />
Policy impacts are often unevenly spread across <strong>in</strong>dustries and regions. To capture these<br />
heterogeneous effects, the model is extended to <strong>in</strong>clude a regional component. A ‘topdown’approach<br />
is used to decompose national impacts to the regional level, us<strong>in</strong>g regional<br />
employment data as weight<strong>in</strong>g. If a region has a high share of national output, then its<br />
regional <strong>in</strong>dustry output will be proportionally affected. The exception is <strong>in</strong>dustries that<br />
produce commodities (mostly services) that are largely consumed with<strong>in</strong> a region. These are<br />
deemed to be local <strong>in</strong>dustries, and it is assumed that their output moves <strong>in</strong> l<strong>in</strong>e with the local<br />
demand for the correspond<strong>in</strong>g commodity, rather than with the national <strong>in</strong>dustry output.<br />
Note that an <strong>in</strong>herent assumption <strong>in</strong> the ‘top-down’approach is that <strong>in</strong>dustries use the same<br />
production technology across all regions (Horridge, 2008).<br />
13. A CET function is identical to a CES function except that the transformation parameter has the opposite sign (i.e. <strong>in</strong>creas<strong>in</strong>g price<br />
<strong>in</strong>creases output <strong>in</strong> a CET; <strong>in</strong> a CES, <strong>in</strong>creas<strong>in</strong>g price reduces demand)<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
29
30 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Appendix B CGE and multiplier analysis<br />
Many studies attempt to quantify the economic contribution of a certa<strong>in</strong> sector or<br />
project us<strong>in</strong>g <strong>in</strong>put-output (IO) multipliers. This is a technique that NZIER (and many other<br />
consultancies) has used <strong>in</strong> the past.<br />
Despite their popularity, IO models have a number of significant drawbacks.<br />
The primary issue with IO models is that they assume that supply is unconstra<strong>in</strong>ed. That is,<br />
<strong>in</strong>puts such as labour, capital and land are always available for expand<strong>in</strong>g a sector. There is no<br />
recognition of the reality that resources used <strong>in</strong> one part of the economy are not available for<br />
use elsewhere. Labour and capital are unconstra<strong>in</strong>ed and available at a constant price <strong>in</strong> an IO<br />
framework. That is important because they are also assumed to be used <strong>in</strong> fixed proportions.<br />
Hence an IO model excludes any consideration of substitutability between factors of<br />
production.<br />
Furthermore, s<strong>in</strong>ce IO models exclude prices, they also assume that supply is perfectly elastic.<br />
This means that no matter how much labour (for example) is used, there is no change <strong>in</strong><br />
wages. The consequence is that they exclude all supply constra<strong>in</strong>ts, rigidities and price<br />
effects, lead<strong>in</strong>g to unrealistically large shifts <strong>in</strong> resource use and economic activity.<br />
The absence of substitution effects also extends to demand. There is no substitution between<br />
different goods as <strong>in</strong>comes rise. Rather, consumption is assumed to rise l<strong>in</strong>early with <strong>in</strong>comes<br />
and the proportion of different goods consumed rema<strong>in</strong>s constant. In reality, as <strong>in</strong>comes rise,<br />
people tend to buy relatively more luxuries and fewer necessities, and more services (such as<br />
tourism).<br />
IO models also exclude a treatment of exports and imports. Imports do not compete with<br />
domestic goods and exports are exogenously determ<strong>in</strong>ed. Neither depends on prices, s<strong>in</strong>ce<br />
relative prices cannot change.<br />
Among the other drawbacks, sav<strong>in</strong>gs are fixed as a proportion of <strong>in</strong>comes, so f<strong>in</strong>ancial<br />
markets are not <strong>in</strong>cluded <strong>in</strong> the model. Technology is exogenous so technological progress<br />
cannot be modelled. This reflects the static nature of the model, which has no dynamic (time)<br />
element to it. The lack of explicit dynamics is problematic for a model which seeks to capture<br />
the change <strong>in</strong> <strong>in</strong>dustry flows over time.<br />
As a consequence of the limitations outl<strong>in</strong>ed above, IO multipliers tend to systematically<br />
overestimate the true ripple effects and provide an unjustifiably rosy picture of the economic<br />
impacts of a project. This is particularly the case for employment multipliers (Mules, 1999).<br />
IO models are only appropriate for circumstances where there are no supply constra<strong>in</strong>ts<br />
and demand considerations completely dom<strong>in</strong>ate the analysis (Bandara, 1991). This set of<br />
circumstances may hold <strong>in</strong> small regional economies (Dwyer et al, 2005). In such economies<br />
factor and commodity flows from outside the region tend to be very free. If the region is<br />
small enough then relative prices can safely be regarded as exogenous, which allows IO<br />
models to be safely used so long as the assumptions and deficiencies are recognised.<br />
CGE models explicitly address many of the shortcom<strong>in</strong>gs <strong>in</strong> IO analysis. They allow resources<br />
to move between sectors <strong>in</strong> response to a shock, and the demand and supply of goods and<br />
factors respond to relative prices. CGE models tend to produce smaller economic impacts<br />
than IO models, primarily because they consider the opportunity costs of the expansion (or<br />
contraction) of a sector.<br />
It is helpful to consider an illustrative example of how IO multipliers compare to CGE<br />
estimates. A comparative assessment of CGE and IO multipliers was carried out for the<br />
regional and national impact of the Australian leg of the Formula 1 Grand Prix circuit. The<br />
2005 analysis of the 2000 Grand Prix resulted <strong>in</strong> the multipliers reported <strong>in</strong> Table 12.
