By Bernard Hickey
This week the long-simmering symptoms of the Dutch Disease burst into a bright red rash of losses right across the Australian and New Zealand economies.
The Economist coined the phrase 'The Dutch Disease' in the mid 1970s after Holland discovered natural gas in the North Sea. A surge of gas revenues pushed up the Dutch Guilder and slammed its manufacturing sector as the rise in its currency made its goods uncompetitive.
Now the Australia and New Zealand economies are experiencing the same phenomenon at the same time, thanks to huge demand from China for two different products.
Australia's iron ore boom through the past five years drove the Australian dollar up by a third. New Zealand's free trade agreement with China in 2008 unleashed massive demand for milk powder, which also helped push up the New Zealand dollar by around a third.
This week a collection of events on both sides of the Tasman crystallised just how much the Dutch Disease has changed our economies, and often in surprising ways.
For example, the Dutch Disease is likely to end decades of V8 rivalry between the Holden and Ford tribes.
This week Holden announced it was ending manufacturing in Australia because the high Australian dollar and high wages meant it made much more economic sense to build Commodores in China than in Australia, unless there were massive new Government subsidies. Ford announced in May it was leaving Australia, which means Toyota is the last remaining car maker across the ditch.
Most believe it will soon pull out too because the car makers share common parts suppliers that can't survive with just one customer.
That means the loss of about 200,000 Australian jobs.
The softness in Australia's jobs market is rebounding across here too as net inward migration climbs.
Fewer Kiwis are leaving for jobs in Australia as the mining booms slows and the manufacturing sector is crunched by the high currency. Plenty of Kiwi-born Australians are coming home too.
That is helping to fuel the 15% house price inflation seen in Auckland over the past year.
The second strange effect of the Dutch Disease was revealed this week by Fonterra when it forecast a halving of its profit and a 22 cent per share cut in its annual dividend. It also froze its forecast milk payout at NZ$8.30/kg, all of which seemed counter-intuitive given Chinese demand for milk powder has exploded.
It's all about the widening gap between milk powder prices and more processed products such as butter and cheese.
Fonterra normally sets the milk price it pays to farmers based on the international milk powder prices. But the power prices have run far ahead of cheese and butter prices, which means Fonterra is having to 'over-pay' for the 30% of milk it then processes into the lower priced cheese and butter.
This has slashed NZ$800 million from Fonterra's profit and forced it to cap the milk price when it could, in theory, have raised it to NZ$9/kg.
The final surprise result of the Dutch Disease was revealed this week by the Reserve Bank.
It included a scenario in its Monetary Policy Statement that would see New Zealand's terms of trade, which measures the 'power' of our exports to buy a certain amount of imports, stay at its current 40 year highs for the next couple of years.
The milk powder boom is the major driver for this.
The Reserve Bank estimated it would have to hike interest rates even more than it's currently planning to keep inflation under control. This scenario would see mortgage rates rise to 8.5% within a couple of years, rather than the 8% currently indicated by the bank.
So what?
So what can or should be done about New Zealand's version of the Dutch Disease? Some countries have successfully managed to avoid the worst of the impact of their Dutch Disease. Norway is the best example.
It too faced a surge of demand for its currency when it found oil in the same North Sea as the Dutch found gas.
The Norwegian Government chose to skim off some of those US dollar revenues from oil in the form of royalties and reinvest them directly in bonds and stocks offshore, thus avoiding having to convert them into Krone and pushing up the currency.
Norway's Sovereign Wealth Fund is now worth NZ$1 trillion.
It worked to avoid a big appreciation and its manufacturing and other labour-intensive industries are still growing. Norway's Government was able to control at least some of those oil revenues because it owned the main oil company Statoil and can collect royalties from others.
New Zealand would struggle to do the same for New Zealand's 'white oil' in the form of milk powder. Fonterra is owned by farmers rather than the state and no one has yet worked out how to impose a 'royalty' on milk collections in the same way royalties are collected on oil.
The Green Party might have a few ideas, in particular the idea of some form of polluter pays principle or resource rental from water use. A Government would have to apply some sort of special tax on dairying.
The last time a government tried something like that (the fart tax) there were tractors driving up the steps of Parliament faster than someone could say 'sovereign wealth fund.'
