Dairy exports vital for NZ economy despite butter price concerns: Dr Jacqueline Rowarth

Should butter be cheaper because New Zealand produces so much of it? Photo / 123RF

THE FACTS

• Fonterra is divesting its consumer brands and Oceania assets.
• Every dairy dollar exported generates over seven times its value domestically.
• There’s public concern over rising butter prices.

Would you sell your car to your neighbour for half the value it could command on the open market?

Fonterra is divesting its consumer brands and Oceania assets.

The answer might be yes if the neighbour is a member of the family.

The same might well apply to your house.

Downsizing parents have been known to assist their children into the family home while choosing somewhere less expensive for themselves.

But if an outlander said they would give you twice the money of the valuation of your home, would you then accept it in the knowledge your children would ultimately be better off?

There could be $1 million extra to spend on whatever you and they need, want or desire – a different house and a car, holiday or whatever.

This is the philosophy behind Fonterra’s approach to selling products from the dairy industry.

A considerable amount of time and energy is spent marketing and positioning to achieve the best price possible for the product.

The money keeps people in employment, funds repairs, maintenance and infrastructure development, and also funds research into new products.

The bulk of the export income goes to the dairy farmers so that they, too, can employ people and create vibrant businesses, while also funding farm research through their levy contribution to industry good bodies such as DairyNZ and Beef + Lamb NZ.

The income streams give everybody more choice, including the Government through tax-take investment.

Every dairy dollar created by New Zealand cows and sold offshore generates over seven times the value in New Zealand and increases employment by over eight Full Time Equivalent positions.

The $27 billion in export dollars is $5400 for every New Zealander, which multiplied by seven is almost $40,000.

That is just for dairy.

It is a lot of packs of butter, or cheese, and certainly litres of milk.

The Government’s concept of doubling the value of exports underpins its desire (and New Zealand’s need) for improved health, education and infrastructure, as well as police, environment, and every other group important to New Zealand’s functioning as a developed nation.

Prices come down when supply exceeds demand, writes Dr Jacqueline Rowarth.

If the export income increases, New Zealanders are better off.

Despite this, there has been yet another outcry over the price of butter, with statements that it should be cheaper because New Zealand produces so much of it.

Prices come down when supply exceeds demand, or if the product is being used as a loss leader by the seller.

Vegetables and fruit tend to be cheaper in peak harvest season because supply is plentiful.

The Food Price Index shows increases during winter and drought (and in the aftermath of cyclones).

There is no glut in dairy products – they are in demand.

Loss leaders are a different issue.

They are an inducement to customers to enter a store to purchase the product at a price which might be below market cost.

Listen to Jamie Mackay interview Dr Jacqueline Rowarth on The Country below:

The goal is to stimulate sales of other, more profitable goods or services.

The store accepts the “loss” on the chosen product on the basis that it will make more money on sales overall, as customers are led into the shop…

Inevitably, this leads to a discussion on supermarkets and whether the current structure allows sufficient choice for New Zealand customers.

Supermarkets have borne the brunt of complaints about rising food prices (overlooking the impact of an increase in wages, power, rates and compliance costs, and the fact about 40% of food is imported).

An article published last year showed each New Zealand supermarket was generating over 40% more revenue than US supermarkets.

But each New Zealand supermarket was also serving more people.

The article suggested having more competition between supermarket companies would reduce the revenue (implication - profit - which is not necessarily the case) for each supermarket.

What was not apparent was that by serving more people, the New Zealand supermarkets were offering a service for less than that being charged in other countries.

From the data, it appeared that in the UK and Australia, the revenue per person was 40% and 23%, respectively, higher than in New Zealand.

When comparing prices here with those overseas, the role of GST, which adds 15% to the purchase price, is often overlooked.

Further, unlike farmers elsewhere, New Zealand farmers do not receive Government support (taxpayer money).

In many cases in the northern hemisphere, the support is what keeps the business solvent while ensuring domestic food security and a managed landscape.

Discussing butter prices, Gareth Kiernan, chief forecaster at Infometrics, has explained that the alternatives are subsidies (which have to be paid for with tax) or regulation.

There is a cost to both, resulting in inefficiencies.

Next time you need butter (or cheese, or milk or any food), thank a farmer for being the bedrock of the economy.

The current Government is grateful; we can be, too.