Table 12 IO vs. CGE multipliers<br />
Multiplier values<br />
IO model CGE model<br />
Regional National Regional National<br />
Output multiplier 2.2 2.3 1.2 0.9<br />
Value added multiplier 0.8 0.8 0.4 0.3<br />
Employment multiplier 10.2 11.6 6.2 2.5<br />
Source: Dwyer et al (2005)<br />
As expected, the CGE multipliers are far lower than the IO multipliers, primarily due to the<br />
price and resource constra<strong>in</strong>ts <strong>in</strong>cluded <strong>in</strong> the CGE model. The CGE estimates <strong>in</strong> this study are<br />
between 20% and 55% of the IO multipliers. Such differences are not unusual <strong>in</strong> the literature.<br />
CGE models are a significant improvement on the previous generation of IO models,<br />
particularly when estimat<strong>in</strong>g the nationwide or regional effects of projects which are likely<br />
to have significant price effects. Indeed, CGE modell<strong>in</strong>g has become one of the most widely<br />
used tools for economic policy analysis over the past three decades. Today, the lead<strong>in</strong>g CGE<br />
modell<strong>in</strong>g <strong>in</strong>stitutions are the World Bank, the International Food Policy Research Institute<br />
(IFPRI) and the Centre of Policy Studies at Monash University (CoPS). Much of the World Bank’s<br />
economic assessment of trade and environmental impacts is conducted us<strong>in</strong>g their LINKAGE<br />
and Env-LINKAGE CGE models. CoPS has done extensive work advis<strong>in</strong>g the government <strong>in</strong><br />
Australia us<strong>in</strong>g their CGE models. Variants of their models are used <strong>in</strong> over 400 organisations<br />
<strong>in</strong> over 70 countries.<br />
The widespread usage and acceptance of CGE results over the last thirty years re<strong>in</strong>forces the<br />
view taken <strong>in</strong> the literature that it is now the best method available for analys<strong>in</strong>g the impact<br />
of economy-wide shocks.<br />
14. For example, Dixon, Parmenter and Rimmer (2000); Adams et al (1994); Dixon, Picton, and Rimmer (2005), Dixon, Madden, and Peter<br />
(1993); Dixon and Rimmer (1999).<br />
15. GEMPACK homepage http://www.monash.edu.au/policy/gempack.htm<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
31
32 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Appendix C Limitations of analysis<br />
• Aggregation bias. We have not split out the dairy sector, but use aggregated dairy<br />
farm<strong>in</strong>g and dairy process<strong>in</strong>g <strong>in</strong>dustries. This leads to aggregation bias. For example,<br />
irrigated and non-irrigated farm<strong>in</strong>g practices and <strong>in</strong>dustry structures are likely to be quite<br />
different, and at present this is not captured with<strong>in</strong> our modell<strong>in</strong>g. Given adequate time,<br />
the model can be disaggregated to more accurately model the specific dairy sector.<br />
• Foreign debt account<strong>in</strong>g. We employ a standard ‘MONASH’method for account<strong>in</strong>g for<br />
the foreign debts – changes <strong>in</strong> net foreign liabilities come about if our <strong>in</strong>vestment is not<br />
met by domestic sav<strong>in</strong>gs. We pay <strong>in</strong>terest on foreign debt that is subtracted from national<br />
