By Rodney Dickens*
It has become increasingly clear that something other than normal global factors are driving NZ export prices.
The adjacent chart compares the ANZ NZ export price index and The Economist’s food and non-food agricultural commodity price index with both measured in US dollars.
The Economist Index is a global benchmark for international food and non-food agricultural commodity prices.
The mix of commodities included in the two indices is quite different as are the weights attributed to each commodity in calculating the indices.
This is why the two indices have parted company for periods, but the scale of the parting of the ways since early-2011 is unprecedented.
To put things in context, the ANZ index would have to fall 40% for it to be back in line with The Economist index (i.e. it would have to fall to 142 versus the 236 recorded in September).
But it sounds much more spectacular when it is put the other way around (i.e. at 236 the ANZ index is 66% above the level it would be if it was at 142 and in line with The Economist index).
But I don’t need to play with numbers to show that something very different is driving NZ export prices than is driving global food and non-food agricultural commodity prices.
This chart speaks for itself.
Dairy product prices are a key part of the story
Dairy product prices are a key part of the story. Dairy products have the highest weighting of any commodity group in the ANZ NZ export price index but don’t feature at all in The Economist Food Index (see http://media.economist.com/media/pdf/Weights2005.pdf for info on the weights in The Economist Food and Non-Food Agricultural Commodity indices).
So if dairy product prices diverge significantly from global food and non-food agricultural commodity prices the ANZ index can part company to a significant extent from The Economist index.
Based on the results from the Fonterra auctions, the weighted average dairy product price measured in USDs increased 63% between early-December 2012 and mid-April 2013, which roughly coincided with the drought.
But even following lots of rain and a strong rebound in dairy production the weighted average price in the mid-October auction was down only 9% from the peak level in April and was still up 48% on the pre-drought level.
In April the Westpac economists produced an interesting report pointing out that increased Chinese demand rather than just the negative impact of the drought on dairy production was behind the surge in dairy export prices last summer.
Chinese consumption of dairy products was reported to have increase by 11% per annum on average over the previous five years. This link will take you to the report by the Westpac economists. This starts to point the finger at increased consumption of Western foods by China as being the key “culprit” in driving NZ export prices up dramatically relative to global food and non-food agricultural commodity prices.
NZ export data confirm the dramatic impact China has had on dairy exports, but also shows that China is driving much more than NZ dairy export prices.
Australian resource exporters have benefits from Chinese demand for some years and finally many NZ commodity exports are riding the China wave.
China, China, China and China
The charts below show the rolling annual NZD values of NZ exports to China of dairy products, wood and cork, meat and edible offal, and fish and crustaceans.
These charts show that it is much more than just dairy products that are benefiting from the awakening of Chinese consumers.
Partly driving the increases in export receipts shown in the charts above are increased commodity prices. It is therefore useful to show what has happened to China’s market share of exports for these commodities.
This puts the impact of Chinese consumers in a more accurate perspective, as is done in the charts below.
In the case of dairy products the Chinese market share of export receipts surged from around 5% prior to 2009 to over 25% in the 12 months ended in August 2013.
China’s market share of fish and crustacean exports almost trebled between 2010 and the most recent 12 month period, reaching 30%. The surge in China’s share of meat and edible offal exports has been much more recent, but is no less dramatic (i.e. from 2.7% in 2010 to 15.3% in the most recent 12 month period).
I haven’t shown the Chinese market share for wood and cork exports because I’m not convinced the breakdown I accessed from Statistics NZ’s database for China is the same as the breakdown I obtained for total exports. But that qualification aside, China’s share of wood exports has also experienced a dramatic increase in the last few years. Instead I have included China’s market share of export receipts for fruit and nuts in the right chart below, with it also having increased significantly in recent years, although it has eased a bit in the last few months.
The growth in the Chinese market share of a range of NZ commodity exports hasn’t been in a straight line, with some temporary setbacks along the way. But it has been dramatic and has occurred in a relatively short period.
There are good reasons to expect further market share growth over the next decade and possibly well beyond the next decade.
China is a developing economy and has lots of urbanisation still to come (i.e. lowly-paid agricultural workers and peasant farmers becoming higher paid secondary and tertiary industry workers).
This will be partly a generational story as was the case in the past for the current developed economies including NZ (i.e. the children of farmers and agricultural workers getting jobs in the cities). I am a Kiwi example of this.
And it is partly a story about rising incomes in general resulting in increased consumption of “affluent” foods, like meat and dairy products.
The tourist industry is a good case study
Rolling annual tourist visit arrival numbers are back to growing again both in total and for the total excluding Chinese visitors (left chart). But in the last few years the total excluding China hasn’t grown much, with growth in total visitor arrival numbers since 2010 larger driven by increased Chinese visitors.
Just as the Chinese market share of a range of commodity exports has grown dramatically in the last few years, so has China’s share of tourist visitor arrivals (right chart).
The experience with Japanese tourist visitor arrivals in the 1970s, 1980s and early-1990s is the nearest parallel to what is currently happening with Chinese visitor arrivals.
Unfortunately, the data on tourist visitor arrivals on Statistics NZ’s website only dates back to the late-1970s so the adjacent chart misses out the growth in the Japanese share of total visitor arrivals in the 1970s. But it does show the Japanese share of total visitor arrivals increasing from just below 4% at the start of 1980 to over 12% in 1992.
High income growth was partly driving strong growth in the number of Japanese travelling and holidaying overseas, which has parallels with the economic development that China is currently experiencing (i.e. the propensity to travel increasing as incomes increased from a business perspective and especially for holidaying).
But in Japan there was also an inter-generational story at work in the 1970s and 1980s that was revealed by in-depth research I did on what was driving growth in visitor numbers from all countries some years ago. Older Japanese didn’t travel much and their propensity to travel didn’t change much, but the younger generations developed travel propensities more in line with Western norms. And as the older generations died off and were replaced by younger generations the national propensity to travel kept increasing for more than two decades.
The Japanese economic development phase turned into one of the biggest speculative bubbles of all time and following the bursting of this bubble the Japanese propensity to travel fell dramatically.
In terms of tourism China has been experiencing a development-related upturn for almost two decades already (chart above). However, China has much to go in terms of urbanisation and economic development, so it should be some years before the Chinese propensity to travel peaks.
The same inter-generational change in behaviour should be relevant to the consumption of Western foods. The older generations may not change their diets dramatically, but as the younger generations replace the older generations the national propensity to eat Western foods and especially beef, mutton and dairy products should keep growing for some years. But there will be temporary setbacks along the way.
*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.