Dairy's role in sustaining New Zealand - Fonterra

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10 Dairy’s role in generating growth in unlimited quantities for the expansion of a sector. It does not consider how those resources might otherwise have been used in the economy – their opportunity cost. In reality, resources are scarce and any additional resources used in the dairy sector must be diverted from other industries. The output of these industries must therefore fall. The overall macroeconomic impact of the increase in demand in one sector should take into account these losses elsewhere in the economy. • It does not account for relative price changes. For example, it assumes that wage rates do not change as the demand for labour rises or falls, and that the prices of intermediate goods such as transport and business services do not change in response to shifts in demand. In reality, if there is additional demand for workers in the dairy sector, this will place upward pressure on wages across the economy. Even though this wage pressure might be relatively small, it will still have a negative impact on input costs for other firms in the economy, and could lead to a drop in output. A similar story is true for intermediate inputs. As the dairy sector demands more of these inputs, their price rises for all other firms in the economy, causing their output to fall. Multiplier analysis therefore tends to vastly overstate the economic impacts of changes in demand in a specific sector. These unrealistically large impacts are thus not particularly informative for policy makers or firms. CGE models explicitly address both resource allocation and relative price shifts, allowing for a more credible, richer analysis of economic contribution. These models tend to produce more conservative estimates of impacts, but are more consistent with economic theory and practice. See Appendix B for a fuller discussion. 2.4 Modelling scenarios We investigate the impact of the dairy sector with two historical scenarios to show how real changes in the dairy sector translate into benefits for the rest of the economy. The historical scenarios examine the benefits that have accrued over the past decade: • milk solids payout increases • growth in the sector over the last 10 years. These two scenarios jointly capture both the benefits to the economy of the long term growth in the sector and the short-run wealth gains from increased milk solids payouts. • milk solids payout increases • growth in the sector over the last 10 years. These two scenarios jointly capture both the benefits to the economy of the long term growth in the sector and the short-run wealth gains from increased milk solids payouts. 2.4.1 Scenario 1: The price of milk solids The world price of milk solids has a significant impact on the dairy industry and the wider New Zealand economy. It has also been fairly volatile of late, as can be seen from Figure 5. This first scenario assesses the effects on the economy of changes in the milk solids price paid to farmers. In order to generate higher prices for milk solids we assume that the world price has risen due to increased world demand for dairy produce. Increased world demand for New Zealand’s dairy produce leads to rises in both milk prices for New Zealand dairy farmers and over a sustained period a rise in the quantity of milk solids produced domestically. We calibrate the price increases in this simulation to be ± $1/kg milk solids in Fonterra’s payout. So we are asking: what are the flow-on impacts for the New Zealand economy from a $1 increase or decrease in the Fonterra payout?
Figure 5 Change in milk solids price: 1998-2009 $ per kg, 2008-09 prices Figure 5 Change in milk solids price: 1998-2009 $ per kg, 2008-09 prices Figure 5 Change in milk solids price: 1998-2009 $ per kg, 2008-09 prices Source: Dairy NZ Final report - 16 November 2010 2.4.2 Scenario Source: 2: Dairy The NZ growth of dairying over the past decade Over the 2.4.2 last Scenario 10 years 2: The the growth dairy of sector dairying has over grown the past significantly, decade increasing milk solid production 2.4.2 Scenario Over the by last 58% 2: 10 years between The growth the dairy 1998/89 of sector has and dairying grown 2008/09. over significantly, In the this increasing case past milk study, decade solid we ask the 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 weincreasing askhave the questions: missed milk solid out 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 questions: stagnated ‘what at 1999 if it hadn’t production grown’? levels’? and ‘what would the economy have missed out The factual is the actual volume path as it occurred; the counterfactual is volumes on if dairy The factual had stagnated is the actualat volume 1999 path production as it occurred; levels’? the counterfactual is volumes remaining remaining at 1998/99 levels, as per Figure 6. at 1998/99 levels, as per Figure 6. The factual is the actual volume path as it occurred; the counterfactual is volumes remaining Figure at 1998/99 6 6 Processed levels, milk as milk solids per Figure solids 6. Million kgs Figure 6 Processed milk solids Million kgs Source: Dairy Statistics 2008/09 Source: Dairy Statistics 2008/09 NZIER – Dairy’s role in generating growth NZIER – Dairy’s role in generating growth 12 12 Dairy’s role in generating growth 11
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 and 16: Table 3 Farming industry structure
Page 17: 2. Modelling dairy’s economic con
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

Dairy's role in sustaining New Zealand - Fonterra

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