<strong>in</strong>come. The <strong>in</strong>terest, <strong>in</strong> foreign currency, is converted to domestic currency by the<br />
exchange rate. In this simulation, the exchange rate appreciation leads to a decrease <strong>in</strong><br />
the domestic currency value of the <strong>in</strong>terest repayments. It could be argued that much of<br />
the <strong>in</strong>terest on this foreign debt is likely to be dividend payments on equity. In this case,<br />
the appreciation of the exchange rate should not decrease overseas payments.<br />
• ‘Top-down’ regional modell<strong>in</strong>g. Regional data is by far the most difficult data to obta<strong>in</strong><br />
across the diverse range of <strong>in</strong>dustries and commodities that we have <strong>in</strong>corporated with<strong>in</strong><br />
our model. ‘Bottom-up’regional modell<strong>in</strong>g provides a clearer picture of regional activity<br />
and <strong>in</strong>-particular cross-region flows, however requires significant data resources. The topdown<br />
approach here provides <strong>in</strong>dicative regional splits.<br />
• Model structure. The CGE model is based on Statistics <strong>New</strong> <strong>Zealand</strong> Input Output tables,<br />
with decisions based on neoclassical economics. Structural changes to the economy from<br />
the reforms are therefore not captured <strong>in</strong> the modell<strong>in</strong>g, nor are any non-competitive<br />
market structures. This means the distributional elements of the results may differ <strong>in</strong><br />
reality if firms with market power do not pass on benefits.
Appendix D References<br />
Bandara, J. S. (1991). ‘Computable General Equilibrium Models for Development Policy<br />
Analysis <strong>in</strong> LDCs’. Journal of Economic Surveys 5, no. 1 (1991): 3-69.<br />
Coleman, W. (2008). ‘Gaug<strong>in</strong>g economic performance under chang<strong>in</strong>g terms of trade: real<br />
gross domestic <strong>in</strong>come or real gross domestic product?’ Economic Papers, Vol. 27 no.4,<br />
December 2008, pp. 329-343.<br />
Dixon, P. B., J. R. Madden, and M. W. Peter. (1993). ‘The effects of reallocat<strong>in</strong>g general revenue<br />
assistance among the Australian states’. Economic Record 69, no. 207 (1993): 367–381.<br />
Dixon, P. B., and B. R. Parmenter. (1996). ‘Computable general equilibrium modell<strong>in</strong>g for policy<br />
analysis and forecast<strong>in</strong>g’. Handbook of computational economics 1 (1996): 3–85.<br />
Dixon, P. B., B. R. Parmenter, and M. T. Rimmer. (2000). ‘Forecast<strong>in</strong>g and policy analysis with a<br />
dynamic CGE model of Australia’. Contributions to Economic Analysis 248 (2000): 363–406.<br />
Dixon, P. B, M. R Picton, and M. T Rimmer. (2005). ‘Efficiency effects of changes <strong>in</strong><br />
Commonwealth grants to the states: A CGE analysis’. Australian Economic Papers 44, no. 1<br />
(2005): 82–104.<br />
Dixon, P. B., and M. T Rimmer. (1999). ‘Changes <strong>in</strong> <strong>in</strong>direct taxes <strong>in</strong> Australia: A dynamic general<br />
equilibrium analysis’. The Australian Economic Review 32, no. 4 (1999): 327–348.<br />
Dwyer, L, P. Forsyth, and R. Spurr. (2005). “Estimat<strong>in</strong>g the Impacts of Special Events on an<br />
