By Phil Beatson – Genetic Development Strategist at CRV Ambreed

Albert Einstein once said the definition of insanity is doing the same thing over and over again and expecting different results.

The need for change in the dairy industry has prompted me to revise an article I originally wrote back in 1999 that is still very much relevant today.

When it comes to the ongoing economic welfare of today’s farmers – the backbone of New Zealand’s largest industry – all sectors must work together to create change. As history demonstrates, without change, we will continue to get the same results.

In 1999 the payout was at $3.42. Back then, I stated that unless growth in production was controlled and emphasis placed on consumer products, farmers faced a payout of $3.10 (in 1999 dollar terms) by 2017. The fact that $4.40 today translates to $3.01 in 1999 dollar terms has prompted this contribution.

In a nutshell: I believe no one should be unduly surprised by the dairy payout being in the $4-$5 range, although this season’s $3.85 payout is a record low in CPI adjusted terms.

After all, in 14 of the last 22 years (if next season’s projected payout is considered), the CPI-adjusted payout has started with a $3, $4 or $5.

As illustrated in the accompanying graph, in only six of the past nine years and in two seasons at the beginning of the century has the payout started at $6, $7 or $8.

Source: Dairy Statistics 2014. 2015 and 2016 values are Fonterra’s forecast payouts.

These recent ’high’ payouts have been solely due to China’s demand while those in 2001 and 2002 were due to America diverting grain from dairy to biofuel production.

This trend has simply continued the long-running erosion of the payout; back in the 1950s farmers received $10-12.
Clearly, history shows us that unless there are unusual global events, farmers will continue to be faced with payouts which make farming economically unsustainable when farming practises require $5.50-$6 to break even.

Surely then, New Zealand dairy must do things differently.

We need to appreciate that when it comes to cross-country dairy trade, New Zealand is a very big fish in a small pond. In my opinion, that is not a comfortable position for the fish – especially in times of drought.

New Zealand farmers produce only three per cent of all cows-milk produced worldwide; yet our dairy exports make up about 40 per cent of all dairy products traded internationally.

Only seven per cent of milk produced worldwide is exported – that’s the small pool. Forty per cent of that seven per cent is contributed by New Zealand – that makes us the big but vulnerable fish.

Quite small blips either in demand for that seven per cent, or in supply, impact quite dramatically on New Zealand as the biggest trader in milk commodities.

So the question is, is that what New Zealand is and we are continuing to allow ourselves to be – a vulnerable commodity trader where returns for our farmers are at the mercy of the commodity world?

The CPI-adjusted payout to New Zealand farmers has at best remained static over the past two decades. Over that time, costs of production and compliance have increased markedly. Margins have been squeezed. Farmers have reacted as they have always reacted – by increasing scale and efficiencies.

New entrants have come in often at a corporate level; established farmers have expanded their operations in a bid to remain viable. But at the end of the day, economic sustainability is entirely dependent on a higher payout.

As I see it, again that will only be achieved when New Zealand stops being a ‘commodity tragic’ and becomes serious in adding value to supply the affluent world with high-quality consumer products.

Our big processors having the wrong KPIs isn’t great when it comes to the welfare of their farmer suppliers: success isn’t just being able to process ever-increasing production. Greater focus on measuring success as sustainable and high pay-outs is surely needed.

Could the first steps to achieve high payout be to curb production and divert more resources to value-add. I often wonder what the pay-out would look like if New Zealand farmers supplied only 1 billion kg MS rather than 1.5 billion kg.

Perhaps we had an inkling in February when processors predicted that this season’s production from New Zealand was likely to be one per cent less than last year. Auction prices spiked markedly but have declined since, with announcements that due to a favourable autumn, milk supply is in fact three per cent higher. It’s simple supply and demand. The buyers of our commodities breathed easy.

Some would argue that curbing milk production might be good for today’s farmer, but not for ‘NZ Inc.’
I’m not so sure, provided we become suppliers of value-added products: higher per unit returns for value-add may gross equal or higher total revenues from less milk; fewer cows would mean lower environmental impact; and those employed in the dairy industry would have a more certain working future.

New Zealand would certainly present itself in a greener and cleaner light to the affluent buyers of quality goods.
Our processors need to put greater investment into research and development to make high-value products.

It’s human nature to point the finger at the big players but, many sectors need to shoulder responsibility including successive governments and farmers themselves.

Politicians and the Commerce Commission have historically let New Zealand down badly. Aspects of the DIRA2001 are woeful.

Fonterra is obliged to pick up all milk offered to it. In itself this encourages proliferation of stainless steel and forces upon Fonterra (and others) a KPI that is killing the industry – the ability to process increasing supply.
Fonterra is obliged to provide rival processors with a regulated quantity of milk at farm-gate prices – what other industry does that?

And while Fonterra has to pick up milk from all and sundry, competitors can cherry-pick from willing suppliers – surely they should be regulated along the lines of having to accept milk at the same price from any willing supplier within the radius of their furthest supplier from factory?

Now that would create an interesting playing field.

As it stands, legislation gives Fonterra a way out regarding farmer returns and gives its competitors unfair advantages in terms of a cheap supply of milk and the ability to choose suppliers. Our politicians must act with vision and urgency.

Further, the Government needs to be more precise with targets they set for agriculture. I would hope when politicians talk about doubling production by 2025 they in fact mean productivity and not volumes of product.

But do they?

Do investments in large irrigation and water schemes really answer the issues New Zealand faces?
And the agricultural industry has allowed all this to happen. It allowed DIRA to proceed with all its flaws and we now powerless in controlling the major companies.

Farmers have allowed new milk into the system at a ludicrously low cost of entry; a share value based on stainless steel is peanuts compared to the value of industry structure and intellectual property that generations of farmers funded.

It is time for politicians, processors and farmers to act. The need for change has never been more evident.