One way would be to encourage Fonterra to invest much more of its profits offshore.
That would prove even less popular with farmers.
The years ahead will be dominated by this issue.
How will the proceeds of New Zealand's 'white oil' boom be distributed in a way that keeps plenty of people employed on good wages?
How much will trickle down to workers?
How much will trickle out in the form of dividends to foreign-owned bank shareholders?
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This is an extended version of an article that appears in the Herald on Sunday. It is used here with permission.
48 Comments
The real danger with NZ's Dutch Disease, is that apart from some "landlord farmers" making 3% yield on dead equity (ie fully paid off farms) the rest is barely breaking even.
http://www.stuff.co.nz/business/farming/dairy/9498048/Be-tight-like-me-on-costs-farmers-told
Even in a boom year, farmers (as opposed to the landlord farm owners) don't have the spare cash to diversify they business or explore other options. It's a debt fueled hike. So if that's our "Dutch disease" our "leaders" are in for some large painful supprises - especially with MPI and Labour dept trying their best to knobble the operations side.
Yes indeed.
One needs to view the money printing gushers flooding out of the USA, Japan and China to add some perspective to the situation.
Currency charts of a few crosses here and here other than our own and the neighbour's all show the impact of such central bank action.
Overall the NZ trade balance is in defecit. We need more exports to pay for what we buy. It doesn't matter whether it is more milk or more widgets we need to earn more if we are to continue spending.
Better to encourage people to invest more, particulary more overseas, rather than spend it on imported goods.
No costs are lower in the States, fuel and Electricity is much cheaper. In Europe they have coloured fuel for farmers so its cheaper too. Closer to markets and more dependence on fresh milk can be a strength.
Dairy product prices have appreciated significantly over the past couple months, and the reasons behind the rally – Chinese demand, low global inventories and the lingering impact of weather issues in New Zealand and Europe – remain in place. However, bulls must eat every day, and this bull market may be running short of fodder. Producers around the world are responding to astoundingly high milk prices by increasing production, and competition for exports is heating up. U.S. dairy processors continue to alter product specifications to meet export demand. These constant improvements are helping to increase U.S. access to global dairy product markets. This week Land O’Lakes announced that it would begin offering skim milk powder (SMP) at the Global Dairy Trade auction in March. Once a negligible part of the U.S. dairy product mix, SMP production is growing by leaps and bounds. U.S. production of SMP in the first ten months of the year is 36% greater than SMP production in all of 2012. Land O’Lakes will offer butter at the GDT later in 2014.
Red Deisel is cheap as its VAT (GST) exempt (plus other duties?). However Im not sure of the exact current price.
Lets see, googling, UK 67.7pence a litre x 2 = $1.30NZD a litre...Im not aware deisel is that expensive here?
"White" deisel (road useable) is 137pence a litre? $280NZD?
Being closer to markets is an advantage, so sure I expect that the shipping costs will get worse and worse. So US farmers exporting to asia and china are not at an transport advantage though?
One of the bigger ones could well be scale of purchasing power, eg they pay way less than us for fertilizer?
Electricity certianly is cheaper in the USA from what I can see, bit of a glut in gas, not sure how many years that will continue for though.
Of course I have to wonder with hydro assets decades old and their build cost must long be past just why we pay such a high price, maybe ask your Natioanl MP?
regards
The grass fed produce is cheap _IF_ you ignore the cost of the asset and only count cashflow interest as the cost. In real terms the rent is around $2 (last year) per kgMS, wages is at least another $1 per kgMS. rates about 20c per kgDM, similar for electricity. Fertiliser about 30-50c depend on where on the rejuvenation schedule you are. Suppliment feed anything from 20c-$2.00 per kgDM. So when you see quotes of 3 - $4 cost of production you know they not counting the landlords yield on their asset. (ie the cost of grass)
That is just not true (although I will agree that it will depend on individual farmer choices on what they spend on).
StatsNZ have been surveying on-farm costs for years and part of the PPI series.
That shows that over the past year, sheep & beef farmers have seen operating costs drop 6%. Dairy farms have seen a 0.5% fall in operating costs. No doubt the higher exchange rate has 'helped', but fertiliser and fuel costs have been falling too.
