Dairy Board Deregulation

  • Bill Birch
Treasurer

Thank you for the opportunity to talk to you today. I have, of course, followed with interest the comments made to this meeting on Wednesday by the Board's new chairman, John Storey, and his media comment since.

He states a clear objective which is obviously the right one, for dairy farmers, the industry, the rural community, and the economy as a whole: To improve the real earnings of dairy farmers and the dairy industry.

We are all aware that we stand on the brink of a new millennium. The indications are that the 21st century will open up vast new opportunities for us, but only if we are innovative and efficient enough to capitalise on them.

John Storey referred, for example, to the fact that the US cheese market is worth $35 billion New Zealand dollars a year. Our present share of that is, he said, through trade restrictions, just $83m-a quarter of one percent.

My advisors tell me the Board estimates the gain available to the dairy industry and the nation from a free trade agreement with the United States, from improved cheese exports alone, at something like $300 million a year.

For cheese alone, that would be equivalent to very roughly $20,000 a year per dairy farmer, on average.

In addition, the United States consumes 500 million kilogrammes of butter annually. Our share of it is around half a per cent currently.

The potential gain involved in trade liberalisation is enormous, for your industry and for the New Zealand economy.

It is particularly significant set against the frustration suffered by every New Zealand dairy farmer for 40 years, as a result of the on-going long-term decline we have had to endure, in the real world price of dairy products.

The health of the dairy industry is crucial to the well-being of every New Zealander. Dairy exports for the 12 months to November, at $4 billion, accounted for more than 18% of total exports.

Since 1994, New Zealand exports have grown by $2.3 billion and dairy products accounted for $1.1 billion of that gain. Real dairy export earnings have risen by 35% since 1985.

That rate of growth¾though well behind forestry, where real export earnings rose by 51% in the same period, and fruit, which rose 42%¾has been vastly better than the 32% fall for meat and the 68% fall of wool, since 1985.

As you all know, however, the rise in dairy earnings conceals a painful reality. Continuous gains in volume have been required, year after year, to offset a steadily declining trend in the real world prices.

Real export prices have fallen by 32% since 1960-61, and that trend has not so far been arrested. The decline registered between 1989-90 and 1997-98 was, for example, 22.5%.

To make gains in the teeth of falling real prices, the industry had to treble export volume since 1960. In that sense, individual dairy farmers have had to run cruelly hard, for a long time now, to make any real progress at all.

Under the pressure of declining real prices, average dairy herd size increased from 53 cows in 1950 to 197 cows in 1997, and will need to reach at least 260 cows by 2010. according to MAF projections.

A lot of farms fall short of that currently. In 1996, for example, 39% of dairy farmers had fewer than 150 cows and were already then, in MAF's view, even at moderate levels of debt, uneconomic.

The plain fact is that, on current trends, we face a probability that very large numbers of dairy farming families are going to be squeezed out of the industry in the years ahead.

We all know what that means. As the population falls in a rural community, its vitality is reduced. Education, health, and other services dependent on a reasonable population base start to come under threat.

People are forced increasingly to combine farming with off-farm work to make ends meet, at a time when local employment is declining instead of increasing. Families face growing personal stress and strain.

That sort of prospect is a matter of very grave concern to me. I know it is of equal concern to the dairy board and everyone in the dairy industry. I agree with John Storey in his focus on improving real dairy industry payout.

But no one should think that's easy.

World dairy consumption is forecast to rise only 1-2% a year from now through to 2005. Fortunately, much of that will come in the less protected markets of Asia and Latin America, and occur despite the Asian crisis.

Customers and our competitors are consolidating. The world's largest food retailer, Metro in Switzerland, has, for example, annual sales about $50 billion US dollars, more than 10 times the Board's turnover.

Monopoly rights to market New Zealand dairy produce are, therefore, very long way from conferring monopoly power on your industry, out there on the wider stage of the global consumer market.

Major supermarket customers are readily able now to specify with extraordinary precision what kind of product they want, and how much they are prepared to pay for it.

Competition on the supplier side is intensifying too. The geographic expansion of the European Union is expected to increase its arable area by about 30% in the foreseeable future.

Some New Zealand industry commentators say our dairy industry will have to maintain productivity improvements of at least 4% a year in the future, to retain present levels of international cost competitiveness and profitability, a major challenge.

I was immensely pleased, personally, to see some of these unpalatable realities recognised upfront and very clearly, in the address delivered by the Dairy Board's new chairman, Mr John Storey, to you here on Wednesday.

