Prosperity through Integrity
A Green Party perspective on the long term success of New Zealand's dairy industry
Westpac Northland Dairy Development Trust Conference
10 November 2009
Fonterra Jordan Valley
Thank you very much for having me here today to give a Green Party perspective on the economic future of the dairy industry. It's great to be in the north and it's great to be talking with dairy farmers as I often do as I travel our country. Dairy farmers play a vital role in New Zealand both economically and socially and I have been impressed by the efforts being made by very many farmers to be excellent guardians of our country.
The question I have been asked to address today is: "How can the dairy industry drive the economy and stay at 8% of GDP and 25% of [merchandise] exports while still meeting the environmental expectations of the public?"
I think this is a good question, but I would argue that this comes down to a slightly different question which is:
Is the aim of the dairy sector to maximise profits or to maximise milk production?
Or to pose it in a slightly more extended version: is the aim of the dairy industry to maximise profits within environmental limits, or is the aim of the dairy sector is to maximise milk production at the lowest price with the consequent environmental impacts?
I actually think this is the real choice facing the industry.
Because it seems to me that, for a long time, maximising profits and maximising production volumes were seen as pretty much synonymous within the industry. And I believe that these objectives are now actually in opposition.
What I intend to do today is critique the maximising production approach and then look at the alternative as I see it.
Cheap bulk commodity exporter?
Now I want to recognise the importance of producing commodities. In a finite world, with finite agricultural land and with a growing population, the food producing business is a good place to be. It is one of the paradoxes of our time that as we hit the limits of the planet's capacity to carry us, countries involved in commodity production are doing pretty well, against the post-war long-term trend for commodity prices to drop. As we come out of a period of global financial crisis, the commodity producing countries are being seen as a good bet by the international currency traders who have artificially pushed up our dollar. It seems that while the currency trading vultures themselves have no useful purpose, they do at least recognise those who produce food and fibre have a purpose that markets will continue to value.
However, aiming to produce low cost commodities that are simply sold into the global bulk commodity markets is not a good strategy. The future of the dairy industry, and indeed the future of the New Zealand export economy, is not in low cost commodities.
There are three reasons that maximising production of low cost dairy won't maximise long-term sustainable profits.
Firstly, in the process of maximising production, we will undermine a key component of our profitability, which is NZ as a brand of integrity. It will be undermined by its own environmental impacts. I will come back to this when I look at the alternative. Secondly, as stocking intensities increase so do input costs, which cuts profit margins. Thirdly with our land and labour costs we are unlikely to be an effective long-term competitor on price and other countries will undercut us.
For a long time Fonterra has largely taken the view that the objective of the NZ dairy industry should be to maximise production. The value added component of the payout is there but it is currently less than 6% of the total - $0.35 out of $6.05 per kg.
Fonterra has encouraged growth in the production of milk solids by 3% to 4% each year. According to Dairy NZ, in the last decade, the quantity of dairy solids processed in NZ grew by 4.4% per annum on average. This period has also coincided with a very significant decline in water quality and increase in greenhouse emissions that are a result of dairy activity.
Annual growth in production of 4.4% means doubling production about every 16 years. This would mean doubling it by 2025 - 1.4 billion kgs of milk solids in 2008 and 2.8 billion kgs in 2025.
If we are to double milk production over the next 16 years the environmental impacts will be devastating. Is it really feasible that by 2025 we can double milk production without further environmental degradation? We already have the situation where many of our rivers are unfit for stock water let alone swimming.
A strategy which aims to increase profits by increasing production faces natural limits - there are limits as to how much pollution our rivers and lakes can handle, there are limits on access to water. And it threatens our brand as clean and green and one of integrity. If we go down this route of seeking to forever increase the production of cheap milk we can kiss our clean and green branding goodbye, and with it some of our competitive advantage.
There are those who say that we can grow the industry and reduce its environmental impact at the same time. This is a dubious proposition. Every report on water quality in New Zealand has pointed to the role of intensification in driving environmental decline.
We know that there are ways we can address the impacts of intensification such as:
• Riparian planting and fencing with larger set backs
• Increased effluent storage capacity
• More reliable effluent dispersal systems
• Use of stand-off pads and herd homes in wet months
• More rigorous resource consent enforcement
• More research into ways to reduce water pollution and cut emissions.
The Greens favour pursuing all these measures but we also live in the real world and in the real world there are limited natural resources and a limited capacity to absorb pollution.
As Dairy NZ puts it: "The primary means for increasing dairy production, is either by intensification or conversion of other land uses, both increase the environmental footprint for dairy farming. This is a fundamental dilemma for the industry."
With the best will in the world, increasing production and intensification cannot continue without increasing environmental degradation. This is a genuine dilemma that the industry is trying to ignore.
The second issue with a strategy based on forever increasing total milk solids is the problem of rising input costs. As intensity has increased in the dairy sector the use of fertiliser, electricity, water, external feed, and fuel has increased, along with the greenhouse emissions per unit of production and vet bills. And land prices will continue to escalate as well. Just as milk prices have responded to the commodity boom on a stretched finite world, so prices of input commodities have increased. And that dynamic won't go away.
