New Zealand’s economy is in trouble. It is not just inflation and the cost of living. It is something much more fundamental.
New Zealand has for a long time imported more than it exports. MPI data show that 80% of the exports come from food and fibre industries. There is no easy solution to the problem of too many imports and too few exports.
We also have a problem that New Zealand is running big deficits on international services payments. This means that the income we receive from tourists, overseas students and interest payments from overseas, is considerably less than what we currently pay out for international services. The big-ticket service expenditure items are our own international holidays, plus interest and dividend payments to overseas investors for all those previous investments they have made.
The overall foreign-exchange balance on trade in the combined categories of goods and services is called the current-account balance. If we earn more than what we spend then there is a surplus. If we earn less than what we earn there is a current-account deficit.
In New Zealand, we have tended to run current-account deficits for many years. However, in the post-COVID world those deficits have increased greatly, with the ratio of current-account deficit to national GDP now higher than any other country in the OECD.
In an open economy, any current-account deficit has to be balanced by an equal inflow of overseas capital. For many years we achieved this by encouraging overseas investors to send their funds to New Zealand. To a large extent, that was to buy our manufacturing companies, develop our tourist industries, buy our retirement villages and also buy forests. We also encouraged foreigners to fund internal Government deficits by the purchase of Treasury bonds.
The problem right now is that the current account-deficits have become much bigger in the last four years, and are currently bouncing around from about $25 billion to over $30 billion per annum. Can we continue to suck in more and more capital to balance those deficits? How much of New Zealand’s future productive capacity will we ourselves own?
The answer is that something has to give. And that is why New Zealand’s medium and long-term future is now grim. We have got ourselves into a pickle for which there is no painless answer.
Speaking in general terms, we have to export more and import less, but that is easier said than done. My own judgment is that in the medium term our New Zealand dollar must fall in value. That will make imports more expensive and exports more valuable.
As to when the dollar might fall, that is harder to estimate. Ironically, it will come when foreign investors get scared that it is going to happen. Then, by their actions of declining to invest in New Zealand, they will collectively make it happen. It might be in six months or a year, or perhaps in two years. It may even take longer, but it will happen.
Now, I come to the issue of how kiwifruit enters into the story. The reason is that kiwifruit is one of the few export categories with significant potential to increase in scale. A focus on increased exports is the only way we can reduce the pain that lies ahead.
Right now, the 2024 kiwifruit harvest season is just beginning. In my household, the fruit bowl contains some of the new Zespri RubyRed variety. The flavour is good if the fruit is eaten at the right stage of softness. This is the third year of limited RubyRed sales, but at this stage they are less than 1% of total kiwifruit volume.
Within days, the SunGold kiwifruit should be in the local market with exports already under way. Then will come the new season Zespri Green.
The last two seasons have been very difficult for Zespri, which, with the exception of Australian destinations, has a global monopoly licence to export all New Zealand kiwifruit. In 2022 it was serious post-harvest quality issues, which led to fruit of unacceptable quality arriving in export markets. Then, the 2023 season was disrupted by a series of storms including Gabrielle just before and during harvest.
However, the future in coming years is promising. Zespri expects New Zealand production of kiwifruit to increase 50% by 2028. China has become the biggest growth market with 26% of sales being made there in the June 2023 year. This is likely to increase further. Japan is the second biggest market. Then comes the EU, Korea and the USA.
Most of the growth will be in the SunGold variety, but RubyRed could become increasingly important once Zespri develops experience in the logistics and storage requirements. This is because RubyRed requires different post-harvest management than either SunGold or green kiwifruit. There is more to learn.
The production of the less profitable green varieties will further decrease as existing growers seek licences to convert across to SunGold.
The most challenging issue for Zespri to manage is provision of Sungold licences for Northern Hemisphere countries. This is needed to get a 12-month supply of Zespri product. This is essential to maintain continuity of shelf space in supermarkets and avoid the need to crank-up consumer marketing each year, with consumers having become used to not eating kiwifruit for about five months.
