Dairy's role in sustaining New Zealand - Fonterra

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8 Dairy’s role in generating growth Dairy exports and rural livelihoods Any inquiry into the New Zealand economy and its workings has to at some point focus on the central driving force of economic growth: trade. Trade is important because over time New Zealand’s spending must equal its income. Without international trade the income of New Zealand businesses is limited by domestic spending. International trade removes this limit. With dairy exports at 26% of goods exports, the impact of the dairy industry on economic activity is considerable. The money that farmers spend in their communities and in other parts of the country drives further economic activity – the more they earn on international markets the more they spend in New Zealand. Dairy farmers’success is mirrored not only in their local communities but also in the cities of New Zealand which produce the goods and services that are bought by farmers. Even imports have a local component since they have to be transported to the point of sale. Nobody understands this more than the mayors of the districts, regions and cities of New Zealand. Peter Tennent, Mayor of New Plymouth, says that “while the dairy industry in his region only makes up 2% of the workforce, 100% of the community are the benefactors of their efforts. When dairy farmers are smiling, the region smiles”. Hugh Vercoe, Mayor of the Matamata Piako District, also knows how important dairy is to his district: “not only are we reliant on the dairy [farming] industry, we have five dairy processing plants and very active sale yards. This helps to maintain a vibrant community”. David Adamson, CEO of the Southland District Council says that the dairy industry has “changed the face of Southland”. He adds that “its economy has weathered the recession well, mainly because of the influence of the dairy industry”. In the first instance farmers spend their incomes on industries that directly support their activities. They buy more cows, upgrade equipment, buy fertilizer, repay debt and make land improvements. David Adamson suggests that this is the most visible sign of the impact of dairy growth on the Southland region: “most of the money earned by farmers is spun out into the community”. Since most of the goods and services come from outside of the provinces, other communities benefit as well. In work done by NZIER (2003) it is shown that it takes about 18 months for this economic ‘ripple’effect of additional export revenue to fully work through the New Zealand economy, all of which leads to stronger household spending and business investment. What would New Zealand look like without the dairy industry? Peter Tennent finds it difficult to imagine this situation but one thing he does know is that “New Plymouth would not have been judged the best place to live on the planet by the United Nations backed Liv.com Awards without the dairy industry … we’d still be smiling but not as wide … and there’d be far fewer businesses here”. Similar sentiments are echoed by David Adamson and Hugh Vercoe. Both said there would be fewer businesses, less vibrant community, and fewer job opportunities. Not only would there be fewer job opportunities and increased movement of people to the cities, those cities would also be poorer. The dairy industry has had a major impact on New Zealand society and economy for over 130 years. Those involved in running districts and cities closest to the dairy industry well understand the positive impact of dairying, not just on their regions and cities but on the rest of New Zealand.
2. Modelling dairy’s economic contribution over the past decade 2.1 Objective of modelling The section above has shown that the dairy sector has witnessed significant growth over the past decade. A key question is: how has this growth benefited the rest of the economy? In particular, we are interested in two aspects of this growth: • The short term impacts of milk solids payout increases • The longer term impacts of volume growth in the sector over the last 10 years. We examine these two aspects using a relatively newly developed economic model of the New Zealand economy. 2.2 Modelling technique The dairy sector interacts with the rest of the economy by generating exports and employment, using intermediate inputs such as fertilizer, and competing for use of land, labour and investment. In order to get a sense of how the New Zealand economy as a whole might be impacted by production and price changes in the dairy sector, we need to use an economic model that takes these interactions into account. We use NZIER’s dynamic Computable General Equilibrium (CGE) model of the New Zealand economy to evaluate the impacts of the price and volume growth in the dairy sector. 2.3 Advantages of CGE modelling Our dynamic CGE model is a more robust framework than alternatives approaches for estimating the contribution of the dairy sector to the New Zealand economy. The most commonly used alternative is input-output (IO) or ‘multiplier’analysis. IO or multiplier analysis has two significant limitations: • It does not adequately consider the reallocation of resources following a ‘shock’to the economy, such as a surge in demand for dairy exports. In particular, multiplier analysis assumes that resources (land, labour, capital, energy, intermediate inputs) are available Dairy’s role in generating growth 9
Page 1 and 2: Dairy’s role in sustaining New Ze
Page 3 and 4: Key points Dairy makes a very stron
Page 5 and 6: It drives many rural economies: “
Page 7 and 8: Contents 1. The current contributio
Page 9 and 10: 1. The current contribution of dair
Page 11 and 12: Table 2 Export values $ millions, 2
Page 13 and 14: Figure 3 Importance of dairy to reg
Page 15: Table 3 Farming industry structure
Page 19 and 20: Figure 5 Change in milk solids pric
Page 21 and 22: 3. Milk solids price spike 3.1 Head
Page 23 and 24: Table 5 Indirect impacts 2010 Perce
Page 25 and 26: Figure 7 Gross regional product imp
Page 27 and 28: 4. Production growth over the last
Page 29 and 30: Table 9 Indirect impacts 2008/09 Pe
Page 31 and 32: Figure 9 2009 Gross regional produc
Page 33 and 34: Appendix A CGE modelling framework
Page 35 and 36: Figure 11 The MONASH-NZ database Fi
Page 37 and 38: At the activity level, intermediate
Page 39 and 40: Table 12 IO vs. CGE multipliers Mul
Page 41 and 42: Appendix D References Bandara, J. S
Page 43 and 44: Farming Milk & cream Ice cream Chee
Page 45 and 46: Farming Milk & cream Ice cream Chee
Page 47: Appendix G Changing dairy export ma

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