Recognising a problem is a necessary first step towards solving it. I can't do better than endorse his key remarks. Mr Storey said, for example, and we are in total agreement about these things:

"It's time to take the bull by the horns. The focus must be to deliver better returns to the dairy farmer." "We've got to stop blaming external circumstances. Some of it lies at our own doorstep. We have taken far too long to capture available efficiencies." "Our historic strengths will increasingly become history if we, as an industry, cannot get ourselves structurally organised to meet the global challenge." "When we had more than 15 relatively small companies, the Dairy Board was the glue which held the industry together. Aggregation is changing that." Clearly, he said, future deregulation is a possibility. If that's the price of a free trade agreement with the United States, for example, then we would, he said, be crazy not to consider it. John Storey laid out his own three-point plan for the immediate future, but he very realistically added that if a free trade agreement triggered deregulation, additional issues may very clearly need to be considered. If we don't lead change, he said, then change is going to lead us.

I was immensely heartened to hear those sentiments from a chairman of the New Zealand Dairy Board. For this country to succeed in the future, we must have, as a nation, that willingness to go out and meet the future head on.

It is extraordinarily difficult for the average New Zealander to grasp the pace of technological development today. We think of space exploration, for example, in terms of the gigantic billion-dollar rockets that put men on the moon.

I was at NASA's Jet Propulsion Laboratory in California a couple of months ago. Some spacecraft they are developing now weigh, including communications, cameras, instruments and propulsion, around 5 kilogrammes.

I held in my own hand a vehicle designed to land on asteroids, and leap about their surface like a flea, in 50 metre bounds. It weighs 2 pounds, and will launch in 2002 for the asteroid Nereus in a Japanese spacecraft called Muses-C.

That spacecraft will be powered using solar energy to generate electricity which accelerates positively charged atoms from four thrusters to more than 108,000 kilometres an hour. But atoms have, of course, a very small amount of mass.

The total thrust of that motor at full power is 120 millinewtons. That's 27 thousands of a pound, equivalent-get this!-to the weight of a single sheet of paper lying on the palm of your outstretched hand.

Yet that tiny amount of power, consistently applied, will drive the spacecraft to asteroid Nereus, land the craft on the surface, and then bring it back, to the earth again, with soil samples, by 2006.

This is the quality of the imagination and know-how routinely brought to bear now, by leading edge people around the world, to extract extraordinary levels of competitive value for money from scarce physical and financial resources.

That is, in my view, a fair measure of the quality of thinking that your industry is going to have to match in the future, to stay ahead of its competitors, in the world dairy business. The pace of change is going to be amazingly intense.

Even in the last 30 years, at much lower rates of global change, the cumulative difference over time, if you don't keep pace, is stupefying.

Thirty years ago, the Dairy Board and Nestlé were about the same size. Today, if our dairy farmers held shares in Nestlé instead of the Board, they would each own, on average, about $2.2 million worth.

In fact, as a result of the different growth rates of these organisations, the average dairy farmer's holding in the current New Zealand Dairy Board is worth $80,000, 4% of the gain Nestlé delivered in the same period.

Obviously, I recognise that some value has been capitalised into the price of dairy land. But that creates problems of its own. And the amount, I venture to suggest, falls, in all probability, just a little bit short of $2.2 million per farm.

A recent study estimated that New Zealand dairy farmers receive 14-19% less for manufacturing milk than their New South Wales counterparts. If that's true, then certainly it is food for thought for everyone in our own dairy industry.

Could an outcome of that sort be connected, for example, with John Storey's examples on Wednesday of available efficiency gains worth up to a couple of hundred million dollars taking five years or more to achieve? I want to be quite upfront with you.

The Government cannot change world prices. Nor can we sort out your efficiency problems. That's your job. Ours is to establish a framework conducive to international competitiveness, as a foundation for sound commercial action.

Beyond shadow of doubt, the Government has, in the 1990s, done a superb job in that respect, on behalf of both urban and rural producers. The pillars of the framework we have established include, to name just a few examples:

The Employment Contracts Act The Reserve Bank Act, which laid the foundation for an economy where inflation no longer continuously erodes our competitiveness A legislated timetable for the total elimination of tariffs Major savings through improved competition in electricity Port reform Competition in accident compensation The modernisation of telecommunications The huge funding we provide for public-good scientific research, including $61m a year currently for animal industries and forage, $51m for horticulture and arable, $23m for forestry and $7m for fish. Food safety, where our people benchmark the highest standards in the world, then build programmes to ensure that we exceed them.

The Government cannot change world dairy prices any more than you can. But in roles like those above, we have made a contribution of irreplaceable value to the on-going success of New Zealand exporters, and the total economy. Indeed, it's not too much to say this nation owes its safe passage through the global turmoil of the Asian crisis and our current recovery to the quality of this Government's policy work, and the framework set in place as a result of it.