Over the past ten years, these costs are up by about 4% on average, Q3 2013 vs Q3 2003 - far less than "%7" (sic).
You can choose high cost farming - or not. But on average NZ farmers have seen 4% pa.
I've cut to the bone, my insurance is up %30 in two years rates have been stable for two years before that %8 pa.Looking at options. I gave up on fertiliser as its uneconomic. Down to a two wheel motorbike ditched the quad.
Accountant told me that many of his clients experienced over 300k losses in last years drought, no one came out uninjured.
Fuel costs are still very high especially compared to the States. Road user taxes climb every year, was it %5 this year?
Costs are too high now, deflationary forces are building.
To be sure....
'Is Ireland ready for more milk?' is the theme for this year's event. This is very appropriate as ... Many Irish dairy farmers have the capacity to grow milk output.......
http://www.teagasc.ie/publications/2012/1607/National_Dairy_Conference_…
Dairy farming solutions. To be able to pay an ever increasing debt burden the dairy industry, which is essentia lto New Zealand needs real help.
1. Lower wages, real effort must be put into driving down wages for dairy workers. I would suggested indentured servitude. Now this is not salvery, it is very close but I must stress that slavery itself is not on the table. Indentured servitude can be fully outsourced, the indebted worker would be imported by an agency, who would be responsible for managing/enforcing the debt/ his debt which would be held off shorore in his home country India. Wages could through this method go down to cents per hour. Thus releasing more income for debt servicing.
2. Urban Dairying, My Milk Park, - the conversion of extisting urban infrastructure to dairying is fast approaching breakeven. First out of the block would be car park conversions.
Actually on a square meter basis converting the Aotea underground park to a dairy operation is looking good. Much cheaper than Southland dirt. The multi story aspect makes it easy to concentrate the effluent to one place. Once the engineers get sorted how to pump up from the lower floors then the meyers park effluent spray system is all go.
There is another underutilised asset in Auckland that could also be used for dairy cows. Unused hotel rooms. Yes. You do not have to pay for hotel rooms in Auckland. Two to a room and magic ! You can't put bulls in there though as the bulls..t factor from such activity is just too enormous.
The rise of robots may well be the big transformation for the next 50 years. Robots have transformed factories. Simple repetitive operations in controlled environments.
But automated cars are starting to show the next steps - robots in less controlled environments
For New Zealand building and farming will be transformed. In farming we will either continue to throw money at interest payments to offshore banks and drive down wages to help do it. Or we will be forced to invest in technology.
Milking sheds, robot tractors, quadbikes. Cows vital signs/location hooked up to the net.
One thing is for shore- continuing to import third world labour terms and conditions will not be the answer.
House building with robot arm help on site- doing the heavy lifting, assembling help.
These are all variations on the factory type robot combined with the automated car robots
technology will change evrything.
http://modernfarmer.com/2013/08/5-robots-on-the-farm/
http://www.stuff.co.nz/the-press/business/8041885/Robotic-arm-milks-dai…
Sadly thats likely what will happen (latinfundia is still expensive as even cheap labour costs)
Labour etc are consumables. Robot capitalise that expensive, and as we see with most farmlandowners, they readily ignore the yield on the assets use (in hope of CG??) so it's just as easy to buy some toys, and ignore the higher cost.
I-Robot.
I am looking forwards to the benefits and taxpayer robots, hand out stretched to serve MPs in their daily grind. They could also help pack for their long Summer break. We could call them "serfs-up robots'...or just plain citizens.
With non-voting voter robots, who get ignored on referrendumb day and fawned after on pay day to get a rise out of em and stay connected to the grid.
(what a waste of time, energy and work force, that all was, we could call them public servants....but that would be a lie.)
But then of course that would all be unneccessary as we could have robot MPs, who talk a load of twaddle, cannot remember what they did yesterday, kowtow to the crony robots, building houses, prisons etc to feed the ever increasing debt and doleing it out to those on the dole who inhabit them habitually.
(I think they were formally called clip-joints, or potential investments, ask the old Big-Daddy robot, model 2008, now extinct 2014, no need)
With a nice shiny figure head Treasury robot, with a Reserve Bank one in reserve, not paid big money, just more of the same to fiddle the books and balance em in their heads.
