Jersey Breeders Conference: A Future Without Peasantry

  • John Luxton
Food, Fibre, Biosecurity and Border Control

MATAMATA

"We should all be concerned about the future because we will have to spend the rest of our lives there" (Charles Kettering 1876-1958)

The Vision:
To have a constructive debate about the future shape our dairy industry should evolve to, we need to know what we want to achieve. What is the vision?

A prosperous industry: where farmers' hard work counts, and is rewarded;

- where farmers have control over your capital and earn a good return from it;
- where farmers' standards of living improve, not decline;
- that encourages innovation and attracts capital so that we can capture the maximum value from the consumer in the international market place;
- that is focused on commercial performance and not distracted by politics;
- that is market driven and has the right incentives;
- where farmers don't underwrite all the risks;
- where farmers don't just take a residue payment after everyone else has subtracted their costs and profits;
- that is out of the commodity trap and provides more value added jobs within New Zealand;
- an industry that your sons and daughters will want to join to build on your efforts.

So do we have such an industry? Well lets listen to some experts.

On the 14 October 1997, Sir Dryden Spring said in his Dairy Boards AGM speech,

"We achieved a record sales volume of close to 1.3 million tonnes of product an increase on the previous year of 258,000 tonnes. To put this increase in perspective, our total branded consumer sales are around 260,000 tonnes and it has taken us over 15 years of concerted effort to reach that volume" (page 3).

That is just 20% of production being sold as branded consumer sales.

Under your current structure and arrangements originally set up in 1926, after 70 years of concerted effort you now have only 20% of your product sold as consumer branded product. If you are to prosper, we now need to make changes more quickly to capture a higher return for the other 80% which is currently sold as commodity or to other organisations to add and capture value through to the consumer. And as the Dairy Board's Operations Manager, Mr David Pilkington, said recently in the NZ Herald, any structure, if it is to succeed commercially, must be market driven. He said and I quote, "No matter what the industry evolves to it has to become much more commercial. We have driven down the cost side but the natural evolution of where we are going is the real world of commercial principles" ( NZ Herald 4 March page E7).

His comments suggest an industry that is not sufficiently commercial, not sufficiently market driven, and not sufficiently in the real world of commercial principles. As the Dairy Boards Operations Manager, Mr Pilkington probably has more inside knowledge than most. He raises real concerns.

When we talk about structure it is important to remember that structures are a means to an end, not the end themselves. Dairy farmers should not be subservient to structures. Rather it is the structure that should be the servant of its owner - the dairy farmer. Can dairy farmerS say that this is the case currently?

Anchor General Products Manager, Ross Townsend said recently in the NZ Herald that the present payment system, where dairy companies were paid according to industry agreed standard cost models, encouraged 'feral' behaviour.

Currently "there is the opportunity for a dairy company position being taken, not an industry one," he said. The present system also did not deal well with dairy company innovation and was not representative of best commercial practice.

He said that the current approach had led to "the wrong plant being built for the wrong reason."

He suggested "we needed to develop a set of tactics which were less obstructive than what goes on now and which would put more money in farmers' pockets."

However, he pointed out that the new payment system, which is now being progressively introduced from June 1 would move returns much closer to market reality rather than the present cross-subsidisation of different milk products

With the new payment system, products will be divided into 10 commodity groups for which a free alongside-ship price will be paid to dairy companies.

But Mr Townsend points out a mere 6 percent were in the innovative product category where companies would be able to negotiate joint venture profit sharing arrangements with the Board.

"If we are serious about innovation this level is a message all on its own," the Anchor General Products Manager said.

From what Mr Townsend says, the new model is progress in the right direction. It will help reduce the huge incentive to produce commodities which only decline in price over time.

Gilbert Petersen, Acting Chief Executive Officer of the Manufacturers Federation also raised serious concerns about the dairy industry in a recent Independent article (Wednesday 3 June 1998). When calculating "value added" based on combining salaries and wages paid, plus profit, the dairy industry is a poor performer.

In the same period that almost $2.3 billion dollars was spent adding to fixed assets in the dairy processing sector ie spent on plant he says, "The increase in added value to the New Zealand economy `from the dairy and meat sectors together amounted to $98 million over the past six years to December 1997, a minuscule growth rate."

