(Originally published here.)
One would be forgiven for thinking that China’s recent decision to ban imports of whey proteins and milk powders produced by Fonterra Cooperative Group — after discoveries of bacteria associated with botulism — would have a big impact on New Zealand’s economy. After all, Fonterra is one of New Zealand’s biggest companies, responsible for sourcing and distributing almost all domestic dairy products in the country. Those dairy products account for about a quarter of New Zealand’s exports, which in turn make up about a third of the country’s gross domestic product.
Intriguingly, yesterday’s trading suggests that investors aren’t worried about the ban. Yes, the New Zealand dollar briefly dropped against the Australian dollar, but the 12-month pattern is unmistakable:
New Zealand dollar v. Australia dollar, August 2012 – Present. Source: Bloomberg
The New Zealand stock market has also been little changed, even though Fonterra alone accounts for 1.4 percent of the total value of New Zealand’s benchmark stock index. The chart below compares the price of New Zealand shares against Australian ones:
New Zealand All Ordinaries Index v. ASX 200 Index, August 1 = 100. Source: Bloomberg
Most striking is the performance of Fonterra shares themselves. After initially plunging by almost 9 percent, they ended the day down only 3.7 percent. That’s certainly undesirable from the perspective of shareholders but not what you would expect if the company’s future were imperiled.
Fonterra share price. Source: Bloomberg
One explanation is that the ban is temporary and will be lifted once the contaminated batches of product have been identified and destroyed.
More generally, I think that New Zealand’s resilience and, in particular, the 14 percent rise in the kiwi dollar against the aussie over the past year, is a reflection of the island nation’s position as a food exporter. Like Australia (and countries such as Brazil), New Zealand has done well over the past decade by selling commodities to rapidly growing China. Unlike Australia, which depends on Chinese demand for industrial products such as iron ore, coal, and copper, New Zealand sells milk and meat.
Australia had the edge when China was willing to spend as much as half of its GDP on infrastructure projects of dubious value. Over the past year, however, traders seem to have concluded that New Zealand is the better long-term bet as China’s economy moves away from excessive investment and devotes more resources to the needs of consumers. This makes sense. Middle-income countries ought to care more about quality baby formula than bridges to nowhere. The stock market’s modest reaction to the botulism scare suggests that traders think New Zealand will benefit from this shift more than its larger Anglophone neighbor.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)