Applied Economics: Fonterra and the Dairy Industry Overview

This study material from Desklib provides an overview of Fonterra and the Dairy Industry, including its history and current operations. It also covers topics such as economic growth, globalisation and international trade, and the impact of monetary and fiscal policies on the industry. Course code, course name, and college/university are not mentioned.

Running head: APPLIED ECONOMICS
Applied Economics
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1APPLIED ECONOMICS
Table of Contents
Brief History and Current Overview of Fonterra and the Dairy Industry:.................................2
Economic Growth:.....................................................................................................................3
a:.............................................................................................................................................3
b:.............................................................................................................................................4
c:.............................................................................................................................................4
Globalisation and International Trade:.......................................................................................5
a:.............................................................................................................................................5
b:.............................................................................................................................................6
International Finance and Exchange Rate Determination:.........................................................6
a:.............................................................................................................................................6
Globalisation and monetary policy:...........................................................................................7
Globalisation and fiscal policy:..................................................................................................7
Reference:..................................................................................................................................9

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Brief History and Current Overview of Fonterra and the Dairy Industry:
Among many renowned co-operatives in New Zealand, Fonterra and the Dairy
Industry is one of the largest one operating in the international dairy industry. It is known for
its vast amount of multinational operation in in the collection, manufacture and sale of milk
and milk-derived products and in fast-moving consumer goods (FMCG) and foodservice
businesses. It operates through five segments: Global Ingredients and Operations (GIO),
Oceania, Asia, Greater China and Latin America. GIO processes and distributes milk, sells
and markets milk products. Oceania includes FMCG businesses in New Zealand and all
FMCG and ingredients businesses in Australia (Fonterra.com 2018). Asia includes FMCG
and foodservice businesses in Asia, Africa and the Middle East. During 1871, first co-
operative in the country has been developed in Otago and by the end of 1920, there were
more than 600 dairy processing factories out of which 85% are owned by the co-operatives
making it one of the largest source of dairy products related jobs (Editorial 2018). During
post World War II, it can be seen that consolidation came in and many co-operatives starts to
merge each other in order to form larger firms that can control the market of the dairy
products in New Zealand as well as in the other western nations too. Fonterra and the Dairy
Industry was formed during 2001 through the merger of two largest co-operatives in the New
Zealand which are Kiwi co-operative Diaries and New Zealand Dairy Group with the New
Zealand Dairy Board which is known for exporting and marketing agent for cooperatives
(Rbnz.govt.nz 2018). Under the market structure of the dairy industry in the state, Fonterra
and the Dairy Industry effectively gained monopsony power that aided the firm to control
export and domestic dairy industry. Though under controlled export of dairy products was
existing during the late 90s in New Zealand, however, easing of regulation in the subsequent
years has allowed every firm to export the same that enhanced the market share and market
power of the Fonterra and the Dairy Industry. Since 2005 the brand has been making

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headlines with its large amount of business growth through business undertaking of the
domestic as well as the foreign firms. Large factories were purchased by the Fonterra and the
Dairy Industry in Australia during 2005 from Nestle, which is one of the largest dairy product
producer in Australia (Hutchinson 2016). As the mean of continuous growth of the firm,
since 2007 Fonterra and the Dairy Industry goes under two year consultation program which
was aimed to perform capital restructuring that focused on stopping the continuous washing
of large amount of money from the balance sheet of Fonterra and the Dairy Industry
germinated through the milk production fluctuation (Munir et al. 2015). During 2010
Fonterra and the Dairy Industry introduced a program called Trading mong Farmers which
was aimed to enhance the interdependence of the farmers and the resolution passed with 89%
support sealing the amount of damage to the firm under fluctuating milk production situation,
which is acknowledged as the outcome of the capital restructuring program (Labbe 2017).
Economic Growth:
a:
Fonterra and the Dairy Industry is one of the largest producer of the dairy products in
New Zealand and the main driver that has aided it to become so is the strong supply chain of
the same. During 2013 the firm has introduced a opaque milk container code named “game
changer” which is arguably can keep milk fresh for two weeks. It has aided the firm to
operate long distance transportation without messing with the quality of the milk and has
aided the firm to face 1.9% growth in its sales figure (Pavlovich 2016). With the keen focus
on the effluent management structure of the firms operating under Fonterra and the Dairy
Industry, the organisation has maintained its production and quality that has helped it a lot to
become where it is now.

