Supply chain problems in New Zealand

Supply chain problems in New Zealand

If you peruse the New Zealand media you will find nothing about this but it is very difficult not to bump into this increasing problem that is not going away any time soon.

This is about all you will find on this.

Interestingly, it was published in an AUSTRALIAN publication.

The pandemic exposes NZ’s supply chain vulnerability – be ready for more inflation in the year ahead

You don’t have to be an economist to know New Zealand faces its highest annual inflation rate in 30 years – 5.9% as of December 2021. Visit a supermarket or petrol station and the evidence is right before your eyes.

The average price of petrol per litre is now up by 31% compared to last year. In some places, it has already hit NZ$3 a litre. To take just one grocery example, tomatoes doubled in price during the same period, contributing to the highest annual food price inflation since 2011.

These severe price hikes are a direct reflection of the impact of the global pandemic on tradable inflation – that is, goods and services we either import for our own consumption or as components in our own manufacturing and exporting processes.

Since mid-2021, annual tradable inflation has been outpacing non-tradable inflation (the rising price of goods and services we produce and consume domestically) – 6.9% versus 5.3% at December 2021.

While tradable inflation accounts for about 40% of New Zealand’s overall inflation, the pace at which it’s growing means external sources are increasingly fuelling inflationary pressure.

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Pandemic pressures

Much of this can be sourced back to the effects of the pandemic on global supply lines. Three key factors are driving the pressures:

  1. Costs of raw materials and other inputs are rising at each stage of the supply chain, with factories closing and reopening due to changing restrictions. The semiconductor industry, for example, has been facing a chip shortage since 2021.
  2. Logistics and transport costs are rising due to massive disruptions at the distribution end of the supply chain. Reduced airline capacity and rerouting of cargo, coupled with lockdowns and isolation requirements, have led to delays in unloading cargo at ports and slower turnaround times for ships. Freight company Mainfreight, for example, expects delays of 20-30 days above normal shipping times for Auckland.
  3. Energy costs are rising, partly due to recovery in global demand in 2021, combined with supply shortages and cartel-controlled production.

These combine to cause disruption at each stage of supply chain – production, transportation and distribution – forcing New Zealand to “import” more inflation on top of what is being generated from within its own economy. Vehicles, fuel, clothing, processed foods and manufacturing materials have all been affected.

Supply chain vulnerability

The rising cost of house construction provides an illustrative example. Prices go up when, say, imported iron girders cost more to produce in their country of origin, in turn caused by costlier imports of iron and steel.

On top of this there can be delays in shipping the materials due to port closures or workforces affected by the pandemic.

Similarly, the scarcity caused by a worldwide semiconductor shortage means higher costs of production for electronic products and new vehicles, pushing up retail prices for imports.

Above all, rising energy costs are a financial body blow to the transport and logistics sector – the backbone of the local economy. The geopolitical tensions over Ukraine and Russia – both major oil and gas producers – simply add to the risk of spiking imported energy costs.

The pandemic has exposed New Zealand’s ever-present vulnerability to global supply chain disruptions. If the emergence of new COVID-19 variants affects New Zealand’s major trading partners (China, Australia, US, EU and Japan) imported inflation will remain a problem throughout 2022.

No quick fix

The unpredictable impacts of the pandemic on supply chain-led tradable inflation create a tough balancing act for policymakers because the causes are out of their direct control.

The Reserve Bank’s use of interest rates and monetary policy to maintain short-term price stability has worked well when domestic factors drove inflation. It’s a lot trickier when external supply shocks become the key drivers, and inflation predictions are clouded by global uncertainties.

Some relief could be provided by the government reducing GST and fuel taxes, but this is not a quick fix. In the medium to longer term, New Zealand needs to diversify risk and bring some supply chains back within its own borders.

The government could take a cue from the trilateral supply chain resilience initiative (SCRI) launched last year by two of New Zealand’s main trading partners, Australia and Japan, and the fastest-growing emerging global market, India. Its aim is to identify key sectors vulnerable to supply chain shocks and invest in their resilience to future uncertainties.

For now, however, New Zealand can count on an unpredictable road ahead, and should be ready for the possibility of even higher inflation than the year before.

And this comes from a specialist rural publication, not the mass media

New Zealand has no food security policy and will be short of some foods within five years, says a Horticulture NZ report on domestic vegetable production.

“We complacently believe we will always be able to sustainably grow enough food to feed ourselves and contribute to the country’s economic wellbeing,” the report says.

“However with prime production land being lost, climate change, competition for water resources, extreme weather events and the constant threat of pests and disease we must turn our minds to food security issues for the future of NZ’s domestic production.”

While most of the vegetables mentioned in the report are sold only domestically, some such as carrots, onions and potatoes, are exported.

“We may consider it a moral obligation for growers to ‘feed NZ first’, but they are running a business that is market driven and [feeding NZ first may not always happen] depending on supply and demand pressures internationally,” the report points out.

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“Developing a food security policy requires us to take a wider perspective on the food chain.” Growers hold responsibility for the sustainability of the environment and for year-long production for the domestic market.

Region-by-region supply of produce is not how it works, says Hort NZ. Instead, ensuring abundant fresh vegetables and fruit at reasonable prices “is a national issue that needs to be addressed by central Government”.

“As the impacts of climate change and more adverse weather make growing more challenging, we also need to ensure the most appropriate land is used.”

The report says with NZ’s population exceeding five million by 2020 (annual growth is 1.5 – 2%), domestic food supply will not be able to match consumption. On current consumption and production levels, food shortages can be expected in the next five years.

“This further highlights the importance of food security, land production and future-proofing the availability of resources to supply our growing population.”

Horticulture NZ president Julian Raine says in the report “a perfect storm is brewing for NZ’s supply of healthy food”.

“Prime fruit and vegetable growing land is being squeezed by rapid growth in towns and cities and high demand for new housing. Emotional battles over water have the potential to leave growers high and dry. ”

Raine says it is time to take stock. “There is an assumption that NZ is a land of plenty and we will always have enough locally grown food… supplemented by imported food where there is demand.

“But things are changing fast. We need to look closely at our domestic food supply and be sure that town, city and regional planning decisions are seen in the context of impacting the whole NZ food supply.”

The Conversation

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