Synthetic milk tastes like the real thing and ingredients can be fine-tuned to be lower in cholesterol. Meanwhile, lab-grown meat is a growing industry.
OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed.
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If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Q: Dear Liam
I have a serious concern that milk will seriously change our economy when it is made in a factory and the cows are no longer needed. Given our largest debt is milk-funded, how will banks handle this market change? Fast activity is going on overseas but there’s general silence here in New Zealand. Precision Fermentation is beyond stopping and how will dairy debt be funded? I would appreciate if you were to let some light shine on this matter.
Best wishes,
Gordon Banfield
A: Hi Gordon,
That’s a fascinating question and one that bothers me too – not just around dairy but all lab-grown cultivated proteins, including meat.
Without getting too technical, what we’re talking about here is the ability to produce dairy and meat-style proteins in a lab – as opposed to plant-based alternatives such as oat milk.
The technology has been around for a decade now but is progressing fast, especially with regards to reducing production costs.
When the science of lab-grown meat was first introduced to the world in 2013, one burger cost more than $300,000 to produce. Now there are cultivated burgers being produced for around US$10 each.
Late last year, Japanese engineering company Hitachi Zosen unveiled a process that reduces production costs of fake meat by about 90%. It plans to start selling its synthetic protein to cell-based meat producers as soon as 2025.
High-powered US consultancy McKinsey says the cultivated meat industry is expected to reach a $25 billion valuation by 2030.
From what I can see, the industry around precision fermentation of milk is less advanced than the meat equivalent.
There has been some activity and news coverage about it locally.
Fonterra has had its scientists looking at the process for several years.
Talking to NZME’s rural news service The Country, food scientist Dr Rob Burton said at the moment, the scale of production meant precision fermentation didn’t represent a challenge to agriculture.
However, he said efforts to increase production volume and decrease costs were ongoing and that with an abundant supply of renewable energy, New Zealand had the potential to become a supplier of precision fermented protein.
Talking to Newshub, Federated Farmers expressed scepticism that parents would ever be happy putting lab-grown meat and milk in their kids’ lunchboxes.
However, surveys in China have found that 90% of consumers would be happy with lab-grown proteins in their food.
Consumers might be a long way from giving up on quality cheeses and top-grade steaks but New Zealand’s economy isn’t really based on that stuff.
The bulk of our exports are lower-value protein ingredients used in processed foods, such as milk powder and mince for hamburgers.
Clearly, the mass adoption of this stuff represents a big risk to New Zealand’s economy. It’s not just the debt repayments. You’re right that dairy debt makes the sector vulnerable to sudden drops in income. According to the Reserve Bank (RBNZ), total agricultural debt (most of which is on dairy farms) sits at $63b.
But that would just be the start of it. A big fall in dairy income would blow out New Zealand’s current account deficit and we’d face a credit downgrade, pushing up interest rates and creating risk around our much larger ($360b) mortgage debt.
So the question is: how likely is this switch in global consumer behaviour to happen and when?
Predicting the future is fraught – despite the fact that economists are expected to do it every day.
It is important to remember there are many factors involved for a technology to be widely adopted, other than just the amazing science.
I am a fan of something called Amara’s Law – after US scientist and futurist Roy Amara. He suggests that we overestimate a new technology’s short-term impact but underestimate the long-term impact.
The idea was expanded by US tech firm Gartner into something called the Gartner hype cycle.
As the graph above suggests, new technologies tend to go through a boom-and-bust cycle. The initial awe at their invention creates inflated expectations which don’t materialise, so people are disillusioned – but then slowly the technology makes its way into our lives, eventually becoming as transformative as was first hoped.
We saw it with the internet, which wowed everyone in the late 1990s and drove a frenzy of business investment, before crashing the stockmarket in 2000. Then over the next decade, it gradually transformed our lives. There is no shortage of people who think artificial intelligence (AI) is going through the same cycle now. In fact, why trust people?
I asked the chatbot Claude where AI was on the Gartner Hype Cycle. “AI is likely straddling the ‘Peak of Inflated Expectations’ and the early part of the ‘Trough of Disillusionment’,” it told me, in a tone reminiscent of Marvin the Paranoid Android from The Hitchhiker’s Guide to the Galaxy.
Anyway, when you assess the hype around cultivated proteins, it looks suspiciously like it is still in the “inflated expectations” part of the cycle.
Globally, both dairy and red meat consumption are falling in many developed nations. But they are still rising globally as developing nations demand more protein.
I don’t doubt fake meat and dairy will change the world eventually but it may take another decade or two. Which should give New Zealand time to adapt and, hopefully, embrace the opportunity.
But we’ll need to watch developments closely. These things have a tipping point at which the transition becomes rapid.
Q: Hi Liam
I listened to a podcast with a geopolitics expert called Peter Zeihan (30 with Guyon Espiner) a couple of days ago and I’m interested to hear what you think about his outlook for China. Basically, he says that China is in big trouble, mostly because of demographic shifts.
This obviously would have huge implications for New Zealand’s economy. It’s not just China – Zeihan also talked about how demographic changes are sparking big changes around the world, both economically and socially. Is he an outlier (his predictions were quite dramatic), or do most experts agree?
D.W.
A: I guess this question is related to the one above, in the sense that it highlights the risk we face with so much of our economy built on selling dairy powder to China.
Actually China accounts for almost 30% of all our annual export earnings.
China was New Zealand’s number one market for exports in May, with an annual value of $17.9b (US$10.94b) for the year ending May 2024.
But that data did show a shift with exports to China down 12% and exports to the US up 33%. That reflects the downbeat Chinese economy, which has been showing less demand for our meat. We’ve also seen post-pandemic tourism from China recovering slower than hoped.