No need for real serfs, no need for real money, no need for real debt, just robotics.
We could connect em all up to the grid, to fast broadband, make New Zealand really hum.
And the Chorus robot could be to build more casinos, an automated bike trail, more solid energy, more aluminium smelters to make more Robots.
AYE-robot.
No need for more houses, no need forfarms to muck spread.
No need for us citizens. serfs up....gotta go.
Bernard is taliking very old fashioned stuff. And I really like it. Great stuff Bernard.
Most of the commentators above seem to agree as well. Individuals and the nation need to get on the right side of that essental equation. Spending less than we earn and investing that surplus.
'Investing' has many paths. A simple one is owning our own farms. It's just incredible to me that with the highest milk flows and huge farm incomes like we have never seen before - Farmers reamin just tenants really. And mostly just passing on all that cash to their lenders. How dumb is that for a system, and how did we decide to make it the way.
If the government can form a fund thats fine. The National Super fund invested offshore seems to work well and achieves what Bernard describes. But it's just one thing. A few more individuals borrowing less and investing more would also mean a reversal of the cash flow to us rather than away from us. My Kiwisaver is a small contribuion to that and I do ultimately have overseas investment as a result. Kiwisaver as a scheme could be made into a massive contributor for this goal with minimal work and politically rewarding to the party that did it.
We don't need a Norwegian goverment mega fund. If one was created out of milk then fine. But as individuals there are multiple things we can do, and as families, companies and businesses.
It's a change of spending patterns and of attitude to borrowing. And what is wrong with that.
Exactly right. No different to the mineral/oil booms in other countries. Also the strength in a single sector of an ecconomy will push up wages and the currency to the detriment of the rest of the productive sectors of the ecconomy. Not balanced or a wise long term strategy.
If they have all this cash then there is no excuse not to enforce the highest environmental farm standards. Sure it is going to cost, but they have the money, and all that will happen otherwise is that farm values will be further inflated on an artificial income that does not allow for the true and sustainable environmental costs.
With milk we have a very distorted market. Our competition has subsidies and/or undertheradar under minimum wage labour. Our side the processor sets the payout, unlike "every product". That means the consumer end is fixed by what they want to pay.
Fonterra (and theCo-ops before that) survived because they could use an extremely low cost business model. Ignoring quity cost, by hoping for future CG on farm disposal or multi-generational ownership; #8 wire safety and reuse levels or operation; not having the overhead of producing "shop front display" level of tidiness and instead focusing on end product quality and cost, not having huge compliance costs. And unlike our competitors we didnt have high priced feed, or large infrastructure to pay for, and we didn't have government inspectors and paperwork using up our resources (so we could be efficient). That used to be our advantage. That's why Dairying is "last NZ market segment standing", we focussed on top quality business based decisions - and Fonterra, and Coops, could buy cheap, and get away with selling cheap, and still make margin. Add all the overheads that our competitors have liek MPI et al, are trying to do; add the big volume overheads, and NZ Dairying will go the way of the rest of NZ manufacturing, and take the support sectors with it....
:) I hear property investment is good.
However it's not about over-inflated costs. Dairy (and every other product or service) has a value to the consumer. Exceed that value and it's just not sustainable. No matter how many jobs are created, how much measurement and controls the government lumps on the bandwagon. There is an upper limit, after which the fleas sucking off the organisation collapse it. This is because in normal production operation efficiency can be added and cut to skeleton (after which product suffers) but with all the parasitic drag of government mandated overheads those efficiencies can't be created, and going into production line systems don't fix the problem when much the base unit cost is exceeded. (eg you can split the cost of automation and inspection over 1million units instead of 100k, but with the major of the cost being in the land value, feed value, processing value, the per unit cost scales with production, so there is no economy of scale, only rising cost of production. By ignoring the capital cost, or subsidising it from somewhere else , this effect can be ignored/condoned/mitigated...but that's the BIG TRAP...if your basic cost-per-unit is excessive, then relying on economy of scale....train crash time...
Some idiot, once advocated a commonsense political party, but as I look around the world, I have never seen such a thing, hence why the world is in uproar.
