Agribusiness Report: Enjoy dairy's rise, but save for a rainy day

Glen Murphy, NZTE regional director in China, at the Fonterra Stand at the China Dairy Expo and Summit in Xian this year. Photo / Mark Mitchell

Global food commodity prices have risen steeply as a whole over the past decade. Despite a major drop-off caused by the Global Financial Crisis between 2008-2010, global prices have recovered.

Throughout that period, New Zealand has reaped the benefits of a relatively insulated Chinese economy continuing to grow and demand high quality food products - particularly from our agricultural sector.

Europe remains the world's largest dairy exporter, accounting for more than one-third of total world trade in dairy products. However, in terms of exposure to the fortunes of the dairy sector, New Zealand stands out among other dairy exporters, according to HSBC.

Despite accounting for only 3 per cent of global dairy production, New Zealand is involved in 20 per cent of the world's trade in dairy products. Putting that in perspective, Australia also has significant exposure to the sector account for only 6 per cent of world dairy trade.

China is the world's largest dairy importer, accounting for 7.4 per cent of the total in 2011 with levels surging since, to be up by 97 per cent in terms of value over 2012 and 2013. The effect for world dairy has seen prices rise to record levels, with further growth anticipated.

"A surge in Chinese demand for dairy products has significantly boosted New Zealand's exports to China in recent years. New Zealand is now, by far, China's most important source of dairy products, with products accounting for 60 per cent of China's total dairy imports," explains Paul Bloxham, chief economist for HSBC in Australia and New Zealand.

"To the extent that New Zealand is doing better than the developed world, a big part of that story is its reliance on China. You can't have it both ways, either you're reliant on a strong trading partner like China and they're helping you to grow or you're not, in which case you're not doing so well. I don't think there's a sense that you can be over-reliant on one economy, I think it's very fortunate for New Zealand that one of its biggest trading partners is one of the fastest growing economies in the world."

Dairy prices have surged over the past year, as the strong Chinese demand, along with earlier supply restrictions, have significantly lifted prices. Dairy prices increased by around 50 per cent through 2013 and this has seen New Zealand's terms of trade reach 40-year highs, providing a significant boost to the economy.

"That's not to say that New Zealand shouldn't also be aware of the risks that it exposes itself to - a potential fall in commodity prices or a drop in the demand for a particular commodity you produce. In order to mitigate the risk a good approach is to save some of the returns in the good times, not treat the full increase in commodity prices as if it is permanent."

New Zealand is even more exposed to the overall fortunes of the of the food commodity sector. Despite its diminutive size, it is the world's second largest exporter of dairy products and sixth largest exporter of meat products. Agricultural exports make up 45 per cent of New Zealand's total exports.

"The rural sector in New Zealand has more limited growth potential. Instead, the biggest impact for New Zealand of strengthening demand for food commodities will be through prices."

Comparatively, agricultural product prices have risen by far less than metals and energy prices over the past decade, but could be the next big story. As incomes rise and the middle classes expand in the emerging economies, populations are expected to demand higher quantities and qualities of food. "History shows that as countries get richer, demand for the finer foods such as meat, dairy, sugar and edible oils rise faster than for more basic foods."