A tale of two in­dus­tries

Dairy News Australia - - MARKETS - JO BILLS • Jo Bills is a di­rec­tor of www.fre­sha­genda.com.au

ONCE UPON a time there were two dairy in­dus­tries, on op­po­site sides of a big ditch, that were very sim­i­lar. They pro­duced about the same amount of milk, they made sim­i­lar prod­ucts and the farm­ers got paid a sim­i­lar amount ….then every­thing changed. Com­par­isons are of­ten made be­tween the New Zealand and Aus­tralian dairy in­dus­tries about prices, far­m­gate prices and var­i­ous as­pects of the in­dus­tries — and de­pend­ing on the cy­cle, which has the bet­ter struc­ture. It’s a ri­valry a lit­tle like the Bledis­loe Cup in Rugby — and de­pend­ing on your mea­sure of suc­cess — al­most as one-sided. As chart 1 shows if suc­cess is mea­sured in terms of in­dus­try size and out­put