There is Nothing Canada Can Learn from NZ Dairy

August 2nd, 2016

Critics of Canada’s system of supply management covering dairy, eggs and poultry matching domestic demand with domestic supply, and which works eminently well for both consumers and producers, continue to haul out old canards about its effectiveness that data demolishes. Sarah Reid is the latest to do so.

She writes “Tiny New Zealand … is on a quest to quench the world’s thirst for milk. Today, milk is the country’s biggest export, and 95 per cent of what Kiwi farmers produce goes abroad, mostly to China.” That is true, but the fall-out of that activity is not even close to what Ms Reid claims it is.

Indeed, NZ dairy is nothing but in massive free fall at the moment, and has been for the past two years. Sales of milk powder, butter and cheese, the staples of the New Zealand trade, are down 6.7% in 2015 over 2014 and NZ banks are seriously looking to call loans made to dairy farmers in more salubrious times. She mentions that last year, overseas shipments of dairy totaled NZ$11.9 billion. What she doesn’t mention is that in 2013, (the last good year), those same shipments totaled NZ$18 billion. How can this be a model we should emulate in Canada?

Moreover, the focus of all this attention, Fonterra, the farmer-owned cooperative that has overseen the expansion of dairy sales overseas, is not the muscle-bound purveyor of milk products that Reid makes it out to be. As one considered, but critical, examination noted, Fonterra “is still confined largely to segments of dairy business that deliver a return on assets of no more than around 5 to 8 percent, [which are only mediocre]. Put plainly, it is still a ‘bottom feeder.’ There has been no economic transformation.”

I spent January and February of this year interviewing NZ dairy farmers and, while a few remained optimistic, most were incredibly anxious about the future. What had kept them afloat, at least as far as the banks went, was their continually-appreciating land values, now reaching as high as NZ$35,000 per hectare in areas like the Canterbury Plains.

With the great milk downturn, (it happens to all commodities at some point), those land price increases are in jeopardy, potentially pulling the bottom card from the deck stacked above it. Moreover, international dairy prices that NZ farmers rely on have hit what surely must be rock bottom – they are now NZ$3.90 per kilogram of milk solid. The average farmer in the country needs NZ$5.20 to break even. And there is talk of prices staying low through 2017, and Fonterra’s farmgate milk price to be similarly placed – below the break even point. How many NZ dairy farmers will emerge on the other side of this catastrophe is anyone’s guess.

Reid offers a bit of history as how NZ got to where it is today, but that, too, is flawed. For starters, NZ never did deregulate its dairy industry in the sense she suggests. Instead, it got a special dispensation from the World Trade Organization and let Fonterra, established in 2001 as a single desk exporter, take over. NZ dairy remains as highly regulated as Canada’s, but without the safety net.

Dairy farmers in that country even have what could be construed as quotas. In order to ship to Fonterra, a farmer must own shares in the cooperative, and they can only ship up to the extent of the shares they own. A big farmer might own one million Fonterra shares, which normally trade in the NZ$5-6 range, necessitating an upfront payment of between NZ$5-6 million. How is that different from our quota system? It isn’t.

Fonterra has loosened this requirement lately, extending the “share-up” period, but only because competitors, (read Chinese companies), are moving into their space through purchases of NZ processors and farmers are unable to afford the outlay. Fonterra’s share of the NZ market has gone from about 95% to the present 88%. Not a good harbinger looking ahead given Fonterra’s critical role in securing for NZ whatever future dairy has. And that is increasingly problematic. This is not to say that prices won’t recover in the future, but NZ exports may not to the necessary extent.

Why? The US and the EU have both entered the export market, and are ruthless foes in the search for markets. They also subsidize production using various mechanisms, meaning NZ dairy farmers find it increasingly difficult to compete. Those farmers with whom I spoke couldn’t understand why neither the US nor the EU had responded to the market signal of too much global production. The price has collapsed, so why hadn’t American and European production, they asked? That isn’t how either works.

