In my most recent article I set out the reasons why sustained economic growth for New Zealand is not possible without sustained growth of exports. Our latest current-account deficit of $27 billion for the September 2024 year is a measure of the extent to which we are currently living beyond our means.
This $27 billion deficit has had to be met by a balancing net $27 billion of new capital coming into the country over the same 12 months. Quite simply, there is no way this situation can be remedied without either a very big increase in exports or a very big decrease in imports, or alternatively both of these happening.
Much of the current account deficit is due to historical flows of imported capital that now have to be serviced through interest payments and repatriation of profits.
I use this as an example of the principle that in economics there are ‘no free lunches’. There are a lot of lunches from the last few years that we still have to pay for.
The net interest payments and profit repatriations now total about $15 billion each year of foreign funds outflows and it is this that is driving the current account deficit. This number has been compounding fast in response to the overall net debt between New Zealand and the rest of the world that now exceeds $200 billion.
Note that this is the net debt after balancing out the overseas assets of New Zealanders. The gross debt is about $600 billion.
Well, that is enough about macro-economics reminders. It’s time to move on to the question of where increased exports might come from?
There is a hard reality that New Zealand’s comparative advantage lies in land-based products. We are never going to be internationally competitive in the manufacture of cars, computers, most medical equipment and medicines.
These manufactured goods need large home markets for efficient production and marketing. It also does not help that most of the world’s consumers are a long distance away. The reality is that manufacturing industries have been declining as a proportion of the economy for good reasons in a trade-based world.
New Zealand’s comparative advantage in land-based products plays out primarily in pastoral industries — dairy, beef and sheep, with deer a supporting act. Add in horticulture, wine, forestry and fish, both ocean and aquaculture, and the latest SOPI document from MPI says that food and fibre products comprise 81 percent of our merchandise exports.
StatsNZ data for the year ending November 2024 shows total merchandise exports of $70 billion and merchandise imports of $78 billion, giving a merchandise deficit of $8 billion. However, simply balancing out merchandise exports and imports by finding another $8 billion of exports would be no more than a start.
If we are to prevent further compounding of the more than $200 billion net liabilities to overseas investors, then we need to bring the overall current account, currently running at $27 billion annual deficit, back into surplus. What a task!
The first step on a long journey is to focus initially on by far our biggest export industry which is dairy. Can dairy be part of the journey?
According to MPI in their latest SOPI report of December 2024, dairy products are expected to earn $25.5 billion of export income in each of the June 2025 and 2026 years. This compares to 25.3 billion in the June 2024 year and $26 billion in the June 2023 year. Dairy comprises approximately 35 percent of our merchandise exports.
My own view perspective is that the SOPI dairy export estimates for 2025 and 2026 are starting to look conservative, despite only being published in the last few weeks. This is because the New Zealand dollar has dropped remarkably in recent weeks.
Only time will tell whether this is part of a longer trend or simply the financial reef fish darting hither and thither. Of course, if the current loss of value of the New Zealand dollar is maintained, then both export returns and import costs will rise when measured in New Zealand dollars.
Most dairy farmers will make good profits this year. In Canterbury where I live this has also flowed through in recent weeks into several dairy farm sales at record prices. These have yet to flow through to official statistics but they are confirmed sales.
There are multiple cautionary notes as to whether the dairy industry can expand further. The hard facts are that there has been no upward trend in total annual production of Milksolids (measured as fat plus protein) since 2014/15. In that period, cow numbers have dropped by 6 percent but per head production has increased by about 6 percent, creating an industry that is overall static.
For those readers unfamiliar with the term ‘Milksolids’, typically spelled with a capital or abbreviated to ‘MS, it is one of the oddities of the dairy industry. It is not the total solids in milk, only the two most valuable components that are used as the basis on which farmers are paid. As for the strengths and weaknesses of the terminology, I don’t make the rules, I and farmers just play the game.
The key reason we use ‘Milksolids’ rather than total solids is that the total value of the milk aligns more closely to the fat plus protein quantity than it does to either the volume of milk or the total solids in the milk.
New Zealand milk is particularly high in both fat and protein. This is because we have bred specifically for high fat and protein content, whereas Europe and the USA have bred specifically for milk volume, and that is the basis on which their farmers are typically paid.
Most investments by New Zealand dairy farmers in the last ten years have been strongly focused on increasing cost efficiency rather than to increase overall levels of production. This 10-year period of static production contrasts strongly to the 10-year preceding period when Milksolids production increased by 50 percent.
The number of herds has declined in the last ten years by 12 percent but this has mainly been through herd amalgamation. A modest number of small dairy farms have changed to beef. A few dairy farms have sold to horticulture. Less nitrogen fertiliser is being used since 2019/20 with the most recent decline since then linked to environmental limits imposed in mid-2021 of 190 kg N/ha. The genetics of the national herd have improved, with this explaining at least part of the higher production per cow.
Despite current high farmgate prices for milk, I see no evidence that farmers will increase production in the near future in any significant way. Profits will be mainly used to reduce debt, to make further cost efficiencies, and perhaps to invest elsewhere.
