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Cablegate: Impact of Rising Food/Agricultural Commodity Prices in New

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RUEHPB RUEHRN RUEHROV
DE RUEHWL #0151/01 1230341
ZNR UUUUU ZZH
R 020341Z MAY 08
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

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