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FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 5212
RUEHRC/USDA FAS WASHDC 0388
RUEHNZ/AMCONSUL AUCKLAND 1661
RUEHDN/AMCONSUL SYDNEY 0670
RUEHBY/AMEMBASSY CANBERRA 5166
RUEHSS/OECD POSTS COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCPDOC/USDOC WASHDC 0226
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHHMUNA/CDR USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 02 WELLINGTON 000151 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EEB/TPP/ABT/ATP JANET SPECK AND EAP/ANP 
USDA FOR FAS/OFSO JAMES DEVER, FAS/OCRA RALPH BEAN, FAS/OCRA RENEE 
SCHWARTZ 
 
E.O. 12958: N/A 
TAGS: EAGR EAIG ETRD ECON PGOV PREL NZ
SUBJECT: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY PRICES IN NEW 
ZEALAND 
 
REF:  A) STATE 39410  B) WELLINGTON 115 
 
WELLINGTON 00000151  001.2 OF 002 
 
 
¶1.  Note:  This is a joint Foreign Agricultural Service and State 
report.  Responses are keyed to Ref A questions regarding the impact 
of rising food and agricultural prices in New Zealand.  End note. 
 
¶2.  SUMMARY.  As a developed country and a net agricultural 
exporter, the recent rise in commodity prices has hit New Zealand 
consumers as well as producers that rely on imported animal feed 
products.  Declining consumer confidence and rising food prices have 
been hot topics in New Zealand as food prices have climbed six 
percent in the year ending March 2008.  The biggest increases in the 
grocery food category were for staples -- cheese, fresh milk and 
bread -- which are hitting consumers in the pocket book.  While 
increased grocery prices have translated into higher retail sales, 
other sectors are feeling the pinch, especially take-out food sales, 
which have fallen six percent from December 2007 to January 2008. 
END SUMMARY. 
 
¶3.  DEMAND:  Soaring food prices are making front page news in New 
Zealand.  According to the New Zealand Herald, 17 everyday food 
items which cost an average of NZ $134.80 in April last year now 
cost NZ $160.36 - an increase of 28.5%.  However, according to 
Statistics New Zealand, food prices officially increased 6% in the 
statistical year ending March 31, 2008.  The most significant upward 
contribution came from the grocery food subgroup (up 9%).  Within 
this subgroup, the most significant upward contributions came from 
higher prices for cheese (up 44.2%), fresh milk (up 21.7%), bread 
(up 12.2%), and butter (up 82.2%).  The inflation rate in New 
Zealand is 3.2%. 
 
¶4.  Press reports attribute rising food prices to several factors 
including increased demand, particularly in China and India where 
people are eating more grain, meat, and dairy products as they grow 
wealthier.  Along with increased demand, news reports also point to: 
increased production of biofuels, which has driven up feed costs; 
record high oil prices, which make fertilizer as well as the cost of 
getting product to market more expensive; climate change including 
the drought in Australia, which has driven up the price of wheat in 
New Zealand; and governmental policy responses in some of the 
hardest-hit nations, which has sometimes resulted in the wrong 
signals being sent to farmers reducing incentives to grow more 
food. 
 
¶5.  SUPPLY:  While New Zealand consumers are struggling to adjust to 
higher food prices, high dairy commodity prices have been a boon for 
New Zealand dairy farmers.  The world dairy market is growing at 2 
to 3% - enough to take New Zealand's total production. Fonterra, the 
largest dairy cooperative in New Zealand with a 95% share of the 
domestic production and a 40% share of world trade in dairy 
products, hiked its domestic payout to dairy farmers to a record NZ 
$7.30 (US$5.70) per kilogram of milk solids for the 2007/2008 
season.  This means that Fonterra farmers are likely to receive an 
average payment of more than NZ $800,000 (US$625,000), and NZ $9 
billion (US$ 7 billion) will be injected into regional economies. 
The 2006/07 payout was NZ $4.46 (US$3.50) per kilogram of milk 
solids. 
 
