Dairy's role in sustaining New Zealand - Fonterra

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18 Dairy’s role in generating growth Where the money goes To illustrate the impact of dairy farmer spending in the New Zealand economy, Table 8 sets out the key cash flow items for an average dairy farm operation for the current 2010/11 June year. In the current year Dairy NZ expects the average dairy farm to produce around 130,000 kg of milksolids. The cash income is the dollar amount received for milksolids sold to the factory (i.e. Fonterra) and also includes net livestock sales. Table 8: Average farm cashflow $ per farm, $ per kg MS 2010/11 $ per kg MS 2010/11 $ per kg MS Cash Income 840,000 6.80 Less farm working expenses 475,000 3.60 Cash Operating Surplus 365,000 3.20 Less Interest and rent 185,000 1.50 Tax 35,000 0.25 Drawings 85,000 0.70 Cash available for development/ investment/debt repayment 60,000 0.75 Apple and Pear Competing export -3.0% Sheep and Beef Competing export -0.4% Textiles Competing export -1.3% Note: Figures are rounded so do not exactly add up Source: Dairy New Zealand 2010 A substantial part of farmers’expenses are the farm working expenses. Farm working expenses typically include wages, animal health and breeding, feed made and purchased, stock grazing fertiliser, expenditure on removing weed and pests, repairs and maintenance, fuel, vehicle charges, administration, insurance, ACC, and rates. This leaves what is known as the cash operating surplus. This is less than half of the initial cash income. From this farmers pay off interest and rent (this includes overdraft and term payments and also rent of land), tax (terminal and estimated tax), and drawings (family living expenses). This leaves the cash available for farm development, any investments made and repaying principal on debt. This demonstrates that most of the money received by farmers as their cash income in one form or another is spent in New Zealand. This is of fundamental importance for the New Zealand economy since it drives further income generation and has a major impact on domestic economic activity.
4. Production growth over the last decade 4.1 Headline results At the national level, the growth in the dairy sector over the last decade has resulted in: • New Zealand’s 2009 GDP increasing by $690 million, relative to what it would have been had the dairy sector stagnated at 1998/99 levels. While labour and land can switch to alternative uses should dairy have stagnated, productivity gains and capital accumulation within the sector are net gains to the economy. • New Zealand’s 2009 welfare as proxied by private and public consumption being $1.1 billion higher than it would otherwise been. From the point of view of 1999, the cumulative net present value (NPV) of the decade’s consumption growth to 2009 is $6.4 billion. • The dairy sector’s strong export growth over the last decade has improved New Zealand’s balance of trade, and allowed for increased consumption spending. This export growth reduced New Zealand’s net foreign liabilities to GDP ratio by over 1%. Together with the exchange rate appreciation, this saved $231 million in interest repayments on foreign debt in 2009, or cumulatively $1.2 billion from 1999. • Real wages in 2009 increasing by 0.9% as increasing incomes means increased demand for goods and services, which in turn results in higher wages for employees. Significantly, the gains from the growth in the dairy sector, including wage rises, are not just felt within the sector itself, but more widely throughout the economy: • Growth in the fertilizer and agricultural service industries, which supply the dairy sector with intermediate inputs, are up by 0.9% and 4.3% in 2009, relative to what they would have been if dairy stagnated. • Industries where households spend their income, such as retail and housing, also benefit from the growth in the dairy sector, with activity in 2009 0.5% and 0.9% higher than had dairy not grown as experienced. • These positive flow-on impacts have further flow-on impacts to the tax-take of the government. Increased tax revenue coming in means more money to spend on essential services such as schools, hospitals and police. In 2009, these sectors are 0.7%, 0.6% and 0.2% better off because of the growth in the dairy sector. • Conversely, there are industries that have lost from growth in the dairy sector, most notably the sheep and beef sector which competes for resources. Our modelling suggests that this industry would have grown by an extra 10% over the last decade, had dairy stagnated rather than grown. Similarly, other export industries such as textiles and apples and pears suffered from a higher exchange rate, down by -2.3% and -3.0% respectively. Regionally, the results favour those areas where dairy farming has grown the most: • Canterbury and Southland 2009 regional GDP levels are 1.4% and 1.3% higher than they would have been had dairying not increased the economic activity within their districts. • Hawkes Bay, with a strong dependence on fruit and horticulture, is 0.3% worse off because of the currency appreciation caused by the growth in dairying. Dairy’s role in generating growth 19
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 and 22: 3. Milk solids price spike 3.1 Head
Page 23 and 24: Table 5 Indirect impacts 2010 Perce
Page 25: Figure 7 Gross regional product imp
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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