NZ Dairying - a case of “Profitless Prosperity”??
January 4th, 2010For some time now I have been thinking that the NZ dairy industry is in fact a case of profitless prosperity - i.e. there is no money in cows.
The NZ Listener (12/12/09) ran a story on just how marginal the NZ dairy industry really is:
- 56% of income is spent on operating the average farm
- 28% of income is spent on interest
- 16% of income for depreciation, tax, capital expenditure, principal repayments, living expenses
Importantly, before the latest Fonterra payout increase “there was no money left at all for depreciation, tax, capital expenditure, principal repayments, and drawings” according to Tim Deane, Fonterra’s General Manager or Shareholder and Supplier Services.
To summarise (and this might sound like heresy), it appears the the NZ dairy farming industry is buggered and we need to use our land for something more profitable!
ADDITIONAL COSTS AND DAIRY FARMING SUBSIDIES
The numbers mentioned by Tim Deane are not the end of it because the numbers do not take account of direct/indirect subsidies to NZ farmers.
Environmental costs - Run-off is polluting many parts of NZ - for example, 70%+ of the the Waikato waterways are considered toxic. Remediation of the Taranaki waterways is way behind schedule. Lake Rotorua is a settling pond. Lake Taupo is well on the way to becoming one. The Manawatu River is one of the most polluted Rivers in the world. So, aside from some notable exceptions, the dairy farmers are not paying to clean up the mess their cows make each day. The NZ taxpayers are! (To put this into perspective, NZ cows crap as much each day as 150m humans WITHOUT toilets).
Subsidised infrastructure - For example, in the South Waikato, Carter Holt (privately owned by NZ’s richest man, Graeme Hart), has turned 25% of Kinleith forests into farmland. Urban ratepayers are underwriting the additional roading etc required to service what are intensive, and arguably marginal, dairy farms.
NZers paying Overseas Prices for Dairy Products - NZers tend to pay more for dairy products that overseas customers - i.e. NZ-only shipping costs are way lower, but we pay the same prices as someone on the other side of the planet. (To be fair, the Dairy farmers are not the only ones - NZers have been been ripped off for decades by NZ exporters e.g. the Building Products industry. The practice is euphemistically called “marginal pricing”).
Image Costs - This is the cost of the world realising that NZ is not 100% Pure. The estimated costs - according to NZ Government estimates - we stand to lose 2/3 of agricultural export earnings and 3/4 of our tourism earnings - i.e. we could lose more than we gain from dairying. (From a risk mitigation perspective we should drop/change dairying - it’s risk profile is potentially catastrophic)
Free-Low Cost Water - Farmers get water for free or low cost. In modern times, it is arguable that a few well-connected farmers are taking the water from future generations of city dwellers (e.g. Canterbury farmers taking water from aquifers used by Christchurch). And of course the land that the few farmers are wanting to irrigate is not sustainable for dairying and dairying uses a heck of a lot more water than arable crops etc.
R&D Subsidies - The NZ Government invests millions of dollars each year on dairy related research. The traditional argument is that it will help make the country more money. Based on the numbers ex the Listener this argument does not hold water (excuse the pun). And now the NZ Government is spending, millions of taxpayer dollars on reducing the carbon footprint of dairying. Sure the intentions are good, but taking account of the marginal returns for dairying, would it not be more cost-effective to get rid of the cows and start growing crops and/or trees??? And the final comment regarding R&D - what other sector of the economy gets such a huge R&D subsidy - hi-tech industries don’t. And with the recent changes to NZ Trade and Enterprise programs, small NZ-owned businesses don’t.
MAKING REAL MONEY OUT OF MILK - PART #1 - GO ORGANIC
If you accept that dairying does not make any money, besides shooting all of the cows and turning NZ into a big garden, the smartest first step is to turn our dairy industry into a 100% organic dairy industry.
