New Zealand farmers are creaming it

Could the dairy boom make our country rich again? Ruth Laugesen reports.

Economist Kel Sanderson says two years ago, everything he thought he knew about where New Zealand's fortunes lay began turning upside down.

The road to riches everyone agreed was high-value manufacturing. And the road to slipping living standards was to churn out basic foodstuffs and raw materials.

But a funny thing happened. World commodity prices for basic raw materials like food, minerals, metals and timber began to climb and climb, and then rocket.

"We started to say hey, you would expect these prices to be going down, but they're not," says Sanderson, director of Business and Economic Research Limited.

Amongst the most astonishing price rises were dairy products, which make up 21% of our merchandise exports. By June this year, world dairy prices were double what they were a year ago.

On Friday Fonterra updated its forecast payout for the current season to a new record, $6.40 per kg of milk solids, or an average of $689,000 for each Fonterra dairy farmer. The payout will pump $8 billion into the $163b New Zealand economy, up $2.4b on last season

This is no statistical blip, says ANZ chief economist Cameron Bagrie. Something remarkable is going on, something "fundamentally huge" for our future living standards, and those of our children, if we are prepared to fully grasp the opportunity.

"We're sitting on a pot of gold. The last time commodity prices were at this sort of level, was way back in the 1960s when New Zealand was in the top five wealthiest countries in the OECD," he says.

Bagrie says there is now a "massive mind shift" going on about what we need to do to make us rich. Ever since the reforming 1980s, we have been told New Zealand is too reliant on the farm, and should diversify into manufacturing.

And despite flurries of reports and political hand-wringing, about two-thirds of New Zealand's merchandise exports still come off the land. That figure hasn't budged much in 25 years.

But now, instead of wailing about our stubborn reliance on the land, some economists are celebrating it.

"Global trends are now working in our favour. Thankfully we didn't drop our rural base and get away from the heartland," says Bagrie.

"I think New Zealand is sitting on the cusp of something pretty special here, in terms of where our commodity prices have gone to, and where I think they're likely to go over the next five to 10 years.

"If we get the strong commodity prices and we get the productivity growth to match, we'll move back up the OECD rankings. The challenge is, are we going to catch this magic bus or is it going to pass us by?" says Bagrie.

Westpac agri-economist Doug Steel is calling it "one of the biggest positive shocks the New Zealand economy has seen, possibly similar to the Korean War wool boom".

BNZ chief economist Tony Alexander is picking the flow-on effects will further strengthen dairying regions like Waikato, Taranaki, Canterbury and Southland, making it easier for those regions to keep their young people and offer them work. And he says it will provide a challenge to Auckland.

And at Treasury, manager of forecasting and monitoring David Galt says he would put the dairy price rises as the biggest improvement in New Zealand's terms of trade since the "massive lifts" of 1972-1973 - a generation ago - when meat, wool and dairy prices shot up briefly.

It's a long way from the 2003 Knowledge Wave conference, at which speakers lamented New Zealand's "commodity mentality". Is it possible that our future lies, once again, in grass?....