But you are the people closest to dairy action. Though the fate of your businesses has a vital impact on the nation, yours is the money most at risk in this industry, so you have the sharpest incentives to get it right.

The Government has been involved so much over the years, solely because this industry enjoys a statutory monopoly over the marketing of New Zealand dairy products, and monopolies will always require Government regulation.

Monopoly deprives suppliers and investors of normal commercial safeguards. If those people get a raw deal, they are locked in. They can no longer walk away and seek a better deal from some other more efficient rival organisation.

It is impossible for Government to grant the privilege of a monopoly to any organisation, then walk away, and say: "Do what you please with it. You have untrammelled power now over your suppliers and your investors."

As long as monopoly exists, Government has no choice. It must remain involved. if only to guarantee fair treatment for people deprived of normal commercial rights, by monopoly power which the State has sanctioned.

The Government becomes able to walk away from detailed involvement only when the safeguard of choice has been set in place to discipline the commercial abuses which may otherwise too readily accompany monopoly.

Government administrations in countries like the United States take monopoly very seriously as a denial of consumer rights. I was last in the States in October. I met representatives of the US Treasury at the highest level.

I argued very strongly for improved dairy access to the US market, as a matter of fair treatment. Their instant response was very simple. "But you don't offer us fair treatment. Your exports are in the hands of State sanctioned monopolies."

That's a hard argument to rebut while our boards boast in public that it's their aim, through single desk, to use their monopoly to extract prices higher than they might otherwise obtain in fair competitive trade, from customers.

You have to ask whether you yourself, as a customer, would see that as the right approach to command respect.

The competitive commercial model seeks, by contrast, through superior innovation and efficiency, to offer customers a better deal than rival suppliers and thereby win, on merit, a growing share of their business.

If the dairy industry wants access to the US market, then it will need to think about that difference, and whether it is prepared in future to operate on a basis of commercial excellence, without reliance on its present statutory prop.

That's a decision for you, not the Government. We are not going to push you. We are not going to intervene. But obviously, we intend doing everything in our power to deliver a free trade agreement with the United States.

The prospects look surprisingly good. Moreover, it's in the nature of the thing that, if it does start to roll, then at a certain point, it may suddenly come on stream quite fast.

Clearly, the Government cannot, in those circumstances, afford to be caught short without having done the homework necessary to analyse all the relevant issues..

Your industry and the community would expect us to have done that well in advance, so that we could move as rapidly as need be, to take advantage of such a major opportunity, for you and for the rest of the nation.

In that case, the gain is such that dairy farmers too could very badly want the industry to capitalise on the agreement without delay. Like us, you have gains to make if you have all your homework in place, ahead of the play.

You may well, as John suggests, see such an agreement as worth a lot more to you than the single desk. We do have, therefore, a community of interest.

I am very happy to recommend to the Government that we accept John Storey's invitation to work with the board and the industry, without prejudice, towards a more commercial future, as a means to higher levels of payout.

It would be a straightforward matter for the Government and the Board each to appoint teams of highly competent people, to work together to define appropriate issues and answers, as a means to a more successful future.

That work would not, of course, commit either the Government or the Board or the dairy industry. But if they came up with anything worthwhile, it would give us all something to think about, and advance our preparedness.

I would not be happy undertaking that if I felt that, up front, ad hoc limits were being placed on the thinking of those two teams in identifying, exploring and reporting on what they felt to be ultimately the most relevant issues.

Nor would the Government be able meantime, while the industry retains a State sanctioned monopoly, to walk away from its obligation to remain involved as the ultimate guarantor of fair play in the business of industry regulation.

But in as much as these teams would be defining issues for the future consideration of the industry and the Government, if that has the capacity to help, let's get on with it at once, and see what it produces.

If I read John Storey right, he was saying on Wednesday that the issues of critical relevance to future success are not limited to the question of what would we do if a US free trade agreement became available to the industry.

Neither you nor the Government can afford to be caught short in any significant development of relevance to the future of the industry. We need to think matters through in a wide-ranging way, as our best ultimate safeguard.

We might call this exercise, for example: Future-proofing the New Zealand Dairy Industry. That's in effect what it should be about, as I see it.

Doing that on a joint Board/industry and Government basis could very well be far the best way to optimise the quality of the answers which emerge from that exploration of the issues the future may throw up for all of us.

You have my total personal commitment to work with the industry and the Board to identify the issues in front of us, as we meet the challenges ahead.

By working together, using our best people, I believe we have every prospect of opening up a new era, marked not merely by dramatic increases in dairy export volume, but also by fundamental improvements in basic profitability.

That would be an enormous achievement for all the farmers and families upon whom this industry depends, and an enormous gain for New Zealand.