By Bernard Hickey
Prime Minister John Key has announced his third and final supply and confidence deal with the National-led Government's minor party partners and has cautioned the slump in the expected Fonterra payout below NZ$5/kg may make it harder for the Government to achieve a surplus in the 2014/15 year.
Speaking after signing a supply and confidence agreement with Maori Party Co-Leader Te Ururoa Flavell in Parliament's Maori Affairs select committee room, Key said on Sunday afternoon Treasury was providing advice for Finance Minister Bill English on how the lower payout would affect the budget and the wider economy.
Key said the expected reduction in dairy incomes of around NZ$5 billion could reduce tax revenues, but there were a variety of factors at play. He pointed to the larger impact being on the 'out' year of 2015/16.
Key also said there may be some short term economic impact from the power blackouts expected to be in place for days in central Auckland.
"There's bound to be some. It's a trading day for businesses in Newmarket and the likes," Key said of the blackouts after a fire in Vector's equipment in Transpower's sub station in Penrose. He said he had power at his own house in Parnell.
Key said he expected a debrief after the reconnection of customers, but he downplayed the idea that there was some sort of infrastructural deficit that may have caused the outrage. He described the fire as a "freak" event.
Sub NZ$5/kg payout
Asked about the financial implications for the economy and the budget from a sub NZ$5/kg payout from Fonterra in 2014/15, Key said: "It can have some impact because if that's the final payout, the impact would be as large as NZ$5 billion for the economy overall, and you would expect that to flow through to the tax revenue, both for the 14/15 year and the 15/16 year. My understanding is Treasury is working on those numbers for the incoming Minister of Finance, which fortunately is the same as the outgoing Minister of Finance as well."
Treasury forecast in its Pre-Election Fiscal Update (PREFU) published on August 19 that the Government's Operating Balance before Operating Gains and Losses was for a NZ$297 million surplus in 2014/15, rising to an NZ$818 million surplus in 2015/16 (year to June 30). Since the PREFU was finalised on August 5, dairy prices have fallen 20% and Fonterra has cut its forecast from NZ$6/kg to NZ$5.30/kg and economists are now forecasting a payout of around $4.80/kg.
"They are giving him (English) a bit of an assessment of what impact that might have. There's a lot of different factors that go into that surplus. We expect it to have some impact and it's a very narrow surplus. That doesn't mean that we won't achieve surplus. It means the Government will have to think through all of the issues here. There may be other options we choose to take," he said.
Key pointed to Treasury's allocation of NZ$1.5 billion of new spending in 2014/15, of which the Government had undertaken only to spend NZ$1 billion.
Asked if the Government would take new actions to achieve its long-targeted surplus, he said: "That would depend on how large the hole is. We're not going to take silly actions and it depends on the timing. The early indications are that it might have more of an impact in the outer years than the earlier years."
New cabinet due tomorrow
Key also said he would announce the new cabinet and minsterial line-up at 11 am on Monday, before it was sworn in on Wednesday at Government House in Wellington.
He said there would be name changes for some ministries, including a change to the Ministry for Women from the Ministry for Womens' Affairs.
Earlier Key and Flavell announced their supply and confidence agreement, including that Flavell will be named Minister for Maori Development and Minister for Whanau Ora, and Associate Minister for Economic Development.
Flavell was also appointed a member of the Cabinet Appointments and Honours Committee, the Cabinet Committee on Treaty of Waitangi Negotiations; the Cabinet Committee on Social Policy and the Cabinet Economic Growth and Infrastructure Committee.
The agreement also specified areas where the Maori Party wanted to keep working with the Government, without detailing specific outcomes.
"The Maori Party wishes to continue to pursue its policy priorities with the government – ongoing investment in Whanau Ora; the continuation of the work by the Ministerial Committee on Poverty; a focus on Maori economic and regional development; encouraging greater Maori participation in the electoral process, among the key ones. These priorities will guide the work of Te Puni Kokiri and be reflected in the Statement of Intent to be agreed between the Minister and Chief Executive," the agreement said.
Meanwhile, Key said he was surprised and disappointed by the loss by National of one seat in the final election count announced on Saturday.