Sure that strategy will annoy a lot of existing players - from the fertiliser companies to the chemical manufacturers - hell even Monsanto will probably lose money as a result. The pressure on the NZ Government will be immense - after all most of the people producing the pollutants we use in NZ are overseas owned corporates. And they will no doubt whine to their respective governments which will in turn do their best to play ducks and drakes with our lot in Wellington. (Some NZers will probably help our foreign competitors - remember Tony Gibbs of Turners and Growers having a go at Zespri)
The logic behind 100% Organic is clear:
- The world WANTS organic dairy products
- We can command better prices for organic products
- And organic products coupled with strong anti-dirty-dairying legislation, could head off what the Government already acknowledges could be a major disaster for NZ - the loss of 65% our agricultural earnings and 75% of our tourism earnings.
And the REALLY good news:
- Organic products earn a premium price per kg (Fonterra currently pays a 20% premium)
- NZ Dairy Farms could be 100% Organic within 5-10 years
- Organic dairy farms are less intensive (therefore better for the environment)
- Organic dairy farms make higher net profits than chemical-based dairy farms
MAKING REAL MONEY OUT OF MILK - PART #2 - NZ-OWNED MARKETING CHANNELS
From the outset NZ farmers have been production orientated rather than marketing orientated. For well over a century we were England’s farm. What we grew, UK-owned companies like Vesteys distributed.
The Vestey relationship was not too different to the way the potato industry works in Australia. There, potato farmers get about $200 a tonne from processors. The processors (usually McCains or Simplot) retail their products at $9000 or more. (See http://users.intas.net.au/reshob/media/pot1.htm)
The problem here of course is that there is always downwards pressure on the prices NZ dairy farmers can command. Perhaps not quite as bad as Tasmanian potato farmers, but it is there. And anyone that has done Marketing 101 knows that you have very little pricing flexibility when you are trying to sell an unbranded commodity.
At first glance, it looks like Fonterra has worked a bit smarter than the Aussies when it comes to capturing the downstream value of NZ dairy products. Fonterra is actively investing in processing. In some cases it has purchased existing operations from major customers like Nestle. In other deals it is entering joint ventures with companies like Nestle. And in other deals, Nestle is buying Fonterra processing capabilities.
So who does own the retail brands??
Well, in most cases it is NOT Fonterra. In fact from what I can make out, wherever Fonterra has a retail brand, someone else buys it (Nestle grabbed Fonterra’s Australian ice cream brands), or the brand (e.g. Anchor in the UK) becomes part of a processing joint venture. It seems that Fonterra has decided to be a production orientated price taker rather than a marketing orientated price maker.
Westland Milk Products does things differently. It sells it’s own branded products. It is a MARKETING company that sells milk products.
Westland provides about 1% of the world’s dairy products. Fonterra is over 30 times bigger.
Imagine what a hugely positive impact there would be on our economy if:
- Westland taught Fonterra how to market retail products rather than commodities
- All NZ Dairy products were 100% Organic and generated a 20% premium
- We secured futures for our non-dairy agricultural exports and tourism by eliminating dirty dairying
… not to mention better use of our water resources etc. (And imagine if the Fishing and Forestry sectors shifted their thinking from production to sustainable marketing models.)
SUMMARY
We urgently need to restructure NZ Dairying. In the next 10 years we need to:
- Make NZ Dairying 100% Organic
- Market NZ Dairy Products, not sell unbranded commodities
Right now, with a few notable exceptions, we are doing what we have always done - slavishly increasing production while offshore interests make the real money. If we keep on doing what we have always done, we cannot expect anything to improve.
Right now:
- 28% of NZ Dairy GROSS revenue goes to the banks - most of which are overseas owned.
- Any significant trading margins - i.e. the super profits - go to our offshore retail “partners”.
- If we double our production, we will not double our profits - but the offshore multinationals will.
- If we get nailed for dirty dairying, we will lose huge numbers of jobs in tourism and agriculture.
If things do not change, you can expect ongoing sales of NZ-owned land by foreign-owned banks to multinational corporations. Foreigners already own 75% of our share market - if we do not change what we are doing with NZ Dairying, within a few decades foreign corporations will probably own 75% of our farms.
And that, dear reader, means that if we do not change what we are doing, most of our grand children will end up as landless, and powerless, peasants.