¶6.  ECONOMIC IMPACT:  In response to higher prices, consumers are 
reportedly buying fewer dairy products and looking at lower priced 
alternatives such as milk powder.  Others are lobbying for the 
abolition of sales taxes (GST) on food.  The main parties in New 
Zealand, Labour and National, have resisted previous calls to exempt 
food from taxes and press reports indicate they are unlikely to 
change their minds.  A spokesman for the opposition National Party 
indicated the party's first preference would be to tackle the food 
affordability problem by cutting income taxes.  New Zealand is one 
of only three countries in the OECD that taxes food at the same rate 
as other goods.  Removing GST from all food in New Zealand would 
reportedly cost the Government about NZ $2.4 billion (US$ 1.9 
billion) a year. 
 
¶7.  Macroeconomic indicators show New Zealand's annual trade deficit 
unexpectedly widened in March 2008 as export growth was the weakest 
in eight months, adding to signs that the economy may have stalled 
in the first quarter.  The shortfall rose to NZ$4.53 billion (US$3.6 
 
WELLINGTON 00000151  002.2 OF 002 
 
 
billion) in the 12 months ending March 31 from NZ$4.42 billion in 
the year through February, according to Statistics New Zealand. 
Overseas shipments, which make up 30 percent of the US$131 billion 
economy (GDP), rose at a sixth of the pace economists expected amid 
falling world commodity prices (Note: Per 2008 IMF Report, prices of 
non-fuel and non-dairy commodities like meat and agricultural raw 
materials remain relatively weak reducing returns for producers. 
End note).  Furthermore, a drought has forced some farmers to stop 
milking cows and send livestock to slaughter.  Falling farm 
production and weaker exports may slow New Zealand's economic growth 
to a 10-year low in 2008, according to more pessimistic economic 
estimates. 
 
¶8.  POLITICAL IMPACT:  This week Prime Minister Helen Clark said tax 
cuts to be announced in this year's budget (due to be released May 
22) "would deliver timely relief for those families struggling with 
higher food prices" but she didn't think GST would be removed on 
food."  She further said, "GST had been in place (in NZ) since the 
mid-1980s when family support schemes like, "Working for Families," 
began and have now become a more significant form of poverty 
assistance.  PM Clark further said that price increases for items 
such as butter, cheese and milk, were driven by the export prices 
farmers were getting for their products.  A Labour finance spokesman 
said a one-off change to GST would not stop international forces 
pushing up food prices.  Other than suggestion of promised tax cuts, 
the New Zealand Government has not implemented any new policies to 
address higher food costs.  The opposition National Party has not 
used the rise in food prices as a campaign issue to date but has 
called for reduction in taxes as way to assist households and 
stimulate the economy. 
 
¶9.  ENVIRONMENTAL IMPACT:  Rising food and agricultural commodity 
prices have not led to any immediate or significant environmental 
degradation in New Zealand although, as mentioned above, the effects 
of the recent drought in Australia and New Zealand have caused the 
price of some agricultural inputs to rise and were a reason for some 
New Zealand farmers to send some animals sooner to slaughter. 
 
¶10.  POLICY RESPONSE:  See ref B for a comprehensive background 
report on New Zealand's agriculture policy.  The government has not 
made any announcements that it intends to significantly change 
current policy in the short term in response to rising food prices. 
However, former Labour Prime Minister and Director-General of the 
World Trade Organization (1999-2002), Mike Moore has opined that 
while New Zealand's dairy sector is booming, it has costs other 
sections of the economy and society.  Moore has said that "although 
dairy products have gone up by more than half for local families, 
higher prices are good for New Zealand but the implications are 
complex."  He believes New Zealand is suffering from "Dutch 
disease,"  which is defined as the deindustrialization of a nation's 
economy that occurs when the discovery/exploitation of a natural 
resource (in this case milk) raises the value of that nation's 
currency, making manufactured goods less competitive with other 
nations, increasing imports and decreasing exports coupled with the 
public services more entangled with business interests.  Moore's 
medium to long-term solution to the higher international food prices 
calls for concluding the WTO's Doha round, which he believes will 
return four to five times more relief to poverty stricken parts of 
the world than all the aid and debt forgiveness put together.  He 
also believes that farmers are most productive when they can operate 
freely with secure property rights.  He further sees carefully 
managed and safe genetically modified (GM) foods as offering great 
hope for the international food shortages. 
 
¶11.  Post will continue to monitor the situation and report on any 
significant developments. 
 
Keegan