For example the dairy sector is currently dependent on phosphate inputs - the phosphate comes from Western Sahara which is illegally occupied by Morocco. The only African country not part of the Organisation of African States is Morocco because the OAS calls its occupation of Western Sahara illegal. Now why are we importing phosphate from an occupied country? Because we can't get it anywhere else in these volumes - China has closed up shop and won't export phosphate. This arrangement is politically fragile, morally dubious and difficult to sustain over time.
Of course the price of urea is linked to the price of natural gas which spiked last year because the price of gas is in turn linked to the price of oil, which is rising again as the global economy recovers. As the price of oil increases so will the price of other fossil fuels such as gas, and even coal, noting that Solid Energy hopes to go down the coal to urea path, and so the price of urea will go up. More intensive dairying requires more urea and hence faces higher unit costs.
The price of external feed has faced upward pressure globally but the New Zealand dairy industry has been able to respond with the extensive use of palm kernel, which has been cheaper than grain.
PKE is imported from south-east Asia and is totally unsustainable and has already caused damage to the reputation of the dairy industry internationally. I suggest this is not a viable long-term strategy either.
In addition the dairy sector will, sooner or later, face the global price on its greenhouse emissions and these global prices are only moving in one direction in the medium term and that's up. More intensive dairying has higher greenhouse emissions per kg solids than less intensive dairy production, and hence the unit costs of intensification rise.
It is worth noting that there are real risks for our exports if we were to embrace a model of ever increasing production and emissions. Eventually our trading partners will demand that New Zealand plays its part in reducing global emissions or suffers the consequences. Even Tim Groser was forced to admit last week that NZ could face unilaterally imposed border tax adjustments in the next five to eight years if we were to walk away from climate change negotiations. Our trading partners will add a carbon charge to our exports if we don't take on our share of international obligations. This will, it goes without saying, add to the costs of the dairy sector.
Rising land prices are the other major driver of costs. I believe that we need to look at how a capital gains tax could dampen speculation in rural land and hence take some of the pressure off farmers. We also need to look at changing the tax treatment of urban investment properties so that we can take some of the pressure off the Official Cash Rate to control inflation coming out of the housing sector - this would put downward pressure on interest rates and the NZ dollar, both of which would help the dairy sector. But these are a little to one side of my message today.
More central is that, as Dairy NZ concluded in their 2009 - 2020 strategy document, other producers, both pastoral and intensive, are beating us on price and are likely to continue to do so.
Thus, an economic strategy which aims to continue to exponentially increase dairy production, with associated increases in intensity, is not a viable strategy. This is a conclusion you come to whether you look at the question from the point of view of environmental limits and the associated brand and reputational issues; or whether you look at it from the point of view of rising input costs; or from the point of view of New Zealand's ability to be the lowest global cost of production.
We need an alternative strategy.
Fortunately, there is a rising awareness of these issues.
Fonterra used to say it didn't make any premium out of the clean and green reputation of New Zealand, that it was just a commodity producer. Whenever the Greens spoke out about water quality and the damage to our clean and green brand Fonterra would yawn. That was before melamine. After that tragedy in China, middle class Chinese mothers sought out New Zealand dairy products and Fonterra's sales increased. Fonterra hasn't been quite so outspoken since clean and green gave it an advantage in the Chinese dairy market. It was a salutary lesson.
I read a speech by Tim Groser the other day where he accepted that customers do care about issues of quality , indeed he used the term "customers as the new trade regulator". In that speech Groser accepted that competing just on the basis of price isn't enough.
Dairy NZ's most recent strategy document starts to address this issue when is says: "There is a clear tension between ambitious production and productivity goals and the reduction of dairy farming's environmental footprint." However, recognising a tension is not the same thing as acting on that tension.
Prosperity with Integrity
So what does the alternative to exponential production growth look like?
Our vision for the New Zealand economy sees 'brand New Zealand' as a quality brand. Our vision is one where consumers pay a premium for our exports because they come from New Zealand and because consumers trust New Zealand.
Peter Townsend, CEO of the Canterbury Chamber of Commerce, has some interesting things to say on this.
"New Zealand cannot and should not compete internationally on price. The world is increasingly looking for products of high quality and integrity. As Asian markets demand more and more high quality food products, and as New Zealand can justify its positioning in world markets with respect to the safety and integrity of those foods, we can position ourselves as a high priced, high integrity, country of origin."
We need to take advantage of our isolation. In a world awash with low quality product, our isolation can be an advantage whereas traditionally we have viewed our distance as a disadvantage.
We have the distinct advantage of being nuclear free.
We have the advantage of being free of genetic engineering. There is currently a proposal for GE cows at Ruakura. I must tell you that if this is approved and the word gets out that NZ is using GE cows it will not help our brand.
If you're a parent in North America or Europe or from the middle classes of Asia, cost is not your big issue when you go to buy food for the kids, but safety is. If NZ product costs five dollars, instead of one dollar for generic food from god knows where full of god knows what, you're going to buy the brand that's safe for your kids.
