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To meet China's seemingly insatiable demand for ice cream, infant formula and other dairy products, New Zealand's farmers ramped up production. They went on a buying spree increasing their herds, buying land and converting sheep and beef farms to dairy. New Zealand's milk powder exports to China increased rapidly and peaked at 744,000 tonnes in 2013-14, generating huge profits. Since then weaker demand in China, higher domestic production and a build-up in stockpiles have prompted Beijing to halve imports. "China purchased more dairy product than it needed," says Ms Higgins. "When it found itself awash with product, pressure was placed on dairy exporters — and therefore, New Zealand — to bear the adjustment, rather than the Chinese domestic dairy industry." Fonterra, which processes about 80 per cent of New Zealand milk, recently slashed the price it pays farmers to a nine-year low of NZ$4.25 ($3.08) per kilogramme of milk solid. This is almost half the peak payment and significantly below the break-even price of NZ$5.25, according to Dairy NZ.
- Figure 1 below shows the price that Fonterra offered its farmers over the 2011 and 2018. Explain the forces that led to the dramatic rise in the price of milk between October 2012 and February 2014.
- Based on the market structure discussed above, what do you predict happened to the number of milk suppliers in New Zealand and the rest of the world between 2012 and 2014?
- Figure 1 below shows the price that Fonterra offered its farmers fell dramatically between February 2014 and July 2015. Explain the forces leading to this collapse.
- How did individual farmers respond to the change in prices? Why might the industry stay oversupplied for a long period of time?
- What does the dynamics in the industry suggest for the shape of the Long-Run Supply function?
We can analyze the market using our model of perfectly competitive firms. In the long run, firms in this model enter... View the full answer