"On the other hand," Mr Petersen says,"the general metals engineering sector doubled the value it adds to $3400 million"

"The farmer's investment... has been going mostly into producing commodity products for which the terms of trade are still in decline." As the Anchor General Products Manager says, "the wrong plant is being built for the wrong reasons."

Mr Petersen makes a further point."The Dairy Boards right to license other companies wanting to use milk derived products is inhibiting investment in value added products. As a result our processed food exports have not grown for more than two years."

And you know as farmers we have grown the amount of milk we produce at record levels over the last two years.

The Manufacturers Federation recently identified a list of the fastest growing industry sectors in New Zealand. With farmers excelling and producing volumes of milk to record levels, you might have thought that dairy would have been on that list. It isn't.

As Manfed says," The good news is that our fastest growing sectors happen to be where know how and value added is at a premium, in the manufacture of electronics and electrical equipment, and in the making of machine equipment."

Combined, these two areas grew 25 percent more in the year ended March 98 than in the same period in 1997.

Some areas of top performing export industries other than machinery and electronics Manfed identified with annual growth figures were:

- sawn timber, up 20 percent
- synthetic resins and plastic materials, up 13 percent
- yachts, boats and ships, up 22 percent
- jewellery, up 32 percent
- sporting goods, up 23 percent
- clothing and knitted textiles, up 13 percent

In New Zealand, while we are growing volume, we don't appear to be growing value added. As a dairy industry we are essentially doing the equlivent of exporting logs. We are exporting opportunity and value that could be captured by New Zealand and its dairy farmers. As Mr Petersen says, the Dairy Boards right to license other companies wanting to use milk derived products is inhibiting investment in value added products. This is really the key issue of what the single seller is about.

The result of this is reduced wealth and lower incomes for New Zealand dairy farmers. In 1972, when I began dairy farming, I received over $6/kg ms in 1998 dollars. Now I receive around $3.50. At the present level of commodity sales, this may halve again over the next 25 years. Quite simply, dairy farmers still continue to be too much commodity traders.

Farmers, on their side of the gate, have doubled their average herd size to almost 200, increased production per cow, cows per acre, spent more capital and produced at record levels in response. Fluid milk production in the 1996-7 season reached a record level of 11,500,000 tonnes, around double what it was 20 years ago.

Much of this increase has been on the back of a transfer of existing dairy farmers assets to new farmers who have not met the real costs of

entry and then been subsidised to produce marginal product by existing farmers from their income forgone.

While farmers continually work to improve on their side of the farm gate, the performance and current structure of those who service the farmer and provide monopoly marketing services on the other side of the farm gate, needs to be further addressed.

To me, any export industry that gets asked to take a 20% drop in income when the trade weighted index drops around 20%, is not delivering as well as it could. Over the years we have heard rhetoric that payout would be higher, if only the dollar was lower.

The status quo leads to peasantry because it traps you in the commodity market, which will continue to decline. All commodity prices decline over time. Unfortunately, politicians cannot legislate for a higher price in the commodity market as commodity prices are set by who is prepared to sell for the least price. If having politicians and legislation meddling in your industry meant higher prices, as some who want to retain the single seller handicap state, my simple question is this. Why aren't prices going up for commodities and more importantly why isn't payout going up?

I would note that while New Zealanders see the Board as a single seller out of New Zealand, they are not a single seller into the international market place. In that market, there are many sellers of the commodity that the board sell and many buyers. Restricting opportunities for innovation and investment in New Zealand doesn't force a higher price.

As owners and operators of medium to large businesses you need more information. I would strongly urge you to ask questions of the dairy processing companies and the Dairy Board, who are now effectively a subsidiary company of them. You deserve answers from them.

Currently, you have little information and are outlawed by the current Dairy Board Act from making normal business choices. You have little ability to make decisions about your own investments off farm, yet a third to a half of your assets might now be off farm in your dairy factory, the NZ Dairy Board.

