Why people are worried about the price of milk
A cut to Fonterra's milk price forecast could wipe $5b off New Zealand's GDP as China's economy falters
Mōrena and welcome to The Bulletin for Tuesday, August 8, by Anna Rawhiti-Connell. Presented in partnership with Z Energy.
In today’s edition: who is funding the Save Our Stores campaign?; PM defends voting down National’s paid parental leave bill; the politics of youth crime; but first, the $5b “dairy cash hole”
‘This isn’t just a shower, it’s an iceberg coming through’
Forget talk of fiscal holes, although this may contribute to the shape of the government’s books, we’re now staring down the barrel of a “dairy cash hole”. The front page of this morning’s Waikato Times is focused on the impact of last Friday’s milk price forecast announcement from Fonterra. The dairy giant has reduced its 2023-24 season forecast farmgate milk price range from $7.25-$8.75 per kg of milk solids down to $6.25-$7.75. The accepted rule of thumb these days is that farmers need $8 per kg to break even. Waikato Federated Farmers president Keith Holmes says it could result in “billions” worth of cuts in total spending with wide-reaching effects across the economy and 70-80% of farms running at a loss. He describes the looming situation as “an iceberg coming through”.
‘Most farmers paid bugger-all tax last year and they’re going to pay none this year’
Holmes is not alone. The Herald’s Andrea Fox and Jamie Gray (paywalled) do an excellent job of outlining the broader economic ramifications of Friday’s news. Rural economist Phil Journeaux says the milk price forecast will wipe $5b off the country’s GDP. To put that in context, before the pandemic the value of New Zealand’s international education sector was estimated to be worth $5b a year, making it our fourth largest export at the time. Coincidentally, according to the last set of government accounts published in July, Crown debt has risen by $5b above forecast to $73b. At the time, the deterioration in the government’s books was attributed to tax revenues being $2.2b behind forecast. The milk price forecast will not be music to the ears of the current or any future finance minister, with Journeaux saying “Most farmers paid bugger-all tax last year and they’re going to pay none this year. The tax take from farming will be well down”. The next opening of the government’s books is the much-awaited Pre-election Economic and Fiscal Update (PREFU) on September 12.
China on the brink of deflation
Weaker than anticipated demand from China is cited as one of the primary reasons for the reduction in the milk price forecast. In a recent article, Andrea Vance asks why we’re not talking more about the implications of the economic slowdown in China for New Zealand. Globally, concerns about the state of China’s economy have been rising since late June after early hopes of a post-pandemic “return to normal” proved to be shortlived. A section in the Financial Times dedicated to China’s economic slowdown (paywalled) that hadn’t been added to since October 2022 now carries a few new stories. The most recent, published on August 2 (paywalled), spells out the seriousness and the uniqueness of the situation in China where the economy is still expected to grow but, as the rest of the world battles inflation, China is on the brink of deflation. Youth unemployment was at 21.3% in June. President of the Peterson Institute for International Economics, Adam Posen penned an article for Foreign Affairs last week headlined “The End of China’s Economic Miracle”. It skews towards the potential for the US and other Western economies to gain from the situation but is worth a read for the examination of the political context. Posen writes that “China today is gripped by widespread fear not seen since the days of Mao.” In the last couple of days, news has leaked out of local economists in China being warned not to discuss the country’s economic woes.
Can we expect to see lower cheese and milk prices at the supermarket?
Closer to home, the milk price forecast might have some thinking we will see a drop in the prices we’re paying for milk and other dairy products at the supermarket. Stats NZ singled out the price of cheese as one of the main drivers of the 6% increase in the Consumers Price Index for the year to June. In the short term, we’re unlikely to see a fall in prices. As the Herald’s Jamie Grey explains (paywalled), there is a lag between falling milk prices at wholesale auctions and consumer prices. Westpac senior agri economist Nathan Penny said that with a 2-litre bottle of milk, there is a general relationship with the price that farmers are paid, but the lag time is quite long - up to a year. There’s also a chance the “dairy cash hole” will impact petrol prices which are back on the rise (paywalled). As BNZ’s Doug Steel says in the Fox/Gray article above, the lower milk price would put further pressure on the country’s terms of trade. “Using a rule of thumb, one tonne of milk powder on average, over time, had been able to buy 46 barrels of oil. Under the new, lower, price one tonne of powder would buy 34 barrels of oil.”
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Who is funding the Save Our Stores campaign?
RNZ’s Farah Hancock digs into an online campaign to Save our Stores which, at first glance, appears to be a grassroots campaign from dairy owners. As Hancock details, Facebook ads have been running since August 1, leading people to a website to support a petition to “save our stores” and repeal the Smokefree 2025 Act. Legislation amending the original Smokefree Act was passed in December 2022 and includes a measure to reduce the number of stores selling full-strength tobacco from 6000 nationwide to 600 by July 2024. As Hancock reveals, printed at the bottom of the page on the Save our Stores website, in smaller type, are the words “proudly supported” by tobacco companies BAT (British American Tobacco) New Zealand and Imperial Brands. The website's privacy policy says the website is “provided” by the tobacco companies.
PM defends decision on paid parental leave vote
Last week, Labour opted to vote down a bill from National’s Nicola Willis that would have allowed spouses and partners to split their paid parental leave. As an article from law expert Claire Breen detailed yesterday, the “shared leave” bill wasn’t perfect but it at least acknowledged the big problems with the status quo. In yesterday’s post-cabinet press conference, prime minister Chris Hipkins stood by his party’s decision to vote the bill down and said he’ll have more to say on the issue ahead of October’s election. Newshub’s Jenna Lynch thinks we should watch out for “Labour perhaps looking to offer paid leave” for the second parent and increase the two-week entitlement. Currently, a parent not on paid parental leave is entitled to take two weeks off when their baby is born but that is unpaid.
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