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Restructuring and the free market: Dairying in New Zealand

Laura Ginsburg Published on 18 July 2014

Just like in the U.S., the 1980s was a decade of unrest for New Zealand agriculture. It was during this time the New Zealand government decided to change the way the state interacted with industry, agriculture and services, and made the dramatic switch toward a free-market approach.

In a free-market system, government involvement with production, distribution and consumption is strongly discouraged. Australia and New Zealand are commonly seen as the most pure free-market systems in the world, particularly in regards to agriculture. This means there are no subsidies, tariffs or production quotas, and most research comes from non-governmental groups.

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The road to a free-market system in New Zealand has been fraught with challenges, and it all started back in 1973, the year the United Kingdom joined the European Union. As a British colony, the UK had been New Zealand’s primary export market since the development of refrigerated shipping in the late 1800s.

New Zealand was often referred to as Britain’s distant farm because of the continuous supply of wool, lamb, sheep meat, beef and dairy, among other products. Once the United Kingdom joined the EU, preferential market supply ceased, and New Zealand producers immediately lost what had been their most reliable customer.

New Zealand agriculture entered several years of crisis, with a drastically reduced market for their products and lower farm income. By the mid-1980s, the government had spent millions on subsidies and market stabilization to no avail.

Dairy farmers at this point were without government assistance, with most of the money going to support sheep meat and wool producers, who were hit even harder with the development of alternative fabrics.

By 1985, New Zealand decided to change tack and adopted a free-market system that did away with any remaining government assistance for agriculture. Turbulence and transformation ensued, with industries trying to gain their footing in a new agricultural market system.

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Because New Zealand farmers have always relied on the export market for a majority of their income, export boards governed agricultural sectors. Dairy was no different, with all exports being handled by the New Zealand Dairy Board.

The NZDB was a single-desk system, so exports from across the country and from different cooperatives all had to be sold through the NZDB. The NZDB also attempted to level production and processing of different products to avoid large market swings. Local boards were responsible for dairy needs for in-country consumption.

The dissolution of the NZDB in 2001 was the last remaining hurdle in becoming a true free market. Over the course of time between the end of agricultural assistance and the end of the NZDB, dairy cooperatives had been undergoing multiple mergers. By 1996, there were 12 dairy cooperatives across the country, and in 2001, there were only four remaining.

At this point, the largest two did a final “mega-merger” with the consent of the New Zealand government, and Fonterra was created. The NZDB was no longer in existence, cooperatives handled their own export markets, and New Zealand dairy farmers were split among three cooperatives: Fonterra, Westland and Tatua.

The formation of Fonterra included several caveats to ensure that they did not become a monopoly for the sale of raw milk to processors and processed dairy foods to consumers. This was a concern as, at the time of formation, Fonterra collected milk from about 96 percent of New Zealand dairy farmers.

First, farmers were guaranteed free entry and exit from the cooperative. Fonterra is obliged to pick up the milk from any farmer who buys Fonterra shares regardless of the farm location. Farmers are allowed to freely buy and sell shares between themselves, and farmers can leave Fonterra at any time.

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Production is not limited, though it is governed by the number of shares a farmer owns, with one share needed for every kilogram of milk solids produced. Also, farmers do not have to pay for the transportation of milk between the farm and processing facility.

Next, Fonterra must make available 5 percent of its milk supply to independent processors. These processors can pick up milk directly from the farmer or can source it through Fonterra.

Pricing for smaller processors is adjusted four times annually, and pricing for large processors, or those that source more than 30 million liters of their raw milk supply directly from farmers, pay a variable rate based on market conditions. Ensuring that domestic market processors have access to milk encourages competition and business development.

While Fonterra remains the primary cooperative, there are now several other companies that farmers can work with depending on their location. These include Synlait, Open Country, Westland Cooperative, Tatua Cooperative, Miraka and Gardians.

Some farmers are choosing to leave Fonterra and work with one of the other companies, a change that has just started happening over the past few years. These companies are not regulated by the same rules as Fonterra discussed above because they have such a small percentage of the market share.

Aside from the formation of Fonterra, the move toward a free market meant other changes for dairy farmers as well. One of the primary differences is: Dairy farmers pay a levy to fund one of the main dairy research and education organizations, DairyNZ.

Every six years, farmers have to vote to continue paying the levy. DairyNZ offers field days, training seminars, conferences, one-on-one farm assessments, farm tours and much more. There is an emphasis on community learning, and field days are a popular method for farmers to gather together to discuss common dairy issues at a local dairy.

I attended a field day recently with about 20 other people from across the dairy industry, from owner-operators to young employees, support agencies to bankers. The primary topic was brainstorming an efficient and cost-effective solution for the farm host’s effluent system, but we also talked about cow dry-off, body condition and good communication strategies between employees.

One of the clear benefits of DairyNZ is that, because dairy farmers fund it, the work they do is applicable, reported in easy-to-understand formats and accessible to all people involved with dairy.

While the transition from a managed system to one that responds to international market signals has not always been easy for farmers, it has helped create one of the most successful dairy export industries in the world. PD

Laura Ginsburg is currently in New Zealand on a Fulbright studying dairy policy and farmer decision-making. She wrote her master’s thesis on Montana’s supply management system.

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