There is another key reason why continuous market supply of SunGold is essential. Greece and possibly other countries now have their own varieties of gold kiwifruit. Hence, a lack of SunGold from New Zealand in the northern autumn and winter creates space that others will start to fill.
Zespri has already sold nearly 5000 hectares of grower licences in France, Italy, Japan and Korea for growers there to produce SunGold, which Zespri will then market under the Zespri brand. Within a few years this will produce about 48 million trays of SunGold per annum but more will be needed.
The most controversial issue is what to do in China. Back in 2021, Zespri sought approval from New Zealand growers for Sungold kiwifruit licences to be sold to approved Chinese growers but just failed to get the necessary 75% support. That failure was a great pity.
Given that China is the largest market for SunGold, there is a need for off-season production in that country. This is much more efficient than having to transport expensive product from Europe.
The problem is that China apparently already has over 8000 hectares of SunGold kiwifruit vines. However, the growers have no licences for this variety, given that Zespri holds the international plant variety rights. That means the growers currently have no legal right to grow or market the fruit.
The first challenge is that this has to be dealt with in the civil courts and not the criminal courts. So, it is not up to the Chinese Government to prosecute these farmers, some of whom have very large-scale operations, probably bigger than those of any New Zealand grower. There are also some thousands of other growers with very small operations. It is up to Zespri to take the court cases across China.
Zespri is in the process of litigation, but even if Zespri wins, and it probably will, it does not have the resources to ensure follow-up across China. It would be much more feasible if Zespri had Chinese partners to keep non-licensed competitors of scale at bay.
Rumour has it that Zespri will soon go again to its growers to obtain support for a China operation that should be a win-win for both sides, with the big Chinese growers already having the capacity to grow quality fruit and manage associated logistics.
If New Zealand fails to develop a local Chinese industry in partnership with the locals, then China always has the option of breeding its own gold kiwifruit from the native varieties that are already there. I am a little surprised this has not already happened. Perhaps it is happening but away from the glare of publicity. One thing for sure is that China has all of the necessary breeding expertise to achieve this, just as New Zealand did.
Of course, kiwifruit alone is not going to solve the economic problems that New Zealand faces. Even if the kiwifruit industry doubled its export earnings, these earnings would only be 20% of the dairy-industry export earnings. And those additional earnings would cover less than 10% of the current-account deficits we have been running in the most recent years. But we have to start somewhere.
Coming back to those greater problems, and with the New Zealand population growing rapidly at the highest rate in the OECD, there has to be a much greater focus on exports. What are some other export industries for which New Zealand can claim a comparative advantage and which have capacity to grow here in New Zealand? It is going to be a huge challenge.
*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. You can contact him directly here.
37 Comments
Well reasoned argument and interesting article thank you.
Obviously we should try asap to give China licenses, even at a discount. Diversifying production outside NZ is also a strategy to avoid wipe-out through disease.
What struck me was the last point - NZ has the highest population growth in the OECD!! Shocking. I would wager our infrastructure and services investment would be amongst the lowest in the OECD.
The moronic and predictable storm of "mysterious" calamity this is/will create is depressing.
Good to see Hawkes Bay apple growers bouncing back . The amount of containers of apples been exported from a relatively small area staggered me .
any research into different regions in NZ been able to stagger the production of Kiwifruit?
My other question is the ability for Northland to produce tropical fruit to replace imports.
For both if they can use acres of hothouses for producing vegetables , why not for fruit?
Bananas are our most eaten fruit.
I agree on the utes , own a small one myself , need it for work, the tray is never empty, unlike most i see without a scratch on the tray liner.
The EV's will lead to a long term saving in fuel an parts imports , as will public transport funding.
Would be good for small lunches etc. i do find larger apples harder to eat now the teeth are falling aprt. i used to eat 5 or 6 apples a day .
Pak n sav had queens surprise on special the other day which was a new variety to me .
edible garden and Koanga Institue have several heirloom varieties avaliable, most have been found in isolated old house sites, so are close to the originals brought in form Overseas , where they may no longer exist as a pure breed.
an old engineer told me when they were working on the Tangarakau tunnel , they found an orchard with apples as big as bread plates. Unfortunately several hosted wasps nests so they had to beat a hasty retreat.
