Will China’s economic slowdown destroy provincial New Zealand?

China’s economic slowdown is already weighing on farms across New Zealand, many of which will be making a loss as a result of higher input costs and interest rates. Global warming-related storms have battered much of the North Island in the past year, with a disproportionate effect on those who work the land. Now, a drought and emissions pricing loom, with some worrying they will have a devastating effect on rural communities.

On the windswept flats of Levin, in the Horowhenua Plains in the Lower North Island, Richard McIntyre​ has only half an hour until his 450-cow herd is brought in for milking. The twice-daily task is first at 5.30am, and again at 3pm. Outside of that, he’s doing other jobs to keep the farm running. After 7pm, he sits down to do paperwork.

Such is life on a dairy farm, where – come rain, shine or illness – there are animals to feed and care for, fences to fix, seven days a week. If anything goes wrong, farmers only have themselves or their neighbours to ask for help.

McIntyre, who is the dairy chair of Federated Farmers, is grateful for the lifestyle share milking has given his family. His daughter has developed a keen interest in becoming a vet, as a result of real-world experience from helping her dad, especially during calving. But as China’s economy weakens – and with it demand for New Zealand’s milk products – he is deeply concerned about the effect this will have on rural economies and provincial towns.

“The question is, how much pain are we going to go through over the next few years, and to what extent is it going to intensify as we go, year-on-year?” he said.

Farming, fishing, forestry, testing, construction and mining (when related to environmental restoration), all have access to an income equalisation scheme to spread out income fluctuations by spreading their gross income from year to year.

But farmers have already faced two years of higher levels of inflation than other sectors. The Reserve Bank of New Zealand (RBNZ) is expecting the number of dairy farmers defaulting on their loans to increase “materially” in the next 12 months, as the pressure eats through people’s cash buffers.

Uncertainty about the effects of climate change-related weather events, and regulatory changes such as emissions pricing, are also a factor. On top of this, farmers are expecting a drought this summer – harsh weather that will stop grass growing, and drive up the price of feed.

Farmers have always factored in climactic variations in their budgets, and milk prices going up and down, he said. Where things have changed is the loss of control over their inputs, such as the cost of feed and fuel, or getting equipment or machinery fixed. Farm inflation has been between 14% and 17%, much higher than domestic inflation which peaked at 7.2%.

“You would need to get something done on the farm, and you’d receive an invoice that you didn’t expect. Everything kept on going up, you know, especially things involving diesel,” he said.

Milk and meat prices have been good, he said, but not good enough to outweigh the higher everyday costs. “They really just kept track with on-farm inflation, so we weren’t making any more money.”

Servicing debts has also been a growing expense. “Compared to people in town, you might have a house with a mortgage of $1 million dollars or something like that … the average farm is worth $5m, $6m.”

Overall, it has contributed to a general feeling of being overlooked, and having their day-to-day realities ignored by central government, especially as it comes up with solutions to the climate crisis. Agricultural lobby groups, such as Federated Farmers, have expressed the view policies such as He Waka Eke Noa, which sets out a plan for farmers to pay for methane emissions for sheep and cattle, will reduce production levels or change farming practices to be less profitable.

How much farmers are having to give up, and how fast, in order for New Zealand to meet its climate obligations is a key political question the next government is facing. There is strong public appetite for action on climate change, and to improve the water quality in lakes and rivers, according to an Ipsos poll released in July. Eight out of 1 0 New Zealanders said they were concerned about climate change.

There are also questions about how much these policies will change the face of rural New Zealand, and how agriculture’s economic fortunes are tied to the nation’s wealth.

McIntyre is hopeful farmers will have a stronger voice in determining its future. He has so-far appreciated the approach from National MP Todd McClay, who is agricultural spokesperson for his party and is likely to be the next minister.

“He says, ‘look, I what I’m thinking about is, I will run this past you’. Too many other politicians turn up as though they know far more than us. It’s almost as if [they think] ‘dumb farmer, who is going to explain this to the dumb farmers.’”

Otherwise, he doesn’t believe farmers have had a strong voice in Parliament. Under the Labour government, and with Green Party co-leader James Shaw as climate minister, farmers have had new policy “pushed on us far too fast and with a lot of unintended consequences, and very little realistic consultation”.

