Dairy's role in sustaining New Zealand - Fonterra

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14 Dairy’s role in generating growth 3.2.2 Indirect impact on other industries The indirect impacts can be broken down into the industry categories described in section 2.5. The numerical results are summarised in Table 5. • Supplying industries – industries that supply dairy with intermediate inputs are likely to benefit from a stronger dairy sector. However, the fertilizer industry loses 0.2% of its sales. That counterintuitive result arises from the movements in the exchange rate, which will be discussed further in the next section. As exports rise, imports become relatively cheaper and that causes primary producers to switch away from domestically produced fertiliser in favour of imported fertilisers. • Government expenditure industries – as expected, the increased incomes from the higher milk solids payout boost tax revenues and enable the government to spend more providing services such as education, health, and law and order. • Household expenditure industries – industries that households spend money on are likely to benefit from increased incomes generated in the dairy sector through employment and wage increases, and increased returns to capital. Such industries include housing and real estate (which takes a large share of households’budget), and consumption goods from the retail trade sector. • Competing export industries – industries that compete for resources with the dairy sector suffer from the dairy sector’s increased spending power. That is particularly so for the sheep and beef sector, which uses many of the same resources. In addition, the appreciation of the New Zealand dollar that results from increased exports of dairy products hurts all exporters, as seen by the drop in production of the textile and horticulture sectors. 10. The second simulation with a $1 per kilogram price decrease shows near identical effects in the opposite direction. In the interests of brevity we report only the results for the price increase here.
Table 5 Indirect impacts 2010 Percentage deviation in value added from BAU levels, selected industries Industry Type Impact Agricultural services Supplying 0.09% Fertilizer Supplying -0.2% Retail Household expenditure 0.7% Real estate Household expenditure 1.1% Residential property Household expenditure 0.03% Schools Government 1.1% Hospitals Government 1.3% Police Government 0.8% Apple and Pear Competing export -3.0% Sheep and Beef Competing export -0.4% Textiles Competing export -1.3% Source: NZIER 3.2.3 Macroeconomic effects The national results follow naturally from the direct and indirect impacts described above. We focus on the key macroeconomic variables described in section 2.5: employment and Gross Domestic Product (GDP), as well as consumption, which is a measure of NEB (how ‘well off’ we are). The NEB/welfare gain for New Zealand, proxied by private and public consumption is an increase of 1.2%. That represents an extra $1.2 billion of goods consumed in New Zealand, relative to the situation if the price of milk solids had remained constant. This equates to over $270 of additional spending per man, woman and child in New Zealand due to the $1/kg price increase. The change in real GDP of 0.24%, or $395 million, represents the increase in the value of goods and services produced in the economy. The benefits arise from the increased flows of income to farmers being distributed throughout the economy via supplying industries and government and household spending. The NEB gain is larger than the GDP gain for two reasons: • An increase in the price of dairy exports improves New Zealand’s terms of trade. An increase in the terms of trade allows us to consume more of our GDP. • The assumed increase in demand for dairy exports causes a currency appreciation that leads to a reduction in the domestic currency value of New Zealand’s interest repayments on foreign debt. This improves New Zealanders’household purchasing power and allows greater consumption of goods and services. Under different assumptions about the mechanisms of foreign investment, this contribution is dampened (see Appendix C). Overall, the increased milk solids price draws wealth into the country via dairy exports and that leads to an increase in New Zealand’s wealth and, thus, our living standards. The impact on export competing industries is negative because of the appreciation of our currency. However, that same appreciation allows us to buy more from overseas as can be seen by the rise in imports and private consumption (see Table 6). Dairy’s role in generating growth 15
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 and 20: Figure 5 Change in milk solids pric
Page 21: 3. Milk solids price spike 3.1 Head
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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