The biggest challenge is to get people to recognise the problem in the first place. Many conflate the government accounts with current account. I don't remember the current account coming up ever during the last election, I guess by blaming everything on the government most people get to shift the problem and not look at their own contribution. Goes along with our general thinking that debt is good.
As to kiwifruit, if they can increase volume and maintain price well and good, I hope it is done without the use of hi-cane. Also there are many other varieties available but Zespri have the total monopoly on marketing meaning the only ones grown are the ones Zespri decides anyone else wanting to grow another must go overseas to do it.
.....Also there are many other varieties available but Zespri have the total monopoly on marketing meaning the only ones grown are the ones Zespri decides anyone else wanting to grow another must go overseas to do it....
There is the Australian market available to other exporters.
But keep in mind the history of Kiwifruit boom (80s) and bust (90s) and boom again on the establishment of the single desk exporter legislation. There will always be small niches for innovation. But Kiwifruit from NZ is a global community selling into markets dominated by huge retail organisations. Open the door to multiple NZ exporters and bust history will repeat - it will be a race to the bottom on price due to those exporters (ticket clippers) having to divest a highly perishable product to a limitednumber of supermarket chains that have massively consolidated purchasing power.
The farmer cooperative is not perfect and innovative self interest will knock heads with the legislated structure of the single desk exporters. But from the balance of payments and NZ Inc perspectives it is the most effective structure to maximise sales receipts back into the New Zealand economy, particularly regional NZ.
Zespri have the total monopoly on marketing meaning the only ones grown are the ones Zespri decides anyone else wanting to grow another must go overseas to do it.
And Zespri outsources the brand activation in other markets. Zespri try to follow an FMCG playbook for their marketing efforts. And to their credit, they make an effort to connect with shoppers in-store. I'm talking about North Asia and ASEAN markets of which I'm familiar.
Even Keith seems to confuse the two things when he says " We also encouraged foreigners to fund internal Government deficits by the purchase of Treasury bonds".
Bond issuance has nothing to do with financing the governments deficits and to buy these bonds on the primary market you must already be holding NZ Dollar Currency issued by the government and held in the Reserve Bank.
Sure. I'm a little confused. The Japanese govt used to fund spending through the issuance of JGBs through the Post Office banking network. Now, I know that the Japanese govt doesn't necessarily need those bonds to fund their spend. Keith is not necessarily 'wrong' in what he's stating here. I kind of get where you're potentially heading in that central banks can swallow all govt bond issuance.
Our government can get by perfectly well without ever issuing any debt, the best that can be said about it is that it helps the Reserve Bank to maintain the OCR and it could do this just as effectively by paying a support rate on reserve balances which it already does anyway. The government cannot borrow back its currency and spend it twice over, it must issue new currency when it spends. If money can be considered a form of IOUs then it makes no sense to borrow back an IOU and then use it a second time as you are only replacing one IOU with another anyway and the overall liabilities have not changed.
University College London goes into some detail here explaining the operation of government finances. https://www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_pur…
The Japanese government is a sovereign currency issuer as are we and so doesn't need other peoples money to spend. It spends with its own currency and cannot spend money from private bank accounts and which are purely bank deposits and this also includes tax receipts. We have Kiwi Bonds which may be a similar thing and these don't finance spending either. They can be considered term deposits at the central bank but they do allow the government to withdraw equal reserves from the banks through the banking system. When the government spends or taxes or bonds are sold onto the secondary market, bank reserves and bank deposits are created or destroyed in equal measure.
Keith has been warning of a serious drop in the NZ$ for a while now. Spending more than you earn always comes with a day of reckoning and it isn't going to be pretty.
In the current NZ economy I would expect imports to be correlated with population, and exports to be correlated with land. It would be very interesting to see what the balance of payments are by different regions of NZ.
Thanks Keith. I'd be interested to hear your thoughts on data storage as a potential export industry. I'm no expert but it seems to me like one of the few industries where our location and size doesn't much disadvantage us - virtually no freight costs, low labour input, we have the surplus electricity in the right places and for six months of the year we are one of the most favourable locations temperature-wise.