(Updated with more detail, background, quotes)
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39 Comments
Who said it was a rock star economy Anarkist ? Who was it, and if you do know, why is what he said relevant to anything and quoted all the time by people who dont seem to know ? Did you know about a potenial $4.80 pay-out some months ago ? everyone knew if would be well lower, but very few were thinking this low, clearly you were one of the few experts - it's supply and demand, its markets, its cycles.
it's supply and demand, its markets, its cycles.
Yep, and there was plenty of experience, leading up to the dairy bust, of just what is possible when one highly geared country accounts for the majority of export sales.
The Treasury time-line page for Solid Energy serves as a great reminder of bottom of the cliff business disasters enabled and fostered by the Nats.
Grant, it was Paul Bloxham from HSBC who first said it in January, when predicting 3.4% annual growth. however, this term was picked up by the Government and used in speeches to describe the overall economy under National, so since the Government have been using it in a general New Zealand economy sense it think it is legitimate for Anarkist to use the same term the government has been.
Bloxham has since suggested it might not be quite so great as first though.
Yes indeed it was dh, and he got that wrong as it looks like it was higher than 3.4%. However, I didn't see the Govt using it in speeches, and I read most of them but not all, but not smart if they did as it just opens opportunities for the naysayers if we get the likes of a commodities downturn.
Its more than likely he was paid to say it, I wouldnt be surprised , would you.
Whats waiting next is Key having to repeal Section 9 of the SOE act for the TPPA, the Maori party will be happy with that I think.
U.S. dairy interests are vigerously lobbying their congress to have NZ dairy blocked from the U.S. market, and Fonterra broken up. You can bet which way Key will roll on that threat to the market. Key has no spine to say no to the U.S..
I don't think so Peak, it was Paul Bloxham of HSBC
http://www.stuff.co.nz/business/industries/9583473/New-Zealand-2014s-ro…
As usual the media jumped on it as a good headline and then suddenly it mean't to be what numerous other people and politicans are expected to have said and thought.
It shouldn't come as a shock to anyone Grant A. The likes of Andrewj and others where questioning the basis of optimistic projections by the Treasury and market analysts for months based on sound analysis of the facts, such as China's faltering economy, increasing milk production in the U.S and Europe, and geopolitical turmoil in the Middle East and Eastern Europe, not to mention the mismanagement of the Christchurch rebuild.
Anarkist, with respect Christchurch is humming and will do for at least the next couple of years - walk around the CBD and see what's happeneing, get out into the new suburbs and see whats happening. Yes for those too optomistic we're currently now where many thought it would or should have been a year ago, but in some ways its better timing for the econmy bearing in mind the weak outlook for dairy for a next period.
With all thats so bad (i.e. diary), what's your pick as to the GDP grwoth rate say for the June - June-15 year ?
Not surprising. Increase of economic growth happens when their is spending, a wealth differential.
Creates a localised jump in GDP. Doesn't matter if it's Earthquake, or new technology as long as it fits the criteria grwoth will happen until equilibrium is reached.
(1) available resources - someone has to be able to fund it. whether its angel investors, share purchase, or insurance/government money.... even loans*
(2) a need to spend in the area, eg tech research, manufactory, builds needing rebuild.
(3) support services to harvest the money from the labour force. housing, tools, entertainment
(note that interest and taxation kill this step)
(4) wages going back into local economy to power 1. velocity of money occurs, bring up wealth and investment levels from these wages, either from people restoring equity for future spending, or support local businesses. (note globalisation kills this step)
Have those 4 factors and local stimulus occurs.
That's why I have difficulty why RBNZ/NZ government clamp down of these four things "to prevent economic growth, which appears as inflation - while increasing costs which causes inflation - then expect development to occur...
It gets worse.
Our rock-star economy looks lacklustre after a 45 per cent fall in dairy prices. Progress towards our goal of increasing exports from 30 per cent of gross domestic product to 40 per cent by 2025 is non-existent.
While we are doing some things right, we neglect to do some of the right things.
The Regional Economic Activity report begun by Steven Joyce last year is a start, but there are glaring policy omissions, in particular the acceleration of established clusters. The Global Competitiveness Report demonstrates we are not engaging on cluster development: we have finally leapfrogged Rwanda to reach 53rd place on the global ladder. Read more
Goldman Sacs expect the milk surplus of over 2 billion liters to last to the mid 2020's. So we better find a replacement fast. The wine industry is dependent more and more on China, a country where French wine sales are back %30 from last year, wheres that wine heading?.
Meanwhile in the EU the farmers are getting ready for the Agriculture CAP to be lifted, more milk?