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b:
Fonterra and the Dairy Industry is one of the largest firm in New Zealand and it is
acknowledged for the one third amount of merchandise out of total export of the economy. In
addition to this it is the source of employment for more than 10,000 farmers, which is
expected to rise in the coming years as the business expands in newer countries too. Apart
from Australia, the firm has aided to have positive growth in the economy through their
endeavours (Fonterra.com 2018). As per the latest annual report of Fonterra and the Dairy
Industry, it can be seen that it has aided the US economy to have enhanced production of
milk by 2% through employment of larger number of farmers and additionally EU zone has
faced 1% growth in its endeavours (Editorial 2018).
c:
According to the statistics export of dairy products has risen drastically during the last
two decades and at 15.5 billion dollar dairy exports, it is accounted for the one third of
country’s annual merchandise exports making it one of the staple source of income for the
domestic economy (Rbnz.govt.nz 2018). Various factors ranging from bilateral relationship
with the countries to relaxation of the rules has allowed the firms like Fonterra and the Dairy
Industry to enhance its business and face growth in the years through continuous endeavours.
Potential factors to change the dairy business are as follows:
Impressive growth in productivity:
With the introduction of modern technologies and capital restructuring program
Fonterra and the Dairy Industry has been enjoying rise in the productivity of the state.
Productivity of the firm has been increased by 1.9% per annum by the firm and productivity
beyond the farm gate has also enhanced by a third as the dairy processor has become more
efficient in production. Wage rate has been moderate during the last two decades for the
farmers that has influenced a large numbers of farmers to join with the Fonterra and the Dairy

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Industry and has enhanced the total output of the firm (Baker 2016). Rural communities, rural
service providers, financial institutions and machinery retailers has shared their contribution
in the rise of production of the Fonterra and the Dairy Industry through providing easy loans,
newer technologies, workers and by other means.
Exchange rate of New Zealand:
During the last four decades terms of trade of the economy has been highest and by
1990 it has remained 20% higher than the average rate showcasing strong growth of the
economy. In addition to this, healthy growth in the Trade weighted index has aided the
economy to face large amount growth in the dairy product (Monge et al. 2015). With the
strong terms of trade, exchange rate of the New Zealand with respect to the US dollar has
remained good since last two three decades that has aided the business of the Fonterra and the
Dairy Industry as well as the economy of the state through providing higher balance of trade.
Relation with china:
Drastic change in the relationship with china has aided the economy of New Zealand
to face large amount of growth. In addition to this, under the ASEAN export from New
Zealand to chins has been increased to 21% by the end of 2013 making it one of the largest
destination of exports of the goods and services originated in New Zealand (Ngo 2018). Over
the time, there is a strong growth in the merchandise from New Zealand to china making
china a weathered trading partner of the New Zealand.
Globalisation and International Trade:
a:
Globalisation has aided economies to connect each other easily under which firms like
Fonterra and the Dairy Industry has expanded beyond their geographical boundary. As it can
be seen in the case of the Fonterra and the Dairy Industry, post 2005, it has expanded its
business from New Zealand to Australia utilisation the globalisation and in addition to this,

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the firm has occupied various large firms of the Australian economy making it one of the
largest producer of the dairy products (Pang 2017). In addition to this, globalisation has
provided level playing ground that has aided the economies to evolve over time and in
addition to this firm multinational firms like Fonterra and the Dairy Industry has developed
their business.
b:
Factors that determine the trading performance of the New Zealand’s trading
performance are as follows:
Exchange rate:
With higher exchange rate there will be fall in the export, however, overall trading
balance of the economy will rise and on the other hand, reduced exchange rate will enhance
the export of the country’s economy (Dosi et al. 2015).
Comparative advantage:
If the New Zealand face comparative advantage in production of one product, then it
will face higher potential to produce the same at lower price compared to the peers nations.
Reduced price will fetch higher demand of the same in international market.
International Finance and Exchange Rate Determination:
a:
Monetary policy is one of the essential tool for the firm in order to control the
exchange rate, money supply and inflation target. As in the case of the china, it can be seen
that the economy is going through an awkward regime of exchange rate. It is rising with a
rapid growth rate and with the growth of the economy of the Chinese economy. When it
comes to the monetary policy, then it can be seen that the Chinese government has taken
expansionary monetary policy by reducing the interest rate. With lower interest rate,
incentive to save is low and thus the money supply in the economy is higher that has aided

