Cash cows to boost economy

Dairying is set to rival construction in boosting New Zealand's economy. Photo by ODT.
Dairying is set to rival construction in boosting New Zealand's economy. Photo by ODT.
The dairy sector is now rivalling the construction sector in boosting economic growth for the coming year, BNZ economist Doug Steel says.

Mr Steel said Fonterra's recently-increased $7.80 per kilogram forecast payment for milk solids, a record, included a lift in production and equated to dairy revenue rising by about $4 billion.

''This estimate includes our assumed 6% production lift from last season's drought-induced decline,'' Mr Steel said.

While there is still risk to be assessed on weather and costs of irrigation replacement from last week's high winds, Mr Steel said the forecasts meant the lift in dairy industry revenue was equivalent to almost 2% of GDP.

''That is very large in anyone's language. Moreover, high advance rates mean farmers will see more of the cash earlier,'' he said.

''The dairy sector is now rivalling the construction sector to provide the biggest boost to economic growth over the coming year,'' he said.

Mr Steel said part of the boost would be from more spending, citing a recent Federated Farmers survey which found a net 28% of dairy farmers intended increasing expenditure over the coming year.

''This survey pre-dates the milk price forecast upgrades, so net spending intentions could well be even higher now.

''Either way, a decent lift in dairy farmer spending looks likely, generating the typical multiplier effects as the cash works its way through the economy,'' Mr Steel said.

He said more revenue gave more options.

Some dairy farmers were taking on more debt, expanding and investing for growth.

Others might use the extra revenue to reduce debt, perhaps including any extra debt taken on to get through the drought-induced cashflow squeeze, and strengthen balance sheets.

''Strong possibilities on both sides make it as difficult as ever to determine the net change in agricultural debt, which is currently growing at just under 4% per annum,'' he said.

However, more revenue also affords more saving, and he noted bank deposits from the agriculture sector were up 7% during the past year.

The question was how much of it boosted economic growth and how much of it ''tilted towards'' improving our external imbalances, Mr Steel said.

''It looks to us that it will be a combination of both over the coming year,'' he said.

simon.hartley@odt.co.nz

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