The recent brouhaha regarding the possible contamination of Fonterra milk products has again raised concerns about the lack of diversity in the New Zealand economy. While it is generally acknowledged that primary production underwrites our export economy, it can be surprising to see the full extent of this domination.

Primary production – particularly dairying dominated exports from New Zealand.

The Guardian Weekly recently queried the durability of the Australian economy because natural resource extraction is so dominant (60% of exports). They argue that the economy has been hollowed out by a resources boom which has driven up the exchange rate making all other exports deeply uncompetitive. Although New Zealand is pretty much in the same boat vis a vis the primary sector, we remain lucky that the demand for primary produce – particularly out of Asia remains strong. But as has been high-lighted by the the dairy scare, this economy is particularly vulnerable to contamination, imported pathogens and invasive pests e.g. varroa mite and PSA.

This relatively limited diversity and complexity of exports from New Zealand influences both the potential of the economy to grow and its resilience. The Economic Complexity Index is an attempt to measure these factors and places New Zealand between Tunisia and Costa Rica at 48th in an analysis of 128 countries . Unsurprisingly in this ranking Japan and Germany head the list, but perhaps echoing the Guardian’s concerns, Australia sits way down in 78th place.

Dairy is likely to consolidate its dominant position in the New Zealand export economy with the OECD predicting dairy conversions to continue through to 2020 with production increasing 2.3% per annum. More than a million dairy cattle have been added to the herd since 2007 (up 23%) at the expense of sheep (down 18.7%), beef cattle (down 15%), deer (down 24%) and pigs (down 14%). There has also been a trend for consolidation of herds with a tripling in average dairy herd size to nearly 400, coincident with a 25% reduction in the number of herds since 1980.

This continuing concentration of exports derived from dairy production further exacerbates the risk to the economy and perhaps explains the fervour of the minority National Government for mineral exploration. Our fourth largest export earner comes from a handful of small oil and gas fields in Taranaki and most of our gold comes from two mines.  Thus a mineral discovery or two could significantly improve the bottom line and help diversify the economy.

The $30M the government gave to Rio Tinto to keep their aluminium smelter open for a few more years wasn’t just to bolster the imminent public sale of our largest power producer, but also acts in the short term to maintain our #10 export earner.

With Viscount Monckton of Brenchley currently touring New Zealand, I expect many of his adherents – including Federated Farmers, will hear quite a bit about the end of climate change because world temperatures haven’t increased for a decade. This meme is taking hold in all the places that want to latch hold of a headline rather than read the whole article (see post about Rodney Hide below). The Economist has recently posted a short discussion with their ‘Globalisation Editor’ in which he calls for a roll-back of climate measures in light of the mounting evidence.

Why then has the last decade – the warmest on record, not continued to get warmer as record amounts of CO2 are pumped into the atmosphere?

• The historic temperature record doesn’t show a steady year-by-year increase; there is typically a step-wise progression with plateaus followed by sharp jumps i.e a staircase rather than and single slope. A plateau in the temperature record is not in itself surprising.

The staircase to hades.

• The El Nino – La Nina cycle has an impact on global temperatures with El Nino dominated years relatively warm and La Nina years relatively cool. If the recent temperature record is divided into El Nino, La Nina and intermediate years and plotted, each category shows a near identical rise in temperature that has not paused nor shown evidence of decline.

• It is also apparent that man-made forces might be counteracting the expected temperature increases. Recently analysis has implicated pollution through both the input of aerosols into the atmosphere (think Beijing) that reflect incoming energy from the sun and fertilisation of the biosphere via CO2 and nitrogen that promote plant growth and the uptake of CO2. The question is are we prepared endure current levels of pollution to defer temperature rise?

Finally new research has revealed that although the surface temperature record has been static, in fact overall global warming has accelerated with more heat now being taken up by the oceans.

Overall this is a good example of how science works. We make an observation that temperatures have been static for a while and either go yippee the panic is over, or we say that’s funny, everything we know about physics says it should still be warming, what could be the reason? A variety of mechanisms have been proposed that may individually or collectively explain the phenomenon – none offer a reason to relax.

