What If the Future Doesn't Unfold as It Should?
There has been talk in the media of milk prices slowly increasing over the rest of this year and into 2016. Dairy farmers in New Zealand, or so the mantra goes, can then heave a sigh of relief and get on with the business of making money.
But what if the global dairy situation has changed fundamentally, and the lower prices we see today become the norm tomorrow? Certainly some things have shifted that might suggest that. Europe got rid of quotas on 1 April 2015, a move that was applauded in New Zealand. I have never understood why it was met with such NZ equanimity. The country wanted to encourage more foreign competition? If that is the case, then ideology triumphed over common sense. To my mind, Wellington should have been keen to keep EU quotas in place and thereby face less competition.
And what of the US? The TTP negotiations were supposed to give NZ dairy much better access to the American market. Does anyone in the country really believe that could have happened? Only over the dead body of the US National Milk Producers Federation, and it is very much alive. In fact, Tim Groser had to swallow more "dead rats" than he ever thought possible back in the heady days when the US signed on to the TPP process. Indeed, the United States took to heart NZ encouragement of more export product, but not the part about more open markets. American competition is now hurting NZ dairy in places like southeast Asia and parts of east Asia. In the first quarter of 2014, US dairy exports increased by 39%, and most of that went to China, eating into New Zealand markets, despite higher American dairy prices than those in NZ. The US now depends on export markets to make its industry viable. Can NZ compete with US milk, head to head, when the latter are geared up full throttle? I doubt it, even if American milk is more expensive than that from, say, Waikato or Taranaki.
Nor have the Americans given up on subsidies. The latest Farm Bill promised US$1 trillion in agricultural subsidies over the decade from 2014. As well, Cooperatives Working Together, a wholly-owned subsidiary of the National Milk Producers Federation, subsidized the sale of more than 1 billion pounds of dairy product to markets around the world. It doesn't run counter to WTO rules given its status as a private sector organization.
What is the tangible result of this NZ competition with the EU and the US? While New Zealand is presently first in terms of supplying the ASEAN market with dairy, holding a 29% share, the EU is coming on strong at 25% while US exports have tripled to the bloc over the past five years and it now hold a 17% market share. Will New Zealand still be first a half-decade from now? Based on these trends, I would think not.
So, what about price? NZ dairy farmers are presently culling cows given the dismal market for milk, and a relatively better one for beef. That will result in less supply coming from that quarter and this is supposed to help right the dairy commodities ship that has taken on a little too much water. But will it?
As NZ cuts dairy production, EU and US producers are increasing theirs. Ireland says its will up its by 50% by 2020, while Germany, Poland and Holland have all said their output will also go up. Americans are chomping at the bit to crank out more milk for more markets. So, will the fact that NZ is cutting production matter? Perhaps not, as others step in the keep the world relatively awash with the stuff. Perhaps low global dairy prices will be the new norm, or profitable cycles will be fewer and of shorter duration. Hard to say, but the trend is there, demonstrated by the latest Global Dairy Trade auction – prices are heading lower just when the "experts" suggested they would be higher.
So, what should Wellington do about competition in dairy? At a minimum it should quietly encourage the Europeans to re-implement production quotas. If one thing is clear since the introduction of the Common Agricultural Policy 53 years ago, it is that Europeans are ruthless when searching out markets for agricultural commodities, and that will only hurt NZ dairy prospects. As for the US, that battle is probably already lost. American farmers have geared up for dairy exports and nothing is going to dissuade them from prosecuting overseas markets with the utmost vigor. They, too, can be ruthless as NZ negotiators saw in the TPP.
Ideology is a nasty thing to stick to when it doesn't work, and NZ's government has professed its love of neoliberalism in the agricultural sector long past its best buy date. And NZ's global policy about freer milk markets has come back to bite it in the nether region. It is a battle it cannot win. As Groser rightly observed in the aftermath of the very disappointing (for NZ) TPP results, "at the end of the day we're a tiny little country, we can't threaten anybody." Perhaps a bit of "back to the future" would be in its best interest; flying below the radar is advantageous under certain circumstances.