Christchurch Quake May Slam Economy, Too

Posted by: Bruce Einhorn on February 23, 2011

Tuesday started out as a great day for New Zealand’s economy. Fonterra, the giant cooperative that dominates country’s dairy industry, announced that a 10.5 percent increase in its forecast payout to farmers to NZ$7.50. That’s higher than expected and is another sign that Kiwi dairy farmers are benefiting from rising milk prices and the strong demand from China and other emerging markets. Prices are already up 20 percent this year and, as my Bloomberg colleague Phoebe Sedgman and I reported last week, Fonterra CEO Andrew Ferrier believes high milk prices are “the new normal.” According to Ferrier, the price of whole-milk powder will likely remain at least 50 percent above their historical averages.

At lunchtime on Tuesday, though, the devastating earthquake hit Christchurch, New Zealand’s second-largest city. Hundreds of people are dead and many others are still missing. The death toll could go much higher.

The destruction in Christchurch may push the New Zealand economy, which was already teetering, back into recession. The tourism industry in the South Island is likely to be hammered. I was in Christchurch on Sunday, two days before the earthquake, and a taxi driver was telling me then that his business had dropped off badly since last September’s earthquake had scared away tourists. And that was an earthquake that had a death toll of zero. The photos and TV footage of Christchurch’s misery now will just make things much worse.

It’s too early to say what the impact will be on the dairy industry. Christchurch is in one of the prime dairy regions of the country. Farmers were able to shrug off the September quake, but that caused much less infrastructure damage and it came in the Southern Hemisphere’s springtime, when the grass was starting to grow and the milking season was just starting. This new quake has caused far more damage and takes place in the middle of the summer. In a press release, Fonterra said its farmers “have come through largely unscathed and are keen to offer help and accommodation.” The co-op today announced it is donating $1 million to the Red Cross Christchurch Earthquake Appeal; Fonterra is also transporting water from a nearby factory to the city.

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