Economy’. Journal of Travel Research 43, no. 4 (May 1, 2005): 351-359. http://jtr.sagepub.com/<br />
cgi/content/abstract/43/4/351<br />
Horridge, 2008. ‘Orani-G: A generic s<strong>in</strong>gle-country computable general equilibrium model’.<br />
CopS/IMPACT Work<strong>in</strong>g Paper op-93; Centre of Policy Studies, Monash University. First<br />
Published 2000. Revised 2008.<br />
Mules, T. (1999). ‘Estimat<strong>in</strong>g the economic impact of an event on a local government area,<br />
region, state or territory’. Valu<strong>in</strong>g tourism: Methods and techniques.<br />
NZIER. (2003). Globalisation a <strong>New</strong> <strong>Zealand</strong> perspective. CEDA chapter March 2003.<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
33
Appendix E Dairy employment statistics<br />
Farm<strong>in</strong>g<br />
Milk & cream Ice cream Cheese<br />
Total dairy Total dairy Total regional Dairy as % Region as % of<br />
employment process<strong>in</strong>g process<strong>in</strong>g process<strong>in</strong>g & process<strong>in</strong>g employment employment of regional total NZ dairy<br />
employment employment other dairy employment<br />
employment employment<br />
employment<br />
South Taranaki 1,450 0 0 1,570 1,570 3,020 11,675 25.9% 8.9%<br />
District<br />
Matamata-Piako 1,260 0 0 1,130 1,130 2,390 13,306 18.0% 7.1%<br />
District<br />
Southland 1,980 0 0 390 390 2,370 15,651 15.1% 7.0%<br />
District<br />
Waipa District 1,050 0 3 420 423 1,473 14,991 9.8% 4.4%<br />
Timaru District 530 0 0 650 650 1,180 21,151 5.6% 3.5%<br />
Ashburton 1,180 0 0 0 0 1,180 14,423 8.2% 3.5%<br />
District<br />
Whakatane 600 0 0 550 550 1,150 12,285 9.4% 3.4%<br />
District<br />
South Waikato 740 0 0 270 270 1,010 7,722 13.1% 3.0%<br />
District<br />
Waikato District 920 0 0 0 0 920 12,160 7.6% 2.7%<br />
Whangarei 510 0 0 400 400 910 30,341 3.0% 2.7%<br />
District<br />
Selwyn District 850 9 0 40 49 899 12,136 7.4% 2.7%<br />
Manawatu 540 210 0 140 350 890 8,660 10.3% 2.6%<br />
District<br />
Clutha District 680 0 0 150 150 830 8,440 9.8% 2.5%<br />
Hamilton City 50 50 0 720 770 820 75,536 1.1% 2.4%<br />
Rotorua District 570 0 0 180 180 750 29,341 2.6% 2.2%<br />
Kaipara District 580 0 0 130 130 710 5,445 13.0% 2.1%<br />
Tararua District 520 0 0 180 180 700 5,924 11.8% 2.1%<br />
Otorohanga 610 0 0 0 0 610 3,227 18.9% 1.8%<br />
District<br />
Taupo District 600 0 0 0 0 600 14,291 4.2% 1.8%<br />
Rangitikei District 280 0 0 290 290 570 5,926 9.6% 1.7%<br />
34 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth
Farm<strong>in</strong>g<br />
Milk & cream Ice cream Cheese<br />
Total dairy Total dairy Total regional Dairy as % Region as % of<br />
employment process<strong>in</strong>g process<strong>in</strong>g process<strong>in</strong>g & process<strong>in</strong>g employment employment of regional total NZ dairy<br />
employment employment other dairy employment<br />
employment employment<br />
employment<br />
<strong>New</strong> Plymouth 560 0 0 6 6 566 34,711 1.6% 1.7%<br />
District<br />
Waitaki District 460 0 0 75 75 535 9,410 5.7% 1.6%<br />
Westland District 270 0 0 240 240 510 3,730 13.7% 1.5%<br />
Waimate District 410 0 0 60 60 470 2,242 21.0% 1.4%<br />
Western Bay of 460 0 0 6 6 466 13,868 3.4% 1.4%<br />
Plenty District<br />
Tasman District 340 0 12 110 122 462 18,146 2.5% 1.4%<br />
