Brian Fallow

The Economics Editor of the NZ Herald

Economic fallout awaited

Reputational hit hard to quantify but three quality issues in five years not pretty: economist.

How big a threat the whey contamination scandal poses to New Zealand's trade and economy is just too hard to gauge yet, economists said yesterday.

In the short term it would depend on the scope and duration of any restrictions export markets imposed on New Zealand dairy products; in the longer term it would depend on the damage to the clean, green national brand.

Dairy products made up 27.7 per cent of total exports in the year to June 2013.

China, the largest market, took 24 per cent of dairy exports, worth just under $3 billion. When the other five countries identified as having received contaminated whey protein are added, the export markets potentially affected rise to 38 per cent of dairy exports.

Surging Chinese demand has been a major driver of a steep rise in export dairy prices, which rose 53 per cent in world price terms in the year to June, according to ANZ's commodity price index.

Fonterra said the overwhelming majority of its output was not affected, including whole and skim milk powers, fresh and UHT milk, butter, cheese and yoghurt.

ANZ chief economist Cameron Bagrie said the reputational hit was hard to quantify, but three quality issues in five years - a reference to earlier melamine and DCD scares - was "not pretty".

Cameron Bagrie.
Cameron Bagrie.

The latest one could be particularly serious as it occurred in New Zealand and it affected infant formula, an area where there was zero tolerance of food safely scares, he said.

"Competitors have already been attacking the New Zealand dairy industry after the DCD issue and this will only add fuel to the fire."

A key barometer to watch would be milk powder prices in Fonterra's fortnightly dairy trade auctions, with the next one scheduled for tomorrow.

While prices for near-dated product should be lower, if prices for product to be delivered later in the season held up that would indicate confidence in the marketplace that the issue would blow over relatively quickly, Bagrie said.

ASB economist Jane Turner pointed to some factors which could mitigate the short-term impact on trade. The issue had arisen during a seasonal trough in dairy production and exports, and dairy products can be stored.

New Zealand supplied around a third of globally traded dairy products, which made it hard for countries with a shortage of their own production to switch away from New Zealand-sourced product, Turner said.

Westpac chef economist Dominick Stephens said it was too soon to estimate the size of the shock to the economy, but the main way it would impact would be through the exchange rate.

"Should the dairy industry be heavily impacted, the New Zealand dollar would fall hard."

While that would mitigate the impact on dairy farmers' incomes it would reduce the ability of all New Zealanders to buy imported goods and services.

"It's the opposite of what has happened over the last four or five years, when we have seen a [sustained] increase in demand for milk powder. The main effect has been a higher New Zealand dollar with all sorts of effects on the economy. It has been bad for non-commodity exporters," Stephens said.

BNZ economist Doug Steel said the currency response was an important shock absorber to consider when thinking about any implications for gross domestic product.

"Perhaps more importantly the events of the past few days are a stark reminder of New Zealand's increasing vulnerability to a single product and a single export destination."

But the DCD residue issue back in January had receded relatively quickly, Steel said. "There is a chance this does the same."

- NZ Herald

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