Where is the capital coming from to build the data centre though? If it's foreign capital, then it's foreign owned and the profits just go off-shore too. And since we don't make computers, or hard drives, etc, all of the equipment would also be imported. So would not really help the current account deficit.
China will never enforce a challenge for the theft of the sungold kiwifruit sadly. They will continue to breed it and plant more acreage until they no longer require NZ kiwifruits and their use for us in that respect will have been done and dusted, mission achieved. There's been criminal cases of this instigated by large firms from China to gather technology worldwide for the mainland. For one example:
Many have talked about this for years, and rightly so, with little progress.
As pointed out the problem is we have a large outflow of dividends and interest payments to overseas investors who have bought many of our industries etc.
My take, as a primary producer, is that we have continued to look at our primary products to find a solution. Therein lies the problem - none of them will solve this problem.
We need to look at what works - to me its staring us in the face - overseas investors have invested in our most profitable industries and take the profits back home - been happening since Europeans arrived.
We need to replicate this and in some way have started. Kiwisaver invests money offshore into shares etc and those returns flow back to the NZ holders. There is over 100 billion there now of which I think around 60 - 70% is invested offshore bringing funds back to NZ. With the power of compounding this will grow, even at the rates we deposit now, and in time will get to trillions.
Assume we had 2 trillion in Kiwisaver and $1.5 trillion was invested in overseas (sound familiar) those returns then come back to NZ (yes good years and bad years but its the same for everything). At say 5% per annum thats $75 billion coming back to NZ owners plus $500 billion invested in NZ infrastructure. This is a long slow compounding burn and will take 30 to 40 years but we need to start now.
This is nett return as well - not Gross like our current export earnings. (It would be interesting to look at what portion of gross export earnings go back overseas to buy the materials and services to earn the Gross amounts).
I personally can see no other way for NZ to increase our wealth. I'm not saying give up what we do - carry on and do the best we can but this quiet giant is in the background compounding away every day.
We need to do to others what they are doing to us and let others work to earn us returns. Just don't do a typical kiwi thing and rob it and destroy the eight wonder of the world from working.
Both good ideas. Also put a tax on multinationals that is a % of sales rather than on profits which can be artificially low due to transfer pricing, debt shifting, or intangible assets. Ie, they pay normal tax or X percent of sales, whichever is higher. Could be a different percentage across industries.
Imports need to reduce to match the income - budgeting 101 - stop spending money we dont have.
Govt has some levers - short and long term
Very quickly seriously tighten immigration rules. Stop carbon farming as it will make the position worse over time (and cancel the Paris agreement payment rules), more gas exploration permits as this offsets fossil fuel imports through a change over period
Longer term add some smarts to our universities so we are seen as world leading (Robertson out of a job) and then train for the skills the world wants (doctors, nurses, IT etc ) -and fund more research
At least KW's contributions are sparking some debate of what the corporate future of these lands might look like. He is right when he says we need to sell more offshore. Many companies, when faced with tough times [now?] start cutting the cost structures, which is not wrong. It's just not the whole story. We need to sell our wares [foods] to foreigners much better than we are currently doing. MFAT are our key govt agency in this regard, working alongside the Zespris & co, but we are coming up short here. The world has 8 billion people & yet we still can't get the full measure of our foods out the door. Smarter selling guys. Please.
MFAT are our key govt agency in this regard, working alongside the Zespris & co, but we are coming up short here.
How does MFAT ensure sales of more trays in China and Japan? What is their expertise in that regard? Shouldn't that by the expertise within the Zespri organization?
DKSH handles the sales and marketing function in the Taiwan market. Not really sure MFAT can do more than the likes of DKSH.
With housing mortgages at about $350B, interest rates exceeding 5% and the majority of lending provided offshore, that's more than $15B general labor "imported" annually. About 5 kiwifruit industries there. Though the trick here is we don't get anything for it; we're just working to sell to each other the houses that are already here and with the capital moving offshore it isn't available for local investment.
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