Hauraki District 450 0 0 0 0 450 5,382 8.4% 1.3%<br />
Far North District 420 0 0 9 9 429 18,641 2.3% 1.3%<br />
Papakura District 20 140 0 250 390 410 15,071 2.7% 1.2%<br />
Duned<strong>in</strong> City 130 270 9 0 279 409 55,662 0.7% 1.2%<br />
Horowhenua 370 0 0 0 0 370 8,293 4.5% 1.1%<br />
District<br />
Frankl<strong>in</strong> District 330 15 0 18 33 363 18,581 2.0% 1.1%<br />
Auckland City 3 9 320 25 354 357 307,312 0.1% 1.1%<br />
Hurunui District 330 0 0 0 0 330 4,100 8.0% 1.0%<br />
Buller District 330 0 0 0 0 330 4,475 7.4% 1.0%<br />
Waimakariri 300 0 0 15 15 315 10,457 3.0% 0.9%<br />
District<br />
Christchurch City 40 210 12 45 267 307 188,948 0.2% 0.9%<br />
Stratford District 300 0 0 0 0 300 2,882 10.4% 0.9%<br />
Palmerston 80 110 0 85 195 275 45,355 0.6% 0.8%<br />
North City<br />
Gore District 260 0 0 0 0 260 6,500 4.0% 0.8%<br />
South Wairarapa 250 0 0 0 0 250 2,967 8.4% 0.7%<br />
District<br />
Rodney District 210 0 0 40 40 250 23,146 1.1% 0.7%<br />
Grey District 200 0 0 0 0 200 7,048 2.8% 0.6%<br />
Waitomo District 200 0 0 0 0 200 4,365 4.6% 0.6%<br />
Kapiti Coast 50 0 0 130 130 180 11,852 1.5% 0.5%<br />
District<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
35
Farm<strong>in</strong>g<br />
Milk & cream Ice cream Cheese<br />
Total dairy Total dairy Total regional Dairy as % Region as % of<br />
employment process<strong>in</strong>g process<strong>in</strong>g process<strong>in</strong>g & process<strong>in</strong>g employment employment of regional total NZ dairy<br />
employment employment other dairy employment<br />
employment employment<br />
employment<br />
Central Hawke’s 180 0 0 0 0 180 5,925 3.0% 0.5%<br />
Bay District<br />
Opotiki District 180 0 0 0 0 180 3,003 6.0% 0.5%<br />
Invercargill City 140 15 12 9 36 176 26,151 0.7% 0.5%<br />
Hast<strong>in</strong>gs District 120 0 0 35 35 155 41,110 0.4% 0.5%<br />
Manukau City 30 0 90 35 125 155 127,635 0.1% 0.5%<br />
North Shore City 0 0 65 85 150 150 86,346 0.2% 0.4%<br />
Marlborough 130 0 0 3 3 133 23,976 0.6% 0.4%<br />
District<br />
Carterton District 130 0 0 0 0 130 2,694 4.8% 0.4%<br />
Thames- 100 0 0 9 9 109 9,625 1.1% 0.3%<br />
Coromandel<br />
District<br />
Kaikoura District 75 0 0 25 25 100 1,656 6.0% 0.3%<br />
Wanganui 75 0 0 0 0 75 18,001 0.4% 0.2%<br />
District<br />
Gisborne District 50 0 0 25 25 75 20,196 0.4% 0.2%<br />
Masterton 55 0 0 3 3 58 10,437 0.6% 0.2%<br />
District<br />
Central Otago 50 0 0 0 0 50 10,757 0.5% 0.1%<br />
District<br />
Ruapehu District 40 0 0 0 0 40 5,994 0.7% 0.1%<br />
Mackenzie 35 0 0 0 0 35 1,886 1.9% 0.1%<br />
District<br />
Tauranga City 12 0 0 12 12 24 48,791 0.0% 0.1%<br />
Nelson City 12 0 9 0 9 21 24,656 0.1% 0.1%<br />
Wairoa District 18 0 0 0 0 18 3,586 0.5% 0.1%<br />
Lower Hutt City 0 0 0 6 6 6 44,927 0.0% 0.0%<br />
Waitakere City 0 0 3 0 3 3 46,742 0.0% 0.0%<br />
36 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth
Farm<strong>in</strong>g<br />
Milk & cream Ice cream Cheese<br />
Total dairy Total dairy Total regional Dairy as % Region as % of<br />
employment process<strong>in</strong>g process<strong>in</strong>g process<strong>in</strong>g & process<strong>in</strong>g employment employment of regional total NZ dairy<br />
employment employment other dairy employment<br />
employment employment<br />
employment<br />
Area Outside 0 0 0 0 0 0 33 0.0% 0.0%<br />