THE HAGUE, Oct. 3 (Xinhua) -- The Netherlands has to pay a penalty of 132.1 million euros (about 165.4 million U.S. dollars) for exceeding milk quotas for deliveries made in 2013/2014, the European Commission announced Friday.
However, the Netherlands is not the only country being fined; seven other member states of the European Union (EU) including Germany, Poland, Denmark, Austria, Ireland, Cyprus and Luxembourg will also be required to pay.
The total fines amount to around 409 million euros. Germany received the highest penalty of 163.8 million euros.
The eight EU member states exceeded their national delivery quotas by a total of 1,469,000 tons, according to national declarations.
The dairy quota system was introduced in the 1980s in order to address problems of surplus milk production. However, this system will be stopped as of April 1, 2015. (1 euro = 1.25 U.S. dollars)
Meanwhile back in the real worlds this month on my vineyard, I got a $1700 invoice from the regional council for bore monitoring, a $1500 invoice for Telemetery and a $600 invoice for reading the Telemetry. We have not faced the elephant in the room, costs in NZ are out of control.I want to expand my vineyard but it would broke me. We need to review the costs facing productive NZ, before systemic collapse sets in.
I have a friend from Chile touring NZ looking at Dairy farming, he is shocked at our costs, put off ever investing here, he thinks its crazy dangerous.
Then they do massive schemes like this just in time for dairy prices to collapse, just in time for massive increases in EU and USA production and a %75 drop in purchases from China.
http://www.stuff.co.nz/business/farming/agribusiness/10574421/Irrigatio…
Re last link - how much funding are the taxpayers really going to end up pouring into this optimistic extravaganza?
.... yes , but that water doesn't have to be earmarked for dairy production per se ...
The problem with some commentators at interest.co.nz is that they have the short term memory of a .... of a ... ummm .... swimmy thing .... gold ! ... feck it , anyhow ... that water from the central plains irrigation scheme may be to best advantage for primary products from our past , not necessarily the current , or the unenvisaged future ...
... ferrets ! ... as one example , we may re-enact the fitch farms of the '80's ... sustainable fur for the fur fancier of the future ...
Imagine that , Canterfurry as the Fitch Farm Fur for future fussy fashionistas from Florence to Fiji ... 100 million little fanged nashing gums , sucking our water , feeding fuel for farmers from Fairlie to Fangiora .... even to Famberley , Foxford & Feta Valley !!!
GBH, the Mink market collapsed about 6 months ago, you can get a great deal on Mink coats.
https://poshmark.com/listing/Price-Drop-Genuine-Ranch-Female-Mink-coat-…
http://www.newera.com.na/2014/10/02/turmoil-mink-market-casts-dark-shad…
On a more serious note, do you have any idea of the cost structure on irrigated land? its not a simple matter of going to seed crops or processed crops, dairy was it, and that won't change unless capital values reflect the income change, and that's very painful for a lot of people who put their lives on the line to get into dairy, and the rate payers who in many cases are the backstop behind these schemes.
I doubt anyone, even Goldman Sachs, can accurately forecast milk prices trends up to 2020. Who could have predicted the Russian ban which is having a significant impact. Russia is the 2nd largest importer of dairy in the world.
European farmers were quite happy to pay the penalties on over-quota milk as it well paid them to - until the Russian ban. We heard Dutch farmers saying they want quotas back.
Do you not own the telemetry hardware Aj? Wow your monitoring bore costs are way higher than that we pay down South for Dairy - but then we pay a special dairy differentiala rate in addition to general etc rates. Thought of moving your vineyard to Central Otago? Cheaper down here and there could be a few going cheap. ;-)
The comments from CPW on nutrients and wanting an increase in N limits in your link is a concern. Hopefully ECan sticks to it's guns.
Russia is the 2nd largest importer of dairy in the world.
An export market NZ still has freedom to engage with if the chatter in this Stuff article is correct.