In the longer term, there are looming issues relating to ongoing pressures to reduce nitrogen leaching and greenhouse gases. These issues are not going to disappear.
My own judgement is that the dairy industry will deal with these issues with a range of technologies and management systems, but it will be hard work. These changes will probably allow current industry output to be retained but it is difficult to see where major production increases might come from.
This suggests that any major increase in the export earning category will have to come from increased market prices for quality products.
The focus of Fonterra, which markets some 80 percent of New Zealand’s milk, is on ingredients which are either sold as commodities or alternatively sold to major food-service companies, where once again they are used as ingredients.
In recent years Fonterra has become very efficient as a producer of these ingredients, but has publicly acknowledged that it has struggled from within its co-operative structure to earn the profits that it seeks from consumer-branded products. Its current plan is to exit from the consumer business.
Here, I am not going to get into the debate as to what Fonterra should or should not do. I could easily write a complete article on that issue alone.
Here, I am simply saying that the Fonterra Board has made its preference clear, that it wants to get out of brands. Also, I expect that Fonterra farmers will support their governance board on this matter. Also, consumer brands are a fundamental component of value-add strategies in any food industry.
Given these realities, even if it is the right decision for Fonterra to get out of brands, that is not necessarily the right decision for New Zealand.
Accordingly, will urban New Zealand step up and invest if Fonterra decides to publicly float its consumer business on either the New Zealand or Australian stock exchange? Alternatively, will this consumer business be offloaded in a trade sale to an overseas entity? I fear that the latter option is the most likely.
At this point I will try and summarise the complex issue of dairy’s future as an export leader for New Zealand.
The starting point is to acknowledge that the New Zealand economy would be devastated in the absence of the New Zealand dairy industry. There is no alternative New Zealand land-use that can come near to dairy in terms of converting the sun’s energy into export earnings.
Most New Zealanders have minimal understanding of the economic debt they owe to the dairy industry, and the high-quality lifestyles, apparently unrelated to dairying, that it has made possible.
Similarly, most New Zealanders have no conception of the river of dairy-productivity improvements that flowed through the industry in the first 15-year period of this 21st Century. Alas, in the latest ten years we have come across natural resource and biological limits that have made current and future progress much more constraining.
In that context, the first priority is to ensure that the fundamental role of the existing dairy industry is acknowledged. The next priority is to recognise that the next steps, in a country with a rapidly growing population combined with a constrained natural-resource base, are very challenging. Quite simply, there is no way that dairy can carry the load of underpinning the ongoing increase in exports required to fund the increasing import demands of a rapidly growing population.
In my next article I will continue the search for export industries that can pay for New Zealand’s unpaid historical lunches and also pay for lunches of the future.
Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. This article was first published HERE
Much of the current account deficit is due to historical flows of imported capital that now have to be serviced through interest payments and repatriation of profits.
I use this as an example of the principle that in economics there are ‘no free lunches’. There are a lot of lunches from the last few years that we still have to pay for.
The net interest payments and profit repatriations now total about $15 billion each year of foreign funds outflows and it is this that is driving the current account deficit. This number has been compounding fast in response to the overall net debt between New Zealand and the rest of the world that now exceeds $200 billion.
Note that this is the net debt after balancing out the overseas assets of New Zealanders. The gross debt is about $600 billion.
Well, that is enough about macro-economics reminders. It’s time to move on to the question of where increased exports might come from?
There is a hard reality that New Zealand’s comparative advantage lies in land-based products. We are never going to be internationally competitive in the manufacture of cars, computers, most medical equipment and medicines.
These manufactured goods need large home markets for efficient production and marketing. It also does not help that most of the world’s consumers are a long distance away. The reality is that manufacturing industries have been declining as a proportion of the economy for good reasons in a trade-based world.
New Zealand’s comparative advantage in land-based products plays out primarily in pastoral industries — dairy, beef and sheep, with deer a supporting act. Add in horticulture, wine, forestry and fish, both ocean and aquaculture, and the latest SOPI document from MPI says that food and fibre products comprise 81 percent of our merchandise exports.
StatsNZ data for the year ending November 2024 shows total merchandise exports of $70 billion and merchandise imports of $78 billion, giving a merchandise deficit of $8 billion. However, simply balancing out merchandise exports and imports by finding another $8 billion of exports would be no more than a start.
If we are to prevent further compounding of the more than $200 billion net liabilities to overseas investors, then we need to bring the overall current account, currently running at $27 billion annual deficit, back into surplus. What a task!
The first step on a long journey is to focus initially on by far our biggest export industry which is dairy. Can dairy be part of the journey?
According to MPI in their latest SOPI report of December 2024, dairy products are expected to earn $25.5 billion of export income in each of the June 2025 and 2026 years. This compares to 25.3 billion in the June 2024 year and $26 billion in the June 2023 year. Dairy comprises approximately 35 percent of our merchandise exports.
My own view perspective is that the SOPI dairy export estimates for 2025 and 2026 are starting to look conservative, despite only being published in the last few weeks. This is because the New Zealand dollar has dropped remarkably in recent weeks.
