Dairy's role in sustaining New Zealand - Fonterra

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12 Dairy’s role in generating growth 2.5 How we analyse the modelling results In analysing the modelling results we take a systematic approach of tracking the impacts as they flow through the economy, beginning with the direct impacts on the dairy sector itself. We look at the export and domestic markets, and how the sector responds to growth with increased employment and investment. We then analyse the flow-on or indirect impacts on other industries. We split indirect impacts into the following industry categories: • Supplying industries – industries that supply dairy with intermediate inputs are likely to benefit from a stronger dairy sector. These are industries such as agricultural services and the fertilizer industry. • Household expenditure industries – industries that households spend money on are likely to benefit from increased income that comes through higher employment and wages, and increased returns to capital from a growing dairy sector. • Government industries – industries that rely on government funding are positively impacted by a stronger economy and bigger tax takes, as this increases the money available for the government to spend. • Competing export industries – industries that compete for resources (such as land and labour) with the dairy sector lose from dairy’s growth. Finally, we examine the macroeconomic effects. Here we report both value-add (GDP) and Net Economic Benefit/welfare (private and public consumption) measures. There are two ways to think about the way that export growth will affect GDP: (i) GDP is the sum of the value of expenditure on goods and services made in New Zealand and exports are a component of that expenditure, so a change in exports directly affects the level of GDP. The change in exports will then have flow-on effects on other parts of the economy, as described in our results section. (ii) GDP is also the sum of the value of resources utilised in the economy. Increased dairy exports are generated, in part, by gains in productivity. Greater productivity allows the same resources – capital, land and labour – to generate greater value, so GDP increases as productivity rises. Thus we expect export growth to have a direct impact on GDP and, in the long run, a positive impact. Although GDP is the most commonly used measure of economic performance, it does not capture necessarily how ‘well off’we are as a country. GDP is essentially a measure of how many goods and services New Zealand produces – it shows the size of the economy. Consumption shows how much household and government spending increases following a change in the economy. It is more appropriate than GDP as a measure of welfare (see Coleman, 2008), particularly in cases where we expect changes in the terms of trade 7 . Ultimately, the objective of an economic development is to raise the living standards of the population. Living standards are better proxied by household and government spending ability than by GDP. Thus our preferred NEB/welfare measure is consumption. Our CGE model allows us to determine, once all inter-industry effects and factor price changes have occurred, the additional boost to New Zealand’s GDP and NEB/welfare resulting from a price change in the milk solids payout or volume growth in the sector. In addition, we also report other macroeconomic indicators such as wages and employment. 7. We use the term ‘welfare’here not in the technical economic sense but merely as a synonym for ‘wellbeing’. The claim is merely that changes in consumption better proxy changes in welfare than do changes in GDP. We do not claim to actually measure welfare in the technical sense.
3. Milk solids price spike 3.1 Headline results A short term increase in the price of milk solids generates immediate benefits for the national economy. The national benefit of an increase of $1/kg in the Fonterra payout is a welfare gain of $1.2 billion, as proxied by private and public consumption. In addition, national GDP is expected to rise by $400 million 8 . The richer dairy sector would generate employment of approximately 4,600 more FTEs and wages would later start to rise 9 . The welfare gain is larger than the GDP gain due to the impact of exchange rate movements: • the improved terms of trade allows us to consume more of our GDP (i.e. we have to export less to pay for a given amount of imports – making the country better off as a whole) • the currency appreciation leads to a reduction in the value of New Zealand’s foreign debt. Both effects improve New Zealanders’household purchasing power and allow greater consumption of goods and services. 3.2 Detailed results 3.2.1 Direct effects: the dairy sector In the first simulation the increased world demand for dairy products drives up both the price and volume of dairy exports. That is passed on down the supply chain and results in a $1 per kilogram of milk solids increase in payments to dairy farmers. The increased payout and volumes cause the dairy sector grows strongly to generate the extra production. The increased payout causes investment in the farming industry to grow by 44%, and employment by 20%. Investment in the processing component of the industry grows by 14% and employment by 5.5%, relative to what would otherwise have occurred. Investment growth is higher than employment growth because capital accumulation tends to lag behind employment growth. The farming component of the sector grows more strongly because we have assumed that the benefits of higher world prices will be passed on to farmers. If dairy processors were to increase their profit margins instead then the differences would diminish 10 . 8. This is on top of the income generated by the ‘base’price. That is, if the 2011 price (say) is $5 and the 2012 payout is $6, our results look just at the additional income generated by the $1 price increase. 9. The direct impact on the economy of a $1 increase in the milk solids price is a $1.3 billion increase in gross output. That gross output generates about $590 million of GDP once the cost of intermediate inputs is subtracted. Furthermore, the effect of the increased dairy output is to increase the price of resources to other industries and thus reduce their output. The net effect on GDP of the $1.3 billion injection, once all these effects have been taken in to account, is the $400 million we report. Dairy’s role in generating growth 13
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 and 18: 2. Modelling dairy’s economic con
Page 19: Figure 5 Change in milk solids pric
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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