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.