Territorial<br />
Authority<br />
Queenstown- 0 0 0 0 0 0 15,353 0.0% 0.0%<br />
Lakes District<br />
Chatham Islands 0 0 0 0 0 0 310 0.0% 0.0%<br />
Territory<br />
Well<strong>in</strong>gton City 0 0 0 0 0 0 137,966 0.0% 0.0%<br />
Upper Hutt City 0 0 0 0 0 0 11,395 0.0% 0.0%<br />
Porirua City 0 0 0 0 0 0 15,401 0.0% 0.0%<br />
Napier City 0 0 0 0 0 0 25,940 0.0% 0.0%<br />
Kawerau District 0 0 0 0 0 0 2,924 0.0% 0.0%<br />
Total (excl not 23,705 1,038 535 8,571 10,144 33,849 1,919,197 1.8% 100.0%<br />
elsw <strong>in</strong>cl)<br />
Source: Calculated by NZIER from Department of Labour, ‘Regional Industry Tool 2009’http://www.dol.govt.nz/services/LMI/tools/regional-<strong>in</strong>dustry-tool.asp<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
37
38 Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
Appendix F Value of regional dairy production<br />
Southland $ 710.35<br />
South Taranaki $ 616.56<br />
Matamata-Piako $ 552.12<br />
Ashburton $ 471.11<br />
Waikato $ 389.91<br />
Waipa $ 361.00<br />
Selwyn $ 269.91<br />
South Waikato $ 262.53<br />
Rotorua $ 253.55<br />
Otorohanga $ 234.54<br />
<strong>New</strong> Plymouth $ 206.31<br />
Hauraki $ 196.40<br />
Tararua $ 188.28<br />
Timaru $ 185.13<br />
Clutha $ 181.72<br />
Kawerau/Whakatane $ 180.33<br />
Manawatu $ 174.45<br />
Taupo $ 172.00<br />
Kaipara $ 167.59<br />
Whangarei $ 159.00<br />
Waitaki $ 146.93<br />
Gore $ 144.88<br />
Waimate $ 143.14<br />
Western Bay of Plenty $ 116.78<br />
Stratford $ 116.45<br />
Frankl<strong>in</strong> $ 112.07<br />
Hurunui $ 106.17<br />
Far North $ 106.08<br />
Tasman / Nelson $ 101.73<br />
Westland $ 97.06<br />
Waimakariri $ 94.65<br />
Horowhenua $ 87.16<br />
Buller $ 85.02<br />
Rangitikei $ 74.10<br />
Grey $ 71.19<br />
Rodney $ 70.08<br />
South Wairarapa $ 69.68<br />
Invercargill $ 67.21<br />
Duned<strong>in</strong> City $ 49.74<br />
Central Hawkes Bay $ 49.13<br />
Opotiki $ 43.54<br />
Thames-Coromandel $ 39.93<br />
Waitomo $ 39.87<br />
Carterton $ 38.01<br />
Marlborough $ 31.99<br />
Palmerston North City $ 27.97<br />
Napier $ 23.66<br />
Kaikoura $ 19.69<br />
Ruapehu $ 18.72<br />
MacKenzie $ 16.24<br />
Masterton $ 16.12<br />
Wanganui $ 14.94<br />
Central Otago $ 14.29<br />
Christchurch City $ 11.17<br />
Kapiti Coast $ 10.12<br />
Hamilton City $ 7.76<br />
Manukau City $ 6.53<br />
Wairoa $ 4.72<br />
Tauranga $ 4.72<br />
Hast<strong>in</strong>gs $ 4.64<br />
Banks Pen<strong>in</strong>sula $ 3.82<br />
Gisborne $ 2.84<br />
Upper Hutt City $ 1.40<br />
Papakura $ 1.38<br />
North Island $ 5,217.92<br />
South Island $ 2,993.32<br />
<strong>New</strong> <strong>Zealand</strong> $ 8,090.98
Appendix G Chang<strong>in</strong>g dairy export markets<br />
F<strong>in</strong>al report - 16 November 2010<br />
Appendix G Chang<strong>in</strong>g dairy export markets<br />
Figure 13 Chang<strong>in</strong>g markets for <strong>New</strong> <strong>Zealand</strong>’s dairy exports<br />
% of export value<br />
Figure 13 Chang<strong>in</strong>g markets for <strong>New</strong> <strong>Zealand</strong>’s dairy exports<br />
% of export value<br />
1989<br />
2009<br />
Source: NZIER<br />
Source: NZIER<br />
NZIER – Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
44<br />
Dairy’s <strong>role</strong> <strong>in</strong> generat<strong>in</strong>g growth<br />
39