You want food free from chemicals.
You want food that was grown naturally. You don't want factory food grown with hormones and pesticides and herbicides and industrial fertilisers.
Governments have tied their hands with a series of interlocking trade treaties. It has become harder for governments to insist on particular production methods, but it's what consumers and citizens want, so smart producers will do it anyway.
Again, Dairy NZ recognises this fact:
"..the expectations of foreign consumers are increasingly likely to be a factor in determining the acceptability of New Zealand dairy products. Key areas of risk include animal husbandry practices, and also perceptions of the environmental impact of New Zealand dairy farming."
Brand New Zealand can have a great story to tell.
We can have a story of grass fed dairy cows, clean rivers, and good animal welfare standards.
Organic production is already getting a premium of about $1 per kg of milk solids. The total value of organic production in NZ is now around $500m with exports of $120m. It is growing rapidly.
We want to have a story about New Zealand production which allows the consumer to trace back the product to the farms where it all started.
It's about trust and integrity. New Zealand is seen as one of the most honest countries on the planet, and it probably is. But if brand New Zealand is saying we're all clean and green, and yet consumers hear stories about rivers full of effluent, then we will lose their trust.
Our successful 100% pure campaign relied on many pictures of clean water. And yet we know that much of our water is heavily polluted. Most of our lowland rivers in pastoral and urban catchments are unsafe for swimming at various times of the year because of pollution. How long until the rest of the world knows this too?
We have a great story to tell about renewable electricity production - renewable electricity that we can use to run our farms and processing plants. We could add a great story about lowering greenhouse emissions by pursuing low intensity farming models.
Integrated with the rest of NZ Inc
If you want to build brand New Zealand then it needs to be across the board. Why is the tourism industry upset about mining in national parks? Because it undermines 100% pure.
Likewise, the dairy industry is affected by the fishing industry's bottom trawling. Out on the Chatam rise New Zealand trawlers drag giant steel nets along the bottom of the ocean as it tries to catch hoki. In the process it is knocking over thousand year old coral - it is like trying to catch a wood pigeon by knocking down an ancient forest with a giant net.
What does this have to do with dairy? Well in the UK one of the supermarket chains decided only to stock sustainably caught fish, and of course they refused to stock New Zealand hoki. The supermarket's market share doubled from 4% to 10%. In the US there was very negative coverage of the NZ fishing industry. If the New Zealand brand is damaged by the greed of the New Zealand fishing industry it will impact all exporters.
We need to find a way to make brand New Zealand a brand of integrity.
The Greens believe that we can achieve prosperity with integrity. We can have a sustainable food production system that achieves a premium in our international markets.
There is another aspect of the dairy industry that is worth touching on and that is the cooperative structure.
The dairy industry has played a vital role in our economy and its collective ownership structure is part of that. There was a time when it was looked down on to be a dairy farmer - all that early morning rising and bloody hard work in the milking shed. So like untouchables dairy farmers banded together in the cooperative, like a bunch of socialists.
But the co-op worked. The sharing of knowledge that the cooperative encouraged has been vital to the spread of new ideas and technology throughout the industry - of course you help your neighbour when you are in it together and this has helped drive great improvements in productivity. While the dairy industry went forward in leaps and bounds, other sectors competing amongst themselves fell by the wayside as farmers were divided. Meanwhile another successful sector is kiwifruit which also has a unified industry structure . It is an instructive lesson.
I don't really like all the dirty competitors that various ex-ministers from the National Party have set up to undermine the collective - the private overseas owned companies like Open Country Cheese - it is economic sabotage if you ask me.
And it is striking that the current attempt to destroy Zespri is being led by Turners and Growers, which also has very close associations with the National Party.
The introduction of OCC and the rest of them blocks horizontal technology transfer because it means that there is no longer a shared vision and shared purpose and shared community, and in the long run it will limit the success of the dairy industry.
And if one of the cowboys entering the industry exports a batch of contaminated milk, it will be all dairy farmers and indeed all exporters of quality primary products that suffer.
So the last thing I wanted to say about the future prospects of the NZ dairy industry is hang on to the collective!
We have to make some choices about the future of the dairy industry in Aotearoa New Zealand. Many have recognised the tension between environmental credibility and ever increasing production. But not many have the courage to speak the truth about the answer. The truth is that we can't continue to go down the path of a cheap commodity producer and expect to prosper, expect to have a quality of life and a decent standard of living.
We need to make a conscious decision to pursue a different path, one that respects environmental limits, one that doesn't seek to double production every 16 years, and a path that seeks to make New Zealand a brand of integrity.
Building a brand of integrity, building brand NZ won't be easy. It will require us to adopt an vision for how we see the New Zealand economy developing. But if we can manage it, then we can avoid ruining this land through ever increasing intensification. It means that we can pass on to our children both a decent standard of living and a decent quality of life. It means that we can proudly say, 'we're passing on this land and this economy in a better state than we found it'.
And it means that we can have prosperity through integrity and prosperity with integrity. And that is a legacy we could all be proud of.
Tēnā koutou kātoa.