Correct. We don't produce in quantity, much of the dairy that Russia imports. Netherlands exports lots of cheese - Edam, Colby etc and are particularly hard hit by the ban. So unfortunately we aren't really in a position to gain an advantage from the ban.
http://online.wsj.com/articles/eu-mulling-compensation-for-farmers-affe…
As a Fonterra supplier I would be concerned if they bowed to government pressure to buy/setup farms in Russia. Fonterra offshore farm policy is more about shoring up markets for NZ farmers milk so only engage in offshore farms if they have a market for kiwi milk products already in that country. Hence why they aren't in India. But a free trade agreement could be useful. :-)
CO, this is interesting look at Ukraine incomes
http://en.wikipedia.org/wiki/List_of_European_countries_by_average_wage
I was interested to read that Russia is saying that its going to let imported dairy product not be replaced, they will just live without it.
Our bore problems are caused by the irrigation scheme, we now only get 5 year consents and charges are up across the board. I'm thinking the grape industry may be about to slip into crisis again.
Goldman Sachs report
http://www.bloomberg.com/news/2014-07-11/milk-output-expansion-poised-t…
The Russians are obviously sensible, a big chunk of their population is lactose intolerant so why would they care. Will do them the world of good in general.
Big potential market in China, yes. But what if your product has adverse health effects on that market. East Asian people are in general more then 90% lactose intolerant. But I guess even 10% there is still 100 million plus people. So we either have not reached those 90% or there are a lot of people with lactose related health issues. Bound to have an impact on total marketsize expectations.
My understanding is Asians are often lactose intolerant, with 90% being the upper figure not so much western(-ised) Russia where the affulence is? ie Northern Eurpoe can be 5%. Bear in mind if only 10% of china can drink milk that is still a huge market. Also this tends to occur after the age of 3 or 4, so there is a huge market for child formula for instance.
The genetic mutation that allowed adult humans to tolerate lactose occurred about 5,000BC in the Russia, Ukraine, Belarus region. While there have been a lot of population movements since then I imagine the ethnic Russians/Slavs are pretty much OK with dairy products.
Oh and flick through any cookbook/baking book from Eastern Europe and most dishes feature dairy products.
A big chunk of Russia are not of NW Europe heritage, slavs are not very good with it either, let alone futher east.
Lactose intolerance starts as soon as one is weaned. (crude word I guess, but correct).
My daugther, very much of N European heritage, was lactose intolerant as soon as she was off the breast. Turns out that her mother was too but was never recognised as such until this came up, but plenty of unexplained health problems which have now gone away. The "west" is pretty good at not looking at a person's diet when it comes to health issues. In hindsight one can call it ignorance and possibly still is.
The first you should cut out when having a cold for instance is milk so that mucus production is reduced. Good stuff that cow juice.
Indeed as I said above a 100 million is a good size market but it does reduce the total potential somewhat.
It does of course opens the way for added value products, lactose free milk for instance so that you can still have the protein and calcium, ao, just not the sugar.
Jake an allergy specialist, who was also a qualified doctor, told me years ago that milk/dairy allergies/intolerances are only passed on to children via their mothers. I have a son who had dairy intolerance when he was younger. Like your daughter's mother, I didn't realise what my issues were until we had our son seek specialist advice. I tolerate Trim milk, but not Blue top. My young grandson was dairy intolerant while he was being breastfed. Was told it was lactose intolerance to start with but that was bollocks. Now a healthy toddler, he is ok eating/drinking dairy. As he has an intolerance as opposed to an allergy, he will probably have his intolerance rise up from time to time as he grows. But in between times he will be ok with dairy as long as his intake is managed.
Similar to adults, the intolerance in babies is quite common. However, every parent should be aware that feeding milk free of lactose to babies and toddlers, could lead to certain side effects. Normally, the digestive system of babies secretes lactase after receiving regular milk that contains lactose. If the baby is regularly fed with milk free of lactose, it is quite likely that he/she will not be able to produce lactase enzyme in the long run. Thus, it is imperative to consult a doctor before using milk free of lactose for infants.
Read more at Buzzle: http://www.buzzle.com/articles/lactose-free-milk.lhtm
These links might help some of you understand that Fonterra isn't just about exporting dairy product as we see here in NZ. They make an infant formula specifically to address the lactose issues in Asia etc.
http://www.fonterra.com/nz/en/nutrition+centre/articles/russias+probiot…
http://www.fonterra.com/nz/en/nutrition+centre/articles/diversity+of+co…
http://www.fonterra.com/global/en/Our+Products/Our+Brands/Anlene
http://www.fonterra.com/global/en/Our+Products/Our+Brands/Anmum
http://www.fonterra.com/wps/wcm/connect/Fonterra_Global_en/Fonterra/Nut…
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