Both have stolen market share in the ASEAN bloc and in South Korea away from NZ farmers. Combined, the European Union and the US annually produce 247 million tonnes of dairy product, as compared with only 21 million tonnes for NZ. With that volume of milk sloshing about the system, albeit most of it consumed by domestic markets, it only takes a few percentage points more production to throw it completely out of kilter. Cooperatives Working Together, a wholly owned subsidiary of the US National Federation of Milk Producers (NFMP), prides itself on subsidizing the sale of billions of pounds of excess dairy throughout the world. It is one way to clear massive US stocks and against which NZ exporters are helpless. Meanwhile China, the focus of so much New Zealand effort, is striving to become self-sufficient, undermining the rationale of the 2008 China-NZ FTA, at least from the latter’s perspective. As well, China has its own, quite serious, economic issues right now.

Further, more serious competitors in the dairy market spells gloom for New Zealand dairy. Only about 7% of total global production is traded internationally, and the NZers have roughly 32% of that 7%, while the US (15% share) and the EU (36% share) combined have approximately 51% of 7%. What is left is a pittance – it amounts to about 15% of 7%, which works out to less than 1% of total global production, to be filled by small players like Argentina and Uruguay, which they strive to do. And that is not even taking into account the stated American aim of increasing dairy exports to push out competition. Canada should give up its eminently workable and effective dairy system for less than 1% on a good day? That would be ridiculous.

Reid quotes a Conference Board of Canada analysis that estimates that if Canada were to begin exporting half of what NZ exports, Canada’s yearly production would increase by 250% and the number of farms would go up by 2.1% over 10 years. This speaks more to the insanity of statistics than it does to milk production or final outcomes. That is fine to assert, but it would not happen, even if Canadian dairy were completely opened up for the reasons adumbrated above. Indeed, that is an absurd proposition and perhaps attractive to economists operating on a theoretical (or an ideological) level. The global market is already (more than) filled, largely with subsidized dairy from the EU and the US, and from NZ, which is a lower cost producer given its pasture-based system.

More likely, if Canada were to open its markets in anticipation of an export boom, we would instead be swamped by American fluid milk, which the US-based National Milk Producers Federation is adamant should happen. Canadian dairy would succumb to the tsunami of white stuff that would roll across us given cheaper US milk. And it is cheaper for a number of reasons based partly on very inexpensive US labour, and subsidies. Rather than increasing our production, we would be faced with dairy disaster with a spill-over and adverse effect on the Canadian countryside and the robustness of rural communities.

More likely, Canada would face a similar dairy future to that of Australia following its real (unlike NZ’s) deregulation process. They went from producing 12 billion liters of milk in the early 2000s to 9.5 billion today and are on a downward trajectory as a result of the crisis in which Australian dairy now finds itself. The government in Canberra has recently allocated an A$550 million support package for its beleaguered dairy farmers. As one I interviewed told me, “We will hope for the best and hang on.” Not a real recipe for success.

This collapse has occurred, even as Australia is an island unto itself. It doesn’t have to worry about a neighbour 10 times as large eyeing its market with subsidized product. Both NZ and Australian dairy farmers, when I interviewed them and outlined a few scenarios, made this point, quite unprompted by me. They understood the very real possibility that Americans would simply take our market if price is all that counted. That was a worry with which neither had to contend.

Nor could we contemplate increasing exports to the US. While about 8% of our dairy market is now open to imports, should the CETA go through, only 2% of the US market is open. This is counter-intuitive given the chorus of yells coming from south of the border that Canada is not playing fair. Indeed, a US Department of Agriculture study some time ago noted that “Trade barriers are arguably the most important feature of US dairy policy.” That has not changed in recent years.

There is nowhere today that can claim dairy as a robust sector of the economy – except for Canada. European dairy farmers are rioting in the streets, Australians are taking legal action against a big cooperative and NZers are wondering what happened to their world. The fact that Andrew Hoggard, as quoted by Reid, is obstinate in his claim that no New Zealand dairy farmer would go back to the old ways, pre-Fonterra, is neither here nor there. And I don’t think it is true. Hoggard is the president of NZ’s Federated Farmers and absolutely committed to the system. But so was the captain of the Titanic to the notion that his ship couldn’t sink. And we know what happened there.

