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Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
The BNZ says a Fonterra payout of $9.75 per KG of milk solids could add $3 billion to industry earnings.
This will translate to higher supermarket prices for cheese in the months ahead.
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.
OPINION
Brace yourself, the price of your favourite block of 1kg cheese is about to riseagain. But don’t worry, it’s good news.
We’ll almost certainly be paying a few dollars more for our cheese next year, but we shouldn’t grumble. It looks like New Zealand is about to get very lucky as a combination of global market conditions and local weather conditions line up to deliver the economy a much-needed, dairy-fuelled boost.
Global dairy prices have been rising, rain has been falling and the grass has been growing.
Whoever coined the idiom about boring things being akin to watching the grass grow obviously wasn’t a dairy farmer ... or a Kiwi economist.
Cheese prices are on the rise again - but it is good news for the economy. Photo / 123RF
BNZ economist Doug Steel estimates this season will deliver an extra $3 billion in revenue to the dairy sector. That’s more than the total export earnings of the wine industry ($2.4b).
It’s in the same ballpark as the value of the entire New Zealand film industry ($3.5b).
And that’s just a seasonal fluctuation in earnings. It’s easy to forget the scale of dairying in this country and how important it is to our economic fortunes.
This can make New Zealand vulnerable to big commodity price swings. There’s no shortage of commentators, including this one, who have warned about the risks of being overly reliant on this one sector.
We’re regularly warning that the industry can no longer deliver the kind of transformative growth it did through the first 20 years of this century. I still think that’s broadly true.
But here we are. Dairy saw us through the worst years of the Global Financial Crisis, now it looks to be coming to the economy’s rescue again.
In this economy, I’ll take it.
In his research report on dairy prices last week, Steel noted constrained supply in major exporting regions, aside from Oceania. He also sees some solid demand out of China ahead of Christmas and Chinese New Year.
In other words, dairy industries everywhere except here and Australia are having a bad season. Meanwhile, an economic downturn constraining Chinese demand for all sorts of commodities has not extended to dairy.
The Global Dairy Trade Index shows prices have been trending steadily up since August last year. They are now 23% higher than they were last season.
Fonterra has forecast a payout to farmers of $9.50 per kg of milk solids. Steels predicts that will rise to $9.75 or possibly even $10.
That would be a nominal record for dairy payouts, although in inflation-adjusted terms, Steel estimates it would need to top $11.50 to match the value of peak dairy boom payouts a decade or so ago.
Federated Farmers are also cautious to point out that one good season doesn’t equal a boom and extra revenue doesn’t necessarily translate to big profits. Many farmers will be using extra earnings to play catch-up on farm maintenance, investment in new equipment or simply paying down debt.
That’s fine, none of that is bad for our economy.
New Zealand dairy farmers will benefit from good growing conditions this season. Photo / LIC
From a macroeconomic point of view, it doesn’t really matter much where the money goes. Debt repayments will reduce the amount of interest flowing out of the country to Australian banks. On-farm spending will still flow through the rural economy.
And if farmers do end up with a bit of surplus to take to town for a spend-up, then good for them - they’ve earned it.
What matters is that we’ll see extra billions flowing into the economy from somewhere other than the Reserve Bank’s balance sheet or the Treasury’s bond issues.
It’s real money.
With all the geopolitical craziness overshadowing the world of economics in the past few weeks and months (or is it years), it’s nice to have some straight-up good news.
The kind of conditions lining up for dairy are very specific and sadly all too rare.
Even the consumer pain of higher dairy prices at the supermarket looks likely to be mitigated as overall food prices and inflation remain subdued.
As most readers are hopefully well aware, New Zealand’s free trade policies and lack of tariffs mean our local prices fluctuate as world prices do. Regardless of how much dairy we produce in this country, there is no subsidy for local retailers and consumers.
While this can be frustrating when inflation is high, it looks like cheese and dairy prices are going against a broader trend in which food price inflation has fallen in the past year.
Monthly food prices fell 0.9% in October compared with September, according to figures released by Stats NZ. Total annual food price inflation was just 1.2%, despite dairy already being on the rise.
The real culprits boosting the annual food price inflation rate were restaurant and ready-to-eat (takeaway meals), up 3.2% and 2.5% respectively.
Prices in those categories remain elevated due to the costs of wages, power and rent, but the rate of increase will likely moderate in coming months.
The reality is that the price of milk or cheese represents relatively a small percentage of the retail price of your flat white or pizza.
It’s at the supermarket you’ll really notice dairy prices rising. There’s often a delay of several months between the peak of a dairy commodity spike and the spike in retail prices.
So prepare yourself. Enjoy the bargains while they last. And when you do find yourself grumbling about the price of cheese, hopefully it will be in an economy that is looking in a lot better shape.
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