No need to copy Kiwis

Australian dairy doesn’t need a government-imposed ‘industry champion’ to succeed

IT DIDN'T attract media attention, because there was no crisis to report. The Productivity Commission’s research report on the dairy industry, released last month, simply reported that nonintervention was working well in the industry, and that the problems faced by the dairy industry are the same as the problems faced by many others.

The key contribution of the report is its debunking of the idea, raised by a handful of the people who sent in a submission, that the Australian government should control the industry like the New Zealand government controls its dairy industry, through the regulated ‘industry champion’ Fonterra.

It is true that New Zealand’s dairy exports have grown more than Australia’s since the Fonterra model was created in 2001.

And the Productivity Commission is the first to acknowledge that the grass is greener on the other side of the Tasman.

But they mean it literally. New Zealand’s volcanic soil is shaky but rich. And it rains a lot. So in peak season, New Zealand can produce a lot of milk per hectare. Amongst other things, this means that transporting milk for processing is cheap, and that it is economical for processing to be done on a large scale.

In contrast, Australian dairy operations span each state, and only Tasmania and Victoria can rival the dairy-friendly conditions of New Zealand. (A silver lining comes from Australia’s superior ability to produce milk year round, which means that our smaller plants operate closer to capacity through the year.) Moreover, many dairy farming areas in Australia suffered drought in extended periods from 2001.

The Productivity Commission goes on to explore the remaining reasons behind New Zealand’s higher growth in dairy exports. And it’s not good news for our Kiwi cousins.

As a result of the now fading mining boom, the value of Australia's economy and exports over the last decade have gone through the roof, with growth far exceeding that of New Zealand. As a consequence, Australian wages have grown faster than wages in New Zealand. Competition for land has become more intense, and our exchange rate has appreciated markedly, making imports cheaper.

These are all good developments for the Australian public, but they have squeezed margins in the Australian dairy industry and ensured that its share of the economy has been static.

In contrast, the New Zealand dairy industry since 2001 has been unimpeded by surrounding success stories — the usual rivals of sheep and forestry have been giving up resources rather than competing for them. The New Zealand dairy industry has soaked up the slack in the New Zealand economy, and dairy exports have grown as a result. Achieving dairy export growth because the rest of the economy is stagnant is not an experience that we should aim to repeat here.

Another reason for the strong export growth of New Zealand dairy is its lack of domestic demand – another feature from across the ditch that’s not worth replicating. The small size of New Zealand means it would be fairer to compare New Zealand’s performance with that of Victoria, which has performed strongly since 2001. In fact, Victoria has lower costs of raw milk production than New Zealand.

The Productivity Commission finds little evidence to suggest that New Zealand’s heavily-regulated monopoly model has strengthened their dairy industry.

The Commission points to huge risks to dairy industry participants from putting all their eggs into one basket. If Fonterra’s reputation takes a hit, then the entire New Zealand dairy industry takes a hit.

And, given the guarantee that Fonterra milk is bought at a regulated price, there is huge risk that Kiwi bureaucrats will set the wrong price for milk. When we regulated wool prices we ended up with a huge wool stockpile. But at least wool isn’t perishable.

The Productivity Commission does discover problems confronting Australia’s dairy product industry. But these problems come from outside the industry, and are hurting industries across the economy. They are the problems of rising transport costs (driven in part by retrograde industrial relations changes), skyrocketing electricity costs, and myriad regulations covering food and agriculture.

Australian industry has traditionally enjoyed low cost energy. However the Productivity Commission finds that since 2006 our retail electricity prices have risen sharply, such that they now exceed prices in the UK, US and New Zealand.

This is particularly damaging for the more energy-intensive parts of the dairy product industry, such as the producers of milk powder which are in bitter competition with those across the Tasman. While the repeal of the carbon tax will help, electricity prices are still unnecessarily jacked up by the Renewable Energy Target, which the government doesn’t have the gumption to abolish.

The Productivity Commission lists a number of regulations adversely affecting the dairy industry. Front-of-pack labelling requirements have been introduced without evidence of any benefits.

Evidence-free regulations on genetically modified crops and biofuel subsidies both increase feed costs for livestock. And distortionary drought assistance arrangements impede farm amalgamation. These are problems which the government could address if it chose, but are not specific to the dairy sector.

But overall, it is refreshing to read a report that concludes all is well within an industry, notwithstanding the problems arising from outside the industry. Australia’s dairy industry can succeed internationally, and doesn’t need a government-imposed ‘industry champion’ to do so.

Page:
1
FarmOnline
David Leyonhjelm

David Leyonhjelm

has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
Date: Newest first | Oldest first

READER COMMENTS

wtf
30/10/2014 2:13:34 AM

rob, I have seen 2 co-ops fail and both were brought down by payment default. That's why the govt underwritten backing was such an important feature for growers when we had AWB, we as exporters are so exposed on the world scene. Reserve currency will change in the future and that strength it has brought the ABCDs will not be available to them, we need to develop our own payment security and that's why our govt got involved in the past. Russia and China are creating their own payment alternative to SWIFT, this means the current world players will lose their keyhole into world fin transactions.
FFS
30/10/2014 4:53:06 AM

Those who can, do; Those who can't, teach.
GFA
30/10/2014 8:44:52 AM

Rob, have you ever heard of companies that start up and go out backwards? I suggest to you that hundreds do that monthly. Co-ops are no more or less immune than companies to that outcome. Have a look at the ones that have succeeded. CBH WA, Murray Goulburn, Norco, are just a few shining examples to prove how successful they can be too. No business venture is easy but if that is understood and fierce determination exists, history shows even the "impossible" can be achieved, but not by the faint hearted or small minded and selfish. That is why NZ is fighting above its weight. It has a go.
Bushie Bill
3/11/2014 5:11:03 AM

It is not the New Zealanders that embarrass us Jock; it is the Neanderthals who believe they, rugged individualistic entrepreneurial trailblazers that they claim to be, can survive and prosper only by being protected by ripping off others. Doesn't it embarrass you Jock to admit you cannot compete without "Big Brother" protection that by definition has to be paid for by your fellow Australians? It embarrasses me as an Australian.
farmed
3/11/2014 8:45:25 AM

question, does nz have $1/milk ? does nz's supermarket chains dictate the supplier price of milk or threaten to delete other supplier items? does the nz government have inquirer's into the dairy industry and find nothing is wrong when clearly the supermarkets are manipulating the system? i dont think so! simple economics, get big enough to dictate the market and then run wild like colesworth are doing. ultimately the primary producer suffers.
FFS
3/11/2014 4:00:13 PM

I certainly doesn't embarrass you and your beloved unions that you can't compete without "Big Brother" protection, bushie bill. You are extremely proud of it.
Jock Munro
4/11/2014 6:37:06 PM

Thank you for your kind words Bushie Bill. farmed, as far as I aware the super markets are prevented from gouging in NZ by legislation and a good structural arrangement.
farmed
5/11/2014 8:48:53 AM

jock, seems we have a government not able to control price gouging by our supermarkets to the detriment of the ag industry. the nz government rely on their farmers to keep the countries wheels turning. here in oz we treat our farmers like pawns in a game of chess.
< previous |  1 | 2
Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

COMMENTS

light grey arrow
I'm one of the people who want marijuana to be legalized, some city have been approved it but
light grey arrow
#blueysmegacarshowandcruise2019 10 years on Daniels Ute will be apart of another massive cause.
light grey arrow
Australia's live animal trade is nothing but a blood stained industry that suits those who