New Zealand is not immune to geopolitical shocks and the dairy industry needs to establish how it will manage unpredictable disruptions in future, says economist Shamubeel Eaqub.
Speaking at the DairyNZ People Expo in Invercargill, Eaqub said an example of an unpredictable shock was the sharp increase in shipping costs during the pandemic.
“No one could predict costs would jump from a $2000 mark to $10,000 during the pandemic, but it did,” he said.
Tensions in the South China Sea, for example, are also something to keep an eye on.
“It really matters for you [farmers and industry]. What’s the most important fuel on farm? Diesel. How many weeks of diesel do we have on land in New Zealand? One. Where do we keep our inventory? On boats.
“What do you think will happen if there’s war in the South China Sea? New Zealand is the last stop [on a shipping route], we’re not going to get diesel first,” Eaqub said.
“We are not disconnected from geopolitics. It can have very direct implications for how we do business and the ability to run the economy.”
NZ perversely benefitted from the pandemic and even the invasion of Ukraine, as commodity prices were high. However, commodity prices are now lower but the price of fuel, fertiliser and labour is still high, Eaqub said.
Many of the risks are not immediate but the industry has to have preparation plans in mind.
The dairy industry’s growth and growth in China go hand in hand, but there are limits to growth, he said.
“That insatiable demand that was coming from China has stopped.”
There are risks to not understanding what’s happening with our end consumers, he said.
Eaqub said insurance costs will be unpredictable in future, especially if natural disasters became more common.
The amount of insurance claims paid out in the past 12 months were unprecedented when compared to the previous 20 years. Insurance companies are in business to make money and have to transfer their risks to others.
“In New Zealand insurance premiums are roughly 40% cheaper than in Australia, I don’t think it’s going to be like that for much longer. Australia has experienced a lot more natural disasters in the last 20 years, they’re much further down the track of insurance.
“The more of these events happen, the less available and more expensive insurance will be. We can’t always transfer risk to somebody else, we have to think about what we can do in our businesses and on our farms to adapt. Insurance retreat will come,” Eaqub said.
“One important lesson out of Canterbury is that when a natural disaster strikes, New Zealand is very good at bailing people out for the first year, the second year we are still kind, the third year we’re like ‘bugger off, you’ve had enough’.”
“Every time there’s a natural disaster, we rely on the rest of New Zealanders to bail us out. It’ll probably happen once, twice, three times. But given where our debt is, we probably have three more natural disasters before the public [and government] would not step in,” he said.
“If insurance has retreated and the backstop of the public has retreated, what’s going to happen?
“Regardless of the structure of government, the reality is that we are stuck at a level where we probably have run out of headroom [to cope with shocks],” he said.
