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September 1, 2008 | by  | in Features | [ssba]

Shock Therapy required to stomach dairy prices

New Zealand’s dairy industry is booming. This is the single piece of good news in what is probably now the first economic recession in a decade. New Zealanders are feeling the pinch. From the pain at the petrol pumps to the depths of the supermarket aisles, every essential item is getting more expensive, and for students these price rises are hitting hard. Unless you’re in the market for a 50 inch plasma TV, inflation (and indeed stagflation) is currently of major economic concern. To ease this pinch, we need to return to price regulation, particularly of dairy products.

We are all familiar with the reason essential items are increasing in price. We are aware this is an international occurrence and we assume our local circumstances cannot escape the reality of imported inflation. Now is the time for a good personal budget because the price rises are endemic and we’d better start getting used to it! Or so we are led to believe – when in actual fact, there is no inherent reason why local prices have to reflect international prices.

Many people gloss over is the fact that the New Zealand dairying giant Fonterra controls one third of the world’s dairy produce. New Zealand, in fact, produces so much cheese, milk and butter that 96% of it is exported overseas. Our country is swimming in an international price bubble that is benefiting local dairy farmers far beyond any other time in recent history. However the benefits of this international price boom are being felt by a small minority in this country, and I don’t just mean the dairy farmers.

The stats behind the facts
It is no longer the case that what we pay is related to the cost of production. At $16 a kg for cheese on average at Wellington supermarkets, we know from supermarket specials that $4 of this figure is pure supermarket mark-up. But where does the rest go? In 2007 farmers received an average payout of $4.46 per kg of produce; yet the 2008 payout had increased to an all-timehigh of $7.30 per kg. That’s a 61% increase. Not many people can realistically argue that our dairy farmers don’t deserve all they put into their work – but consider the following: Statistics New Zealand recently released figures showing that Fonterra now controls 25% of total New Zealand exports with a national market worth $9 billion dollars at 2007 production levels. Of this total only 4% enters the local New Zealand market, worth around $360 million. To cut New Zealand dairy prices in half, therefore, would cost the industry around $180 million. Under this scenario the national dairying industry would have a turnover of $9 billion but instead $8,820,000,000. And that is based on 2007 figures. In 2008 dairy prices have increased profitability massively: Fonterra expects to turn over produce worth close to $15 billion. The cost of regulating New Zealand prices to an acceptable level pales in comparison to this annual increase in profit. If Fonterra was obliged to sell their local produce at a set price, accepting $180 million in losses, they would still be making billions and billions of dollars more from the 96% of their customers paying the full price from overseas.

To take another example, it may not be surprising for people to find, that yes, it does not actually cost NZ$2 a litre to produce and transport petrol to New Zealand. Oil giant Saudi Arabia, the largest oil producer in the world (9% of total world oil production) respects this variance between price and cost and massively subsidise the local market to the tune of around 2 cents per litre. That’s less than NZ$1.00 to fill up a 40 litre car, while at petrol pumps in New Zealand it’s past NZ$80.00. And so the argument goes – “Why do they get it so cheap Auntie?” “Well, dear, they produce the stuff, and they’ll have enough to last them at least another 200 years.”

While New Zealand’s oil output is increasing and has potential to develop further in the years to come, our current status as a net importer of oil means there is nothing any politician can do to realistically reduce the price. Tinkering with petrol taxes merely reduces the ability to fund road and transport infrastructure. The price we pay at the pump, therefore, is hostage to an international price that reflects increasing world demand but a stagnant world supply. This increases petrol prices in what now seems like a weekly occurrence. There is nothing much New Zealand can do about this and as economic recession sets in we will have to suffer its consequences.

So back here in New Zealand, until we find those oil fields in the great south basin, petrol will remain at the whim of international speculators. Even more importantly we won’t see the price going back down to where it used to be, especially when oil producing countries regulate their prices to such a low level that demand is unlikely to drop – and as the world supply dwindles more will be diverted to these countries, where at under NZ$1 for a full tank it isn’t exactly expensive.

The Colby cheese debate in New Zealand has one simple answer “If we can’t get oil cheap, why not dairy! We produce the stuff, mate!”
However, like the rest of the world we pay $16.00 for a kg of cheese. Our market dominance of the dairy industry is three times what Saudi Arabia has for oil, yet, in New Zealand we blindingly accept what the media tells us – high prices are good for the dairy farmers!