Unless they have an abundance of resources, it can only get worse in every country.
When the bankers printing fractional reserve money and politcal theorists have their hand in your pocket to pay for their wild ideas, it is no wonder the peasants are revolting as they see just how the other half live.
Here in New Zealand, we have been lucky to a certain extent.
We have had energy to burn and land to split up at exhorbitant prices to house the richer immigrants. Once it was Brits, now it is an amalgam, mostly Asian.
So we have a lot of paper millionaires, but that also brings corruption, corruption from the state to ease that money into their pockets, via a never ending taxation process.
That is why we take millionaires in the first place.
As we only care about capital gains and houses on this site, a common sense political party has never been on the agenda.
Our politcal parties are quite satirical in their desires to better themselves.
It does not matter which one has a majority, as the minority parties hold sway.
Each has their snouts in the trough. Not an ounce of common good, with commonsense between them.
This creates a complete nonsense of any reforms, just more of the same.
Tricky accounting and inflated prices and leveraging for inflation may cut it for all you, so called investors. Mostly benefitting from a desperate government and other goverments to re-inflate the property bubble world wide to keep the wolf from the door and appear to be doing something useful, staving off the inevitable.
Appearing better off is an illusion for most.
I have yet to see it.
But I have seen people wasting an aweful amount of time, effort and money ripping each other off.
Beuraucrats is a polite term.
Ask Mandela. He would be spinning in his grave at all the wasted effort, he put in.
And other gravitate to, like Hone, Obama, Key, and our and other party hearty selfies.
Like leeches.
You cannot get em out of power. And you cannot get em, out of our and your .....debt.
But you could with a little common sense party.
Just a tad. 50% plus, but not enough with common sense, just vested interests.
So take this one a step further.
We are told that the reason for Fonterra pulling in the dosh is that they have the biggest, best and most efficient milk powder dryers in the world and the others do not so cannot compete for the China market.
However there is adequate milk to meet Chinese needs but it is not available as powder.
Just how long will it be when these powder factories are built and the price falls,even halves maybe?
Then start to rework the equations!
long or short, its big.
Milk powder buyers in China are starting to cut their reliance on New Zealand's Fonterra, opening the way for US and European firms to break the dairy giant's grip on an infant milk formula market set to double to US$25 billion by 2017.
Fonterra said it was normal that some fast growing customers would look around for other supply options.
"When you've got customers who are growing like mad, it's not so much that they're wanting to diversify, it's that they know that if they're growing faster than we are, they're going to have to see volumes of product coming out of Europe and the US to fill what would be a supply gap," said Tim Deane, director of global sales at Fonterra."
While heavy demand lifted New Zealand powder imports in October, imports from elsewhere are rising fast, jumping 53 per cent in the year to October, almost twice the pace as those from New Zealand.
But analysts said breaking Fonterra's dominance would not be easy, and it remained to be seen if Europe and the United States could significantly raise their export capacity.
http://www.stuff.co.nz/business/farming/dairy/9526212/Fonterra-challeng…
this years payout when accounted for cpi is looking the second best, its the money thats not worth as much.
IF that is Fonterra's advantage then we are doomed.
What do you think is stopping US interests in just saying "Texas has bigger betterer more efficient milk pwder driers" and just buying the next generation latest and greatest hardware. They have the finance, the volume, the demand and the bigthink, to pull it off.
I'm hopng someone somewhere in NZ Dairying has discovered the value of IP.
Texas has just gone through another drought? 2nd in 3 years? they are using up water for fracking and poisioning their ground....yeah I can see that being great milk to sell.
Ive long held the belief that NZ cannot as a general rule compete on price, what we can do however is offer the highest quality and charge a premium.
IP is a dangerious two edged sword, really if you think thats going to save us I'd suggest not only worng but the reverse. If we get TPPA in the US lawyers will screw us senseless they have been at the IP game for decades....we wont win that one.
Where we have value I think will be low energy and grass fed produce and that means we need to clean up our environmental act before we lose the clean green image.
