A muddy future for white gold

Dairy farming is great for us right now, delivering cash to the economy in the world recession. Plasma TV and car makers aren’t doing well. Food makers are doing OK.

So we might say thank goodness David Lange’s “sunset industry” description of farming turned out wrong, thanks to dairy farmers’ productivity leap and a global upturn for food products. This decade dairy exports have been the mainstay.

Look ahead 10 years: the cashflow from dairy exports, with help from other parts of the land-based sector, plus tourism, gives us a window of opportunity to build a higher-wage economy.

But there are catches.

The 2020 strategy by DairyNZ, the industry body, launched by John Key last Tuesday identified some heavy threats.

One was the “erosion of New Zealand’s low-cost competitiveness” as costs rise at home and competitors abroad become more efficient, in part with New Zealand money and know-how.

Productivity gains have averaged 1 per cent a year this decade against the 2004 strategy’s target of 4 per cent. The average return on capital was 3 per cent. In effect, dairy farmers have been farming for capital gain. This decade there was a 7 per cent annual gain in land values but that is unlikely next decade.

A second threat comes from the “dominance of global retail chains” which to a large extent decide what is available to consumers. “The control over market access is arguably shifting from agreements between nation states” (DairyNZ laments the Doha round impasse) “to agreements between producers and retailers”.

The local dairy industry’s quaint ownership structure hands the bargaining advantage to the global retail chains. DairyNZ politely calls this the industry “struggling to reconcile the cooperative ownership model with the aspirations of a large multinational dairy company” (Fonterra).

Maybe this will change as megafarms replace ageing family farmers, a switch illustrated by the rise since 1997 of those working on farms who are on wages from less than a third to more than half.

Another threat — bequeathed by governments over two decades — is chronic underinvestment in research, science and technology both for farms and to develop high-end milk-derived products.

And, perhaps most important of all, the strategy identifies a decline in New Zealanders’ view of dairy farming. Some 65 per cent still have a positive view but the percentage is declining.

In part this stems from, the strategy says, dairy’s poor and worsening environmental and resource use reputation — yet another major threat.

DairyNZ notes a “mixed record of compliance with environmental regulation, leading to increased tension with the government and other stakeholders”, including “high levels of non-compliance in effluent management”.

And, coming down the track are “additional constraints around water access and cost”. Add to that: The global focus on greenhouse gases and emissions trading … means farming is likely to bear significant costs.”

Key weighed in at the launch with an injunction to “take leadership” in meeting environmental issues. Agriculture Minister David Carter has been saying farming will not escape the emissions trading scheme.

Then there is Environment Minister Nick Smith’s urgency to get water use policy sorted in the next few months. The logic, recognised by DairyNZ, is a price on water use and at some point cap-and-trade for waterways pollution.

Add this up: while milk has been this country’s white gold over the past decade or so, it has lately been acquiring a chocolate-ish hue. The risk is that at some point that muddy image rubs stains the country as a whole.

So should we expect a rapid and deep response?

Farmers can play for time a while yet. Any system of water pricing will need to be grandfathered. And the emissions trading scheme (ETS) rules are to be relaxed.

The government says the ETS must be aligned with Australia’s. Quite apart from the fact that the emissions profiles of the two countries are radically different, which complicates and might negate alignment, there is now a timing issue.

Australia’s scheme is to be delayed a year, to mid-2011. Huge concessions have been made to big emitters and more are in train. That has bought some support from peak business organisations. But even watered down, the scheme still has no majority in the Senate.

Australia’s delay means a delay in the ETS revision here, almost certainly postponing electricity’s entry next year and transport’s in 2011. Alignments means farmers will come in after 2013, with a gentle phase-down.

The risk is that the pressure for farm-level change eases. Right now we need the white gold’s cash and there is a recession. And threats are for the future. So why not muddle through on the cow’s back?

The “why not” is that the threats are large and on many fronts, which makes them threats not just to farmers but to dreams of rising prosperity. The government says it wants rising prosperity. DairyNZ has set it a big policy challenge.