And who has the power to regulate? Oh that’s right – the government actually has the power to solve the problem. Unfortunately as a Western nation we have been pot-peddled with an American imported anti-communist, neo-liberal, freetrade riddled rhetoric that makes regulation a bearer of all evil. Regulation, this rhetoric assumes, would bankrupt dairy farmers and leave the whole country starving to death. More moderate arguments tend to position regulation as acting in the deterrent of a thriving global economy, one where regulation creates unnecessary determinants to the efficient production of goods. However, this argument ignores that every other country in the world subsidises or regulates some goods. Others say the dairy farmers deserve mass profits after years of neglect. This may be true but is it really a long-term position we should be adopting?

The political scenario is not exactly bursting to solve this issue. A tired and reactive Labour Government is unlikely to address it – they have ruled for a long time and have long stopped placing demands on the business elite. It certainly won’t happen from a National government backed by big business. John Key will have the answers to everything from tax cuts, to law and order to the inefficiency of government bureaucracy, but he will not dare tackle an issue of corporate responsibility that will see his rich mates stand to lose some money. Yes. The everyday consumer continues to lose out, even though a third of the world eats dairy produce that is made in New Zealand by our own people.

In all seriousness, does anyone reasonably believe that to regulate the 4% of produce destined for New Zealand supermarkets would seriously affect the monopolistic conglomerate that is Fonterra? Of course it wouldn’t. $180 million in losses is petty cash for Fonterra – the chief executive’s Christmas bonus. Annual dairy produce demand is continually expanding throughout the world and world dairy prices are expected to remain high. The only people who will gain from price regulation are YOU, yes YOU – the people of Aotearoa, New Zealand.

Will the foreign-owned media ever investigate this national inequity?
When the mainstream media discusses the issue of whether we should be paying less for dairy products it is important to keep the following in mind. Our media, after all, are nearly entirely controlled by international corporations who have no interest in seeing lower dairy prices for New Zealand supermarkets. They are filled with talented journalists who follow a firm editorial line. This should be kept in mind when these media ask the question “Would you rather pay more or less for your basic grocery items?” the answer is likely to be framed as “Lower prices for NZ consumers will be bad for Fonterra’s margin,” and consequently the end-of-year bonuses for the company’s directors.

The worst is when the media frame their debate to make the public seem stupid for thinking otherwise, like a recent Dominion Post feature: “you don’t need a PhD from London School of Economics to realise that high prices are a good thing.” What we should all realise is that as a world market leader in the dairy industry, lower dairy prices in New Zealand should be our national right. Considering that New Zealand controls one third of total world dairy production and we are battling with high world inflation, dairy prices simply do not have to be rising at the rate they are. Price regulation can be set at a lower level that can be socially and politically agreed upon. Indeed, capitalism in New Zealand can be made to be fair, with the right regulations that reflect our country’s productive benefits.

The crust of the logic
Fonterra is allowed to thrive in a land and climate so perfect for dairy farming, is it really so unrealistic to assume, that yes, the people that live here should receive some benefit from the national trade? When we pay through our taxes for dairy production’s environmental degradation? In an interconnected and global world where inflation is acting to reduce the living standards of so many, surely as a nation we must benefit from what we are best at making for the global market!

To state it in economic terms, in a rationalised and globalized world we have turned away the national benefits of being self sufficient in our food production and that is seemingly a truism (no environmentalist can ever win this argument in the current economic climate). If we are to accept this argument and instead commit our farming to the profitable dairy industry, then surely the local consumer should benefit locally as a result of this shift in rationalised production.

I’m sure there are a few rich and powerful men out there who will surely be the losers in this issue of price regulation. The reality is, however, that the regular New Zealand citizen (and those tourists we invite here) should be foremost in law-makers’ minds – not just the interests of a handful of capitalists. All over the world price regulation for national produce is common. In New Zealand we need to start putting ourselves first beyond the global neoliberal rhetoric. Otherwise we risk losing the optimism that is so integral to a national culture.

Dairy farmers are not the victims of this argument. Most would tell you that, reasonably, they wish it could be cheaper for the local consumer. They are well aware of what it actually costs to make dairy produce. Under a local price regulation scenario they will still experience some of the highest dairy payouts in history. For New Zealanders in the supermarket aisles, however, there is no need for shock therapy every time we take a look at the price of milk and cheese. It is an issue of fairness and something that can easily be regulated with only minor economic effects. Since this is not happening, perhaps we here in Aotearoa, New Zealand need to pose the simple question: why not?


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Comments (2)

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  1. Tom says:

    Dear Joe,

    NZ produces in the region of 3% of total world milk production but around one third of export trade. You dont seem to understand this.

  2. a disgruntled soul says:

    Joe Francis is my hero

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