Trilobite – another fossil.

Everyone from John Campbell to Gareth Hughes has been dumping on Don Elder over the last week. Not only did he oversee the now disastrous diversification of Solid Energy that has been deemed responsible for significant redundancies in the coal mining industry, but he also continues to draw his rather large salary while on gardening leave. John Key has been less than complimentary about the performance of the SOE which Bill English has assured will not be allowed to fail.

Regardless  of who was running the show, Solid Energy was certainly facing the prospect of a grim future. Here we had a multi-billion dollar enterprise based on operating coal mines (Waikato, West Coast and Southland) and billions of tons of undeveloped lignite in Southland. As the reality of climate change begins to hit home, it is starting to dawn on even the energy companies, that their share market valuations are based on coal, oil and gas reserves that can never be developed. Current modelling suggests that the listed global Reserves of fossil fuels exceed what can safely be mined by a factor of 5.

We have not yet got to the stage where questions are being asked as to which reserves should not be mined and therefore which companies are grossly overvalued, but we are starting to see some manoeuvring as gas muscles into the power market in the U.S.A. at the expense of coal. The abundance of gas is also a factor in driving down coal prices which is hurting the bottom line at Solid Energy.

This is not the time to have a portfolio chock full of lignite; the dirtiest fossil fuel and perhaps the one most likely to be scratched from the Environment’s dance card. This is where Don Elder comes in. It was almost as if Solid Energy’s diversification strategy was to build up an industry around lignite, as quickly as possible, so that it is too big and too advanced to suffer in any subsequent environmental rationalisation. Hence the dash to develop diesel, fertiliser and briquette industries even though they were heavily criticised by the Parliamentary Commissioner for the Environment in 2010.

It would appear that Don Elder was trying to save his (our) coal company by making Solid Energy too big to fail and thus insulate it from inevitable rationalisations in fossil fuel use. This dinosaur strategy of following short-term profits/lift in company value at the expense of long-term consequences is prevalent in today’s economic growth models. The cynicism of this strategy is exemplified by the lack mitigation measures associated with the lignite projects.

Fortunately this grand gamble was laid low by a strong dollar and low coal prices. Lignite is now off the agenda and the coal mines face downsizing or mothballing. The employment crisis facing the laid off coal miners was always inevitable and the Government’s role should be to facilitate their transition from the industry rather than prop it up through cost-cutting measures such as allowing mining in the Conservation Estate.

Last year I signed the petition calling for a referendum on the sale of the power companies. Although our minority National Government went to the polls in 2012 saying they wanted to sell, they only scraped past the post; ending up with 59 + 1 (ACT) + 1 (United Future) seats that were for the programme out of the 121 that were available.

Any wind in their sales?

Without getting into the debate over what sorts of margins should be required for governments to pass irreversible legislation, questions regarding the economic merits of selling asset generating an 18% return, when with an extremely strong dollar and low interest rates borrowing is such an attractive option. Especially as the Government intends to spend all of the money raised rather than retire debt.

I’m not an economist, but the fact that they (economists) are arguing among themselves as to the merits of the programme and prices are likely to be depressed by the economic climate all suggest that the sales might not be a smart option. Yet John Key remains locked in to the strategy with a resolve that reflects ideology rather than sense.

So what do I do now?

The sale legislation was passed in Parliament (61 to 60), the High Court challenge has been dismissed and the referendum although likely, will be too late.

Do I buy shares in Mighty River Power – the first cab off the rank in the sale process? Because if I don’t, my allocation could go offshore, or be consolidated within the portfolios of a minority of New Zealanders.

Do I boycott the sale in the rash hope that everyone else does too? Leaving the government with an under-subscribed float and egg on its face.

The answer is I don’t know. My inclination is that I should buy, but it feels wrong. The continued flow of wealth and wealth-generating assets to the few is not an equitable, nor fair solution for the bulk of New Zealand society.