I looked at the cyclical slowdown in China’s economy a few weeks ago. It doesn’t look like we should be expecting a quick turnaround. I quoted ANZ chief China economist Raymond Yeung, who pointed out that the property market in China could take another three years to rebalance and that this will keep consumer demand subdued.
But is it even worse than that? Peter Zehihan, a geopolitical strategist and author – thinks so.
I watched the interview with Zeihan. He’s a compelling commentator and very confident about a lot of things (including Joe Biden winning the US elections in a landslide).
Even though he’s a great writer and thinker, I’d take his boldest proclamations with a grain of salt.
I’ve been listening to Western commentators (usually American) warning of a Chinese economic meltdown for as long as I’ve been covering its economy (about 15 years).
I’m wary of making bold proclamations about the future based on current trends. That assumes trends won’t change.
But they often do, and in surprising and unforeseeable ways.
Some readers may be old enough to recall the apocalyptic predictions of global overpopulation and mass starvation predicted by some demographers and ecologists in the late 1960s and early 1970s.
A popular book called The Population Bomb, by US biologist Paul Ehrlich, predicted a “great die-off” with hundreds of millions starving to death in the 1970s.
He was wildly incorrect.
The population alarmists at the time failed to foresee the exponential growth in food production that subsequently occurred. They also failed to pick the extent to which access to contraception and higher levels of education and career opportunities for women would lower birth rates.
Zeihan is right about China’s demographic issues. China clung to its one-child policy (ironically, out of fear of overpopulation) for too long. Now it finds its more educated middle-class population isn’t keen on big families – even with the encouragement of the state.
Effectively, China finds itself headed down the same path as Japan, Europe and most of the Western world with regards to an ageing population.
That’s problematic for economies that rely on consumption for wealth creation, as older people tend to consume less and save more. It might be good for inflation, as I wrote back in April.
But it poses problems for economic growth.
Countries like New Zealand and Australia have the option of using high rates of immigration to keep the trend at bay.
Rise of the Chinese middle-class
Western commentators often underestimate the extent to which China is able to do the same using internal migration. The urbanisation of China, the rise of its middle class, is key to understanding its economic growth in the 21st century.
The Pew Institute estimates that China’s middle class surged from just from 39.1 million people (3.1% of the population) in 2000 to roughly 707 million (50.8% of the population) in 2018.
The pace of growth as slowed. But it is still growing.
The Boston Consulting Group (BCG), has estimated that China will add an additional 80 million people to the middle and upper classes in the period from 2022 to 2030.
That effectively adds another export market the size of Germany with a strong demand for New Zealand’s infant formula, cheese pizza and flavoured milk drinks.
Given the lack of trade barriers and the strong supply relationships we have in place with China, it’s not hard to see why exporters aren’t in a hurry to give up on it.
There are all sorts of things that could go wrong of course (political upheaval, increasing geo-political tension, war)... but aren’t there always?
All this talk about big macroeconomic risks to New Zealand’s economy can get pretty worrying. That’s economics for you, famously dubbed “the dismal science” by Scottish philosopher Thomas Carlyle. There’s always something to worry about.
While it’s good to be aware of risks and plan for them, that can create another risk – pessimism.
We know that an overly gloomy outlook can make recessions worse, as people collectively stop spending. Unfortunately, there’s not much we can do about that right now, as it’s helping beat inflation.
This week’s very gloomy NZIER Quarterly Outlook of Business Opinion almost had economists cheering from sidelines. They saw it as evidence that monetary policy is working.
“Today’s results are hugely encouraging for the RBNZ,” said ASB senior economist Mark Smith.
“OCR cuts before year end remain a distinct possibility. Our OCR call is under review.”
But we also have to be careful we don’t let the gloom about the current cycle bleed into despair about New Zealand’s long-term outlook.
In my Sunday column, I noted that many Kiwis were giving in to pessimism about the country’s long-term prospects. We’ve been through worse and we’ll get through this.
But I think Craigs Investment Partners Mark Lister might have made the point better with his column, pointing out that pessimism is no pathway to wealth.
Pessimists sound smart, optimists make money, Lister wrote, with the clinical confidence of a professional investor.
I agree. I’ve interviewed hundreds of successful entrepreneurs and business leaders over the past 25 years and I haven’t met many pessimists.
It’s been a quiet couple of weeks for economic data but we’re about to get a flurry of progress reports on how this economic cycle is tracking.
Believe it or not, we are already due another update from the Reserve Bank next week, with a rate call and a one-page Monetary Policy Review.
Coming ahead of some important hard data numbers around inflation and unemployment, nobody is expecting any major change in stance from the RBNZ next Wednesday afternoon (2pm). So expect the cash rate to stay on hold and the statement to keep talking tough about sticky, long-term inflation risk.
They might say something encouraging about the recent gloom, like: “Monetary policy is working.”
On Wednesday we’ll also get new immigration numbers. Is the influx of new migrants holding up at historically high levels? Will we see another grim record for Kiwi departures?
On Thursday, we get new Selected Price Index inflation data. That’s about 45% of the total Consumer Price Index (CPI), including food, rent and transport costs.
The full CPI drops on Wednesday, July 17 to finally give us a fresh official read on the inflation rate (currently 4% for the year to March 31).
Centrix credit data has been marking the slide into an economic downturn for several months now. Credit card arrears and business liquidations have all risen sharply. But given the pressure high interest rates are putting on homeowners, mortgage arrears are one area holding up okay.
While the year is on the rise, the percentage of people behind on mortgage payments is still below pre-Covid levels.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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