It also means we have to get out of the pay too much and carry huge debt on farms game hoping to retire with no CGT to pay. The debt is going to bite us and badly IMHO.
regards
Bernard, the process of inflation in New Zealand goes like this:
1 Credit is created overseas, either by the private banking system, by government borrowing to fund deficit spending, or by central banks via depressed interest rates or quantitative easing.
2 The money created flows in a complex path via the international banking system
3 It ends up with the New Zealand banking system having lots of money to lend. This is lent against collateral primarily, there is a partial screen to check the recipient is able to pay the interest payments out of income. Thus asset prices (farmland, Auckland houses) are bid up.
The point is that none of this will show as inflation if you measure inflation as the consumer price index. The banks get the money first, then those with assets and income, lastly the masses. So inflation is not a blanket process, it starts in assets, then in highly paid jobs like barristers who defend the ownership of those assets, then in CEOs and only reaches the lower paid jobs last.
So what can be done? Here are a few somewhat wacky suggestions, they are rough and unformed.
1 Make interest not deductible as a business expense, reduce the company tax rate to the same level as Irelands (12.5%) to compensate. If you actually want people to have jobs just lower the company tax rate. Why New Zealanders' actually want to be poorly paid beats me.
2 Put GST on interest and rent, reduce the personal income tax rate to compensate
3 Tell the RBNZ to buy gold or other stockpileable real commodities (JOGMEC have a good list) up to a defined rate of money creation, eg no more than 10 billion NZD per annum (5% of GDP).
That should stir things up a bit.
1 Make interest not deductible as a business expense, reduce the company tax rate to the same level as Irelands (12.5%) to compensate. If you actually want people to have jobs just lower the company tax rate. Why New Zealanders' actually want to be poorly paid beats me.
2 Put GST on interest and rent, reduce the personal income tax rate to compensate
Watch out. You might get an official rebuke.
Actually I wanted to edit that to:
Put the GST rate back down to 12.5% but extend it to include interest payments and rent, reduce personal income tax to compensate.
I'm glad Bernard is talking about Dutch disease, but very few people seem to grasp what a many headed hydra it is. Part of the problem is when money flows to a small number of people rather than being widely spread. One of the key stages of industrialisation is textiles because it employs a lot of highly skilled machinists, thus the money is spread widely in society. The opposite is oil wealth in a despotic state - all money flows to government, so the country runs on networks of patronage and corruption.
The jobs thing is just a national disgrace. A seriously low company tax rate would pull jobs from the Aussies and be a magnet for American venture capitalists with money and ideas for the future.
If any New Zealand government actually had the balls to do these things it would cause me a lot of trouble but I assume they will not.
All good suggestions particularly the GST on interest. Since interest is simply a method of wealth transfer we would be better off seeing that 15% put back into NZ's cofferes rather than disappearing offshore. Of course the ultimate answer is to get rid of interest alltogether as it is immoral and unnecessary, but given that won't happen your ideas would be a great way to moderate the transfer out of NZ. What is more important in the long run than letting fictitious electronic 1's and 0's disappear offshore is to make sure the phycical (real)wealth of this country remains here.
Yes, the bankers of the world have managed to mess up a lot of our thinking. They have used our suspicion of wealthy people against us. Someone in society has to control the assets. Personally I'd rather it was talented individuals who were skilled at owning assets but the consensus has been tainted by assets being appropriated by the unworthy. To me a healthy society has widespread ownership of assets (not the current pretense of ownership subject to paying the interest on the debt, or should that be the danegeld to the overlords).
Dutch Disease? Again Bernard has latched onto an economic concept and misinterpreted it, DD specifically applies to natural resource extraction negatively impacting manufacturing or *agriculture*, the difference being that natural resource extraction is high value low labour and agriculture/manufacturing aren't, This is exactly what is happening in Oz but I'm sorry simply calling milk "white oil" does not make it comparable.
WE DO however need some mechanism to allocate the environmental cost more accurately, though I feel that bligthly flinging about incorrect epiphets is more likely to do harm than good for this cause.
Few realise that Fonterra subsidises other milk processing businesses by providing huge amounts of milk to those competitors (NZ or NZ based Overseas producers) - a decision that is government driven! Would you like to subsidise your neighbour? I don't think so! It is more complex than many realise, globalisation is something we keep learning about as markets and consumer demands adjust and alter.
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