Only time will tell whether this is part of a longer trend or simply the financial reef fish darting hither and thither. Of course, if the current loss of value of the New Zealand dollar is maintained, then both export returns and import costs will rise when measured in New Zealand dollars.
Most dairy farmers will make good profits this year. In Canterbury where I live this has also flowed through in recent weeks into several dairy farm sales at record prices. These have yet to flow through to official statistics but they are confirmed sales.
There are multiple cautionary notes as to whether the dairy industry can expand further. The hard facts are that there has been no upward trend in total annual production of Milksolids (measured as fat plus protein) since 2014/15. In that period, cow numbers have dropped by 6 percent but per head production has increased by about 6 percent, creating an industry that is overall static.
For those readers unfamiliar with the term ‘Milksolids’, typically spelled with a capital or abbreviated to ‘MS, it is one of the oddities of the dairy industry. It is not the total solids in milk, only the two most valuable components that are used as the basis on which farmers are paid. As for the strengths and weaknesses of the terminology, I don’t make the rules, I and farmers just play the game.
The key reason we use ‘Milksolids’ rather than total solids is that the total value of the milk aligns more closely to the fat plus protein quantity than it does to either the volume of milk or the total solids in the milk.
New Zealand milk is particularly high in both fat and protein. This is because we have bred specifically for high fat and protein content, whereas Europe and the USA have bred specifically for milk volume, and that is the basis on which their farmers are typically paid.
Most investments by New Zealand dairy farmers in the last ten years have been strongly focused on increasing cost efficiency rather than to increase overall levels of production. This 10-year period of static production contrasts strongly to the 10-year preceding period when Milksolids production increased by 50 percent.
The number of herds has declined in the last ten years by 12 percent but this has mainly been through herd amalgamation. A modest number of small dairy farms have changed to beef. A few dairy farms have sold to horticulture. Less nitrogen fertiliser is being used since 2019/20 with the most recent decline since then linked to environmental limits imposed in mid-2021 of 190 kg N/ha. The genetics of the national herd have improved, with this explaining at least part of the higher production per cow.
Despite current high farmgate prices for milk, I see no evidence that farmers will increase production in the near future in any significant way. Profits will be mainly used to reduce debt, to make further cost efficiencies, and perhaps to invest elsewhere.
In the longer term, there are looming issues relating to ongoing pressures to reduce nitrogen leaching and greenhouse gases. These issues are not going to disappear.
My own judgement is that the dairy industry will deal with these issues with a range of technologies and management systems, but it will be hard work. These changes will probably allow current industry output to be retained but it is difficult to see where major production increases might come from.
This suggests that any major increase in the export earning category will have to come from increased market prices for quality products.
The focus of Fonterra, which markets some 80 percent of New Zealand’s milk, is on ingredients which are either sold as commodities or alternatively sold to major food-service companies, where once again they are used as ingredients.
In recent years Fonterra has become very efficient as a producer of these ingredients, but has publicly acknowledged that it has struggled from within its co-operative structure to earn the profits that it seeks from consumer-branded products. Its current plan is to exit from the consumer business.
Here, I am not going to get into the debate as to what Fonterra should or should not do. I could easily write a complete article on that issue alone.
Here, I am simply saying that the Fonterra Board has made its preference clear, that it wants to get out of brands. Also, I expect that Fonterra farmers will support their governance board on this matter. Also, consumer brands are a fundamental component of value-add strategies in any food industry.
Given these realities, even if it is the right decision for Fonterra to get out of brands, that is not necessarily the right decision for New Zealand.
Accordingly, will urban New Zealand step up and invest if Fonterra decides to publicly float its consumer business on either the New Zealand or Australian stock exchange? Alternatively, will this consumer business be offloaded in a trade sale to an overseas entity? I fear that the latter option is the most likely.
At this point I will try and summarise the complex issue of dairy’s future as an export leader for New Zealand.
The starting point is to acknowledge that the New Zealand economy would be devastated in the absence of the New Zealand dairy industry. There is no alternative New Zealand land-use that can come near to dairy in terms of converting the sun’s energy into export earnings.
Most New Zealanders have minimal understanding of the economic debt they owe to the dairy industry, and the high-quality lifestyles, apparently unrelated to dairying, that it has made possible.
Similarly, most New Zealanders have no conception of the river of dairy-productivity improvements that flowed through the industry in the first 15-year period of this 21st Century. Alas, in the latest ten years we have come across natural resource and biological limits that have made current and future progress much more constraining.
In that context, the first priority is to ensure that the fundamental role of the existing dairy industry is acknowledged. The next priority is to recognise that the next steps, in a country with a rapidly growing population combined with a constrained natural-resource base, are very challenging. Quite simply, there is no way that dairy can carry the load of underpinning the ongoing increase in exports required to fund the increasing import demands of a rapidly growing population.
In my next article I will continue the search for export industries that can pay for New Zealand’s unpaid historical lunches and also pay for lunches of the future.
Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. This article was first published HERE
1 comment:
Thank you Kieth for clearly quantifying the importance of the jewel in our economic crown. Our very survival relies on its protection from meddling interference.
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