You have no way to know whether the next dollar invested by coercion in an offshore subsidiary, the Board, or your local dairy company, is going to give as good a return than if you used your money to reduce you overdraft or mortgage. And, of course, you are outlawed from having that choice anyway.

And you need to be treated fairly when seeking your own answers on performance. How many of you know the exact value of your investment off farm and what its rate of return is? I suggest that you ask the Board for specific figures.

Opportunities
So how do we improve things? How do we build from our current base to improve the business of dairy? I am pleased there has been debate on future structures over the last year and different models have been suggested. In the last budget the Government announced that it was giving the producer boards the opportunity to develop plans to enable the respective sectors to capture more value for the farmer and grower without the handicap of politicians in Wellington. You as dairy farmers need to take that opportunity.

It is important with any change that if at all possible, we maintain and grow the existing marketing infrastructure and support services. I don't want the current marketing, infrastructure and support services broken up for the sake of it. Such a change could result in New Zealand losing marketing opportunities in the short term until the industry adapted to the significantly different export marketing structure. Rather, I wish to see the current statutory single seller handicap removed to get the industry responding to the market, not central government politics.

You as dairy farmers need to consider all your options. Personally, I believe we will be best off if we remove the demestic political shackles that the Dairy Board has to operate under and allow them a fair opportunity to perform in the international market. Many of the Board's international competitors have far greater commercial freedom because they are not subjected to the same political interference. I think we need to stop outlawing more innovation, investment and access to international markets, that the current legislation prohibits. And I think farmers capital should be recognised by giving them direct ownership in their off farm assets. The disciplines and opportunities of a share market listing for some of these assets would be very positive. I think New Zealand dairy farmers should be trusted to make their own business decisions, like other business people in New Zealand are allowed to.

Mr Alan Tooth, Managing Director of the Australian farmer owned dairy co-operative, Dairy Farmers, recently said that his co-operative is looking very seriously at a public float with a decision by September this year. He says "there are lots of opportunities out there." But his co operative was being frustrated in taking advantage of them because of lack of funding flexibility available to co-operatives. Dairy farmers in other parts of the world, such as Irelands Kerry Group, have seen their 35 million pound off farm asset grow to over 1.1 billion in ten years. That is about the same size that the Dairy Board has grown to over 70.

Farmers should be allowed to build a profitable future from the current base. The Boards should be freed from existing constraints and allowed it to utilise its recognised skills and expertise to grow and harness new opportunities.

I believe that the timetable for change needs to be sooner rather than later. Each year that goes past is another year of falling behind.

As Sir Dryden Spring says it has taken over 15 years of concerted effort to get total branded consumer sales to the same level that volume increased by last year, that is just 20%. And as Ross Townsend says of having a mere 6 percent in the innovative product category under the new payment system, "If we are serious about innovation this level is a message all on its own."

For those of you who want to retain a political structure for your international business, I would suggest the best and most profitable single seller isn't one forced by politicians, but one based on commercial performance. One based on innovation, value added, "a brand" that is highly desired by consumers who are prepared to pay a premium.

Unfortunately, politicians cannot legislate for higher commodity prices as the price decline of commodities over the years shows. The current statute and its single seller is a major handicap weighing down the dairy industry's prospects, keeping us low cost commodity producers.

If we are to prosper, we now need to make changes so that we can quickly capture a higher return for the 80% of product which is currently sold as commodity or to other manufacturers to add value.

However, politicians do need to get involved on the world stage to progress trade access issues. This is a very important area across all our export sectors. Other New Zealand industries experience similar frustrations of limited access and tariffs just as the dairy industry does. The dairy sector is not unique in this regard.

In conclusion, I want to congratulate the Board on their efforts to now focus on the future without the handicap of central government politics. I know that, like me, they want to work towards a stronger and more profitable industry for the benefit of New Zealand's 14,000 dairy farmers who are working hard and investing large amounts of their capital and effort. The best reason for making constructive progress is your bank accounts

The status quo leads to peasantry. It is not an option. I want a future without peasantry. As Heraclitus said in 540 BC " nothing endures but change". I believe that the dairy industry has a rosy future if it addresses the challenges and opportunities that our fast changing world offers. The choice is yours.