Fran O'Sullivan: Hope for high-volume tax relaxation

Steven Joyce

Steven Joyce is bullish on NZ's long-term dairy trade with China after high-level talks with the Chinese vice-premier.

Joyce says Wang Yang told him his sense was that the Chinese consumer demand for dairy would continue to grow off the back of rising middle-class incomes.

"We had a good conversation in a general sense," says Joyce.

The critical point is that while China's domestic dairy sector is itself having to rebuild - after its own consumers lost confidence in the safety of Chinese products on the wake of the 2008 melamine disaster - the growing demand could not be met by Chinese farmers alone.

That meant there was plenty of room for NZ dairy suppliers.

This however is in the medium term.

There are signs that the major build-up of dairy inventory in the Chinese market is starting to diminish. But this has yet to translate into the rampant demand that led to the White Gold rush where prices for Fonterra's milk powder topped $8kg of milk solids.

In the wake of Fonterra's own financial results last week, dairy farmers will be more hopeful that the downturn will not be a lengthy one.

The forecast is now for $4.60kg MS - up 75 cents for the $3.85kg/MS it previously predicted on "Black Friday".

What was also positive was the 183 per cent in profit.

The upshot is that another $1.3 billion should also be distributed into the NZ economy although clearly a great deal of that will be on debt-servicing.

Where the going is tougher for NZ's dairy sector - especially now that Australia is moving towards implementing its own free trade deal with China - is the existing "safeguards" that see higher tariffs implemented once a certain threshold of NZ products are imported into the market.

The Chinese Government is loath to remove the safeguards altogether but Joyce is hopeful that there will be some relaxation. Soundings at Chinese ministerial level tend to confirm his view.

NZ's 2008 bilateral free trade agreement progressively reduces tariffs on dairy products to zero over a period of time. The tariff on milk powders will be phased out by 2019 and on all other products such as cheese and liquid milk and cream by 2017.

In 2015 the safeguards were to be triggered once China has imported 135,675 tonnes of skim and whole milk powders from New Zealand. The upshot is that once the NZ safeguard is triggered, NZ reverts to paying a most favoured nation rate. These safeguards will continue to be applied until 2024.

Ultimately there will be some relaxation of the safeguards.

But the bigger gains will come as Fonterra - and other NZ dairy companies - expand their presence in China via retailing major branded dairy products.

In China last week various brand specialists made it clear that Fonterra itself is not recognised as a food brand - but products like Anmum are.