Dairy's $3.6b contribution to NZ economy

16:00, Jan 02 2011

"When dairy farmers are smiling, the whole region smiles."

This quote from the New Zealand Institute of Economic Research's report in December on dairy's economic contribution to New Zealand illustrates how important the sector is, not only to the national economy but especially rural economies.

With as many as one in four jobs in some rural areas dependent on the dairy farming and processing sectors, it should be easy to see that dairy is not only the backbone of the rural economy, but in many ways its lifeblood.

Yet until now, the true value of dairy's economic contribution has been unclear. Beyond the big numbers, such as 26 per cent of exports, or 2.8 per cent of GDP, New Zealanders until now have been unable to easily identify the direct benefits flowing to them.

That's why Fonterra and DairyNZ commissioned NZIER to quantify what dairy contributes to rural and urban communities. It illustrates that when dairy farmers are smiling, we're all doing well. In the more rural regions, we're doing very well indeed.

In fact dairy's contribution to regional economies is far greater than the national average of 2.8 per cent of GDP.

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Take Southland, for example. Southland has nearly 10 per cent of the national herd, reflecting the sector's growth in the South Island. Dairy revenue in the region in the 2009 calendar year was $710 million. Dairy growth since 1999 means every Southlander is $650 better off. Southland and Otago combined generated nearly $900m in dairy production in 2009. More than 4200 workers are directly employed by the sector in the region. It's a similar story across regions like Waikato, the Bay of Plenty, Taranaki and the King Country.

All of these local economies sit up and take notice when Fonterra announces our payout forecasts. They know it will determine the answer to the question, "how's business?" That's because, as the NZIER report shows, 50 cents in every dollar a dairy farmer earns goes back into the economy. Last year, that amounted to $3.6b paid for farm supplies, services like vets and accountants and utilities costs such as the whopping $45m spent on electricity. That $3.6b does not include farm wages.

That spending creates demand for goods and services and demand for the workers who produce them. This creates jobs and contributes to wages. The dairy sector employs about 35,000 workers, supports as many as 10,000 self-employed contractors and indirectly supports workers in firms that supply the dairy sector.

Right across rural New Zealand, farmers are out in the dairy sheds at dawn, getting the milk in for tankers to collect and transport to Fonterra's sites. That milk gets turned into export products, with every tonne crossing the wharves contributing to better living standards for New Zealanders.

Recently, New Zealand announced it had just recorded a decreasing trade deficit led by dairy exports, which rose to more than $1b in October, up 61 per cent from September, out of a total of $3.7b.

For folk out shopping, the only surplus that makes sense is some cash left over after the bills get paid. Productive cows just don't come into the picture at all. But they should. Whether you live in Khandallah or Kaiapoi, Stratford or Sumner, dairy is doing you good, keeping the trade deficit down and enabling greater government spending through a higher tax contribution.

That trade deficit is a good example. As NZIER notes, the strong export growth from the dairy sector has been a key factor in New Zealand's current account deficit narrowing in recent years. This is important because as the deficit rises as a proportion of GDP, foreign investors and ratings agencies start to have concerns over the ability of the New Zealand economy to withstand any unexpected negative economic shock.

These concerns translate into New Zealand having a higher risk premium attached to it on foreign borrowings. In short, it becomes more expensive for New Zealand firms, households and the Government to borrow on international markets and that means higher interest rates. Keeping the balance of trade on the positive side has saved households $1.2b in interest repayments on foreign debt over the past decade. It has also delivered better education, health services and policing, with the tax flowing from dairy to the Government enabling more spending in these important areas.

There's no doubt dairy is the backbone of the economy. At 2.8 per cent of GDP, our contribution is greater than that of the fishing, forestry and mining sectors combined and 10 times that of the wine sector. Each of these productive primary sectors helps us earn our way in the world, but take away dairy and New Zealand would be a very different place.

As New Plymouth's former mayor Peter Tennent put it, when asked how his region would look without dairy: "We'd still be smiling, but not as wide – and there'd be fewer businesses."

So let's break with the New Zealand tradition of cutting down our tall poppies. Let's celebrate our dairy industry's success on the global stage, and appreciate Fonterra and the dairy industry as an achiever that makes a difference to our everyday lives.

Andrew Ferrier is Fonterra's chief executive.