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the aggregate demand of the economy (Nakata 2016). With the higher money supply,
inflation rate during the last one decade has been reduced, however, the same enhanced
money supply has raised the demand leading to rise in the inflation rate in present date.
Globalisation and monetary policy:
Monetary policy is another way to enhance the economic performance that comes
with rising the aggregate demand through controlling the money liquidity in the market. With
lower interest rate government can enhance the liquidity because there will be lower savings
at lower interest rate (Stojkov et al. 2016). On the other hand, liquidity will fall once
government enhance the interest rate. Thus by changing the liquidity in the market monetary
policies enhance the performance of the overall economy. Considering the case of the New
Zealand economy, it can be seen that it has effectively controlled the interest rate in order to
control the market performance however, comparing the same with the demand driven
Chinese economy, it can be seen that the performance of the this state has been better. Under
high interest rate china gained much amount of foreign investment and now it is reducing the
same in order to enhance the liquidity for germinating higher effective demand in the
economy.
Globalisation and fiscal policy:
One of the main driver of the growth of the dairy firms like Fonterra and the Dairy
Industry, largely depends upon the fiscal policies taken by the domestic government. With
the rise in the government expenditure, there will be rise in the infrastructure, which will aid
the firms like Fonterra and the Dairy Industry to expand its business in the domestic
economy. As it can be seen in the case of the New Zealand, with the expansionary or
contractionary policies, government can influence the market performance because, fiscal
polies by the government can influence the market demand and supply pattern. In addition to
this, there will be shift in the exchange rate as well, which can either take the domestic

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economy to better position or can lead it to face downward growth (Kaplan et al. 2018). As it
can be seen in the case of china, that post 1990, the economy has gone through rapid
expansion with the aid of the expansionary fiscal policies. Tax rate were high so does the
government expenditure allowing the firms to avail loans and financial support from the
government to foster the business. Under the trade pacts like ASEAN, Chinese and New
Zealand economy are having good bonding that can be seen from the enhanced business
between these two states (Byrne 2016). With the expansionary fiscal policies, Chinese
economy has faced large amount of growth and as the means of continuous growth of the
economy, china has maintained high aggregate demand of goods and services (Stojkov et al.
2016).

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Reference:
Baker, R., 2016. Implementation of the Fonterra Palm Kernel Guideline.
Byrne, P.J., 2016. Crisis in dairy industry escalates to new level. News Weekly, (2979), p.5.
Dosi, G., Fagiolo, G., Napoletano, M., Roventini, A. and Treibich, T., 2015. Fiscal and
monetary policies in complex evolving economies. Journal of Economic Dynamics and
Control, 52, pp.166-189.
Editorial, R. 2018. ${Instrument_CompanyName} ${Instrument_Ric} Company Profile |
Reuters.com. [online] U.S. Available at: https://www.reuters.com/finance/stocks/company-
profile/FCG.NZ [Accessed 29 Jun. 2018].
Fonterra.com. 2018. [online] Available at: https://www.fonterra.com/content/dam/fonterra-
public-website/pdf/Fonterra_Annual_Results_presentation_2017_NZX.pdf [Accessed 29 Jun.
2018].
Hutchinson, N., 2016. Batten down the hatches: The dairy industry in crisis?. Geodate, 29(3),
p.17.
Kaplan, G., Moll, B. and Violante, G.L., 2018. Monetary policy according to HANK.
American Economic Review, 108(3), pp.697-743.
Labbe, A., 2017. DEAL: Fonterra's multi-currency loan from Bank of China. International
Financial Law Review.
Monge, J., Parker, W.J. and Pizzirani, S., 2015. Identifying Complementarities for the Dairy
and Forestry Industries in the Central North Island.
Munir, M.T., Yu, W., Young, B.R. and Wilson, D.I., 2015. The current status of process
analytical technologies in the dairy industry. Trends in Food Science & Technology, 43(2),
pp.205-218.
Nakata, T., 2016. Optimal fiscal and monetary policy with occasionally binding zero bound
constraints. Journal of Economic Dynamics and control, 73, pp.220-240.

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Ngo, H., 2018. Potential dairy industry in vietnam: Case Study: Vinamilk LTD.
Pang, A., 2017. Product safety failure and restoring reputation across markets: Fonterra's
management of the 2013 bacterial contamination crisis. Journal of Marketing Channels, 24(3-
4), pp.136-152.
Pavlovich, K., Sinha, P.N. and Rodrigues, M., 2016. A qualitative case study of MNE
legitimacy: The Fonterra-Sanlu IJV corporate milk scandal in China. International Journal of
Emerging Markets, 11(1), pp.42-56.
Rbnz.govt.nz. 2018. The significance of dairy to the New Zealand economy - Reserve Bank
of New Zealand. [online] Available at:
https://www.rbnz.govt.nz/research-and-publications/speeches/2014/speech2014-05-07
[Accessed 29 Jun. 2018].
Stojkov, K., Noy, I. and Sağlam, Y., 2016. The trade impacts of a food scare: The Fonterra
contamination incident. Journal of Agricultural & Food Industrial Organization.