Undoubtedly, there will be fewer NZ dairy farmers to consider that belief this time next year. The number of farms to be taken over by banks because of non-payment of mortgage loans will see to that. In Southland alone, 35 farms have been told their lines of credit have been cut off, meaning the bank has moved in. I wonder if those 35 would agree unreservedly with Hoggard.

Finally, there is always talk of efficiency and price, where critics always claim that Canadian milk is more expensive than that to be had in NZ. Indeed, as Reid points out, New Zealand dairy cows did experience productivity increases of 25% over 17 years. The average Canadian dairy wins that contest, hands down, as well. NZ cows are different from ours – they have a Kiwi cross of Holstein and Jersey and are much smaller given their necessity of walking up to 10 kilometres per day to the dairy and back into pastures – a productivity increase over 17 years that averaged only 1.5% per year is not something to boast about. In Canada, over the period from 1973 to 2014, our cows have increased their productivity by an average 3.3% (134% over that time), a staggering figure. Importantly, this has been accomplished without the use of growth hormone found in other jurisdictions. It has also significantly outpaced productivity increases in the US (116%) the UK (91%) and New Zealand (49%) over that 41-year period of time.

Critically, I would bet NZ productivity rates have dropped recently, as well. One dairy farmer told me that his cows were now in “starvation mode.” He couldn’t afford supplements or fodder given the global price, so the grass in his fields was what his cows had to eat. When that was gone, well, starvation might be a good way to characterize it. Efficiency? I think Canada’s cows are much more “efficient,” whatever that means, than those in New Zealand.

Reid also seems to think that the fact that the number of dairy cows increased from 2.7 million to 4.4 million is a recommendation to emulate that system. Urban NZers would not agree at all. Dairy, whether deserved or not, has been stuck with the moniker of “Dirty Dairy.” Quite apart from the massive dislocation afflicting farmers today, they are on the back foot in attempting to clean up the environment. In short, too many cows creating too much manure and urea in too small a space. NZ production is down 4% this year, (again, not a vote of confidence in the system), and thousands of cows have been culled. Perhaps the global dairy crisis will achieve what legislation has only begun to address in terms of reducing the burden on the land and on waterways.

And what about the price consumers pay for milk? Oddly, and at odds with Reid’s breezy assumption that Canadian consumers are being shafted, this too is not true. I have paid about C$4 for a 4-liter bag for years in southern Ontario. It has recently gone up to C$4.29. In NZ, consumers pay the equivalent of about C$6 for 4 liters. A while ago, the head of the NZ Consumer’s Association called dairy “a luxury item.” How does this square with the NZ milk Valhalla that Reid writes about?

Canadian milk is well-priced and affordable and the consumer pays the full cost of production. I have never understood why people like Reid, who used to work for the Canadian Council of Chief Executives, an organization which espouses a no-subsidy, consumer pays the cost philosophy, would be opposed to it here. Our milk is not subsidized, pure and simple. Perhaps it’s the regulation part of the model to which she objects. But it is that element that makes Canadian dairy so robust and so Canadian.

It allows dairy farmers, and their egg and poultry colleagues, to live decent lives, farming in a way that is entirely sustainable and which meets Canada’s requirements for food sovereignty and food security.

In short, everything about Reid’s polemic is wrong. It is wrong to assert ideology as fact. NZ does not represent a “free” market. One doesn’t need to rely on biased sources like Andrew Hoggard, the compromised Martha Findlay study or a Conference Board of Canada examination that proposes something that is not even remotely realizable. Finally, taking issue with Reid’s title, I don’t think there is any lesson for Canada in NZ’s dairy experiment. In fact, quite the opposite – New Zealanders have important lessons to learn from the Canadian model if they want to avoid the next crippling downturn.

The world is due for a paradigm shift and Canada is leading the way in this area. Supply management is a post-modern philosophy for a post-modern globe. It feels good to be a trendsetter.

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