One of those unintended consequences was extra paperwork for farms, many of which were smaller and family-run. “We do everything within their farm. We are HR, the accountant, with do all those things, and so anything you do put on farms in terms of record keeping, that is an absolute challenge in that respect.”

Immigration policies are also blind to realities in rural communities, he said. “Immigration settings are all based on that you’re encouraging a factory worker in the city to come off the benefit versus bringing in a migrant, I completely get that. Well, the problem in a rural setting … it’s very hard to convince an unemployed person to drive an hour out into the country. There are heaps of stories of people saying, I’ll go to the interview. And then they get 45 minutes into an hour drive and then turn around and go home.”

Rural communities also have fewer job opportunities, and their residents are disadvantaged in the public services they get too. Rural students have lower NCEA achievement and university entrance attainment, while rural patients face even longer waits for GP appointments than their urban counterparts.

“I think it’s this overarching thing where provincial New Zealand feels it’s not getting a fair deal in terms of the provision of good education, [or] health services,” McIntyre said.

Sheep and beef farms are also feeling the pain, although this doesn’t pose as big of a risk to financial systems as dairy because they tend to be equity-financed and represent a smaller share of bank lending.

Still, Kate Acland, chair of Beef and Lamb,​ says farmers are under a lot of pressure as a result of China’s cooling economy. China has bought on average one third of dairy exports in the past five years, 40% of meat, and 60% of forestry exports. But the prices for dairy and meat have dropped by 8% to 20% over the past year.

“It’s a double-edged sword,” she said. “Costs are up, incomes are down, the cumulative impacts of the regulations coming up are adding up [too],” said Acland, who runs Mt Somers Station with her husband David in the mid-Canterbury foothills.

She says the sector has made progress, reducing emissions by 30% since the 1990s, but should not sit on its laurels. But she is drastically opposed to plans to price methane. “In my view it will do nothing other than drive our most extensive sheep and beef farmers to plant their farms in trees,” she said.

“We will see iconic landscapes going to trees.”

The Climate Commission has also warned the government about its over-reliance on pine trees through the emissions trading scheme, and said this would stop New Zealand from hitting net-zero emissions by 2050.

“Every time we offset an emission you or I make today with another hectare of forest, we are committing New Zealanders to maintain that forest cover for a very long time, so we are removing choices, options and opportunities from the future,” commissioner Dr Rob Carr wrote in his April report.

But Acland believes the sector’s opposition to methane pricing has been conflated with the idea it wants to “do nothing” in the public’s perception. A balance between adapting to climate change, and keeping the agricultural sector strong, was yet to be found in policy, she said.

“I see farmers who feel like they have been vilified – they have been made out to be the bad guys. There is definitely a disconnect. Urban New Zealand doesn’t understand what is happening on farm.”

Acland said a change of government was a great opportunity for more farmer-led solutions. “This is our opportunity.”

Brad Olsen, a senior economist and chief executive at Infometrics, said China’s slowdown was a growing economic concern, and that some in the agricultural sector felt was poorly understood or wasn’t being given the attention it deserved.

China had not experienced a post-Covid boom, as other economies had, of pent-up consumer demand. Its housing market is shaky, its exports are in a slump and it has high levels of youth unemployment. Chinese consumers have remained cautious, according to the RBNZ, while dairy production in dairy-producing economies, including China, have increased from an already high level, leading to less demand for New Zealand’s produce.

The fall in revenue would wipe “billions in cash in provincial economies”. Farmers are often the drivers of commerce in their communities, and the more money they have in their back pocket, the more is spent on the local farm service sector, and also places like the local movie theatre, or restaurants. Without much cashflow, farmers may put off servicing or delay replacing machinery or equipment.

“The flow-on effects here are significant,” he said.

“The risk of how challenged the primary sector could be over the next 12 months isn’t quite as well understood. I am hearing quite clearly from the primary sector that it’s a bigger challenge than we are making it out to be at the moment.”

All up, it may make it harder to get a handle on inflation – which is still high, although lower than the peak at 5.6%.

“It’s the lower tax take and that lack of general spending [means] less GST coming in. It is more that again, if we are trying to keep the economy moving and get inflation under control, having that squeeze is going to be a tough ride for some.”