Guest Post – Cooperatives ? another form of socialist mediocrity

The big issue that dominates the discussion on our dairy industry is falling prices. Our seeming inbred predilection for negative news means we overlook important issues about the future of milk, what is happening internationally and how New Zealand should be responding.

There is sufficient pessimism in some quarters to suggest that dairying is a lost cause and that there should be a deliberate effort to scale it back and stimulate investment in different economic activity.

While diversity is usually a helpful goal in an economy it is far too early to write off dairying. Conservative predictions are for the consumption of milk and milk products to rise by 36% over the next 10 years, away ahead of even the most optimistic numbers on production growth. China is only one of many countries to have growing needs for protein.

Milk2

Milk1

Both graphs convey the probability of shortages?? looming by 2020 at the latest and consumption significantly outstripping supply through the 2020?s.

It is evident that prices will be impacted. The shortages will start to influence prices before they occur in actuality as the market factors in the likelihood.

For New Zealand farmers this means a return to the prices in the NZ$7.00 to $8.00 per kg milk solids.

The current milk price in New Zealand reflects the level of volatility in the market, a slow down of demand in China and, mostly, the affect of a European export ban in Russia. The market has anticipated growing supply out of Europe as the quote restrictions come off. Ireland is optimistically forecasting up to 50% growth over the next 10 years but, in context, their total production at that point would be only be 30% of New Zealand?s present production. While Europe has significant potential for expansion there are severe limitations arising from environmental and production cost factors. It is the same for the USA.

The reality is that within a relatively short time demand will be driving prices for milk back to the 2013 levels.

However, if New Zealand wants to experience the gains in higher salaries, more quality jobs, greater GDP, price stability, and insulation from commodity swings there needs to be some dramatic changes. The cooperative system is increasingly unable to transform the industry from a commodity based business to an added value, high return operation. The cooperatives are there for protection. They are farm focused, not market focused. The culture is misaligned. Their directors have more at stake back on their farm than they do in the market. There is so much of our GDP tied up in exporting cooperatives including meat companies it is having a negative affect on our growth when we could be doing so much better.

Fonterra remains primarily a good seller of bulk product with a few interesting options that add more value than cost. It uses its dominant position in the market effectively. However they are struggling with a debt/equity ratio that restricts their ability to take medium/long term risks. The deregulation of the industry in 1993 promised more. The Chinese have been able to enter the industry and buy milk partly because of an arrangement in the deregulation act that requires Fonterra to supply milk to new entrants and partly because there is no real competition for milk.

It is difficult to see how progress into added value will happen other than in small steps over a long time period. There is a need for new entrants, hopefully locally, with the capital and expertise to develop the myriad of opportunities there are in the sophisticated, added value market. Although there are many small players doing some exceptional things their collective impact is small. One of our best options is to milk our sheep as their milk has up to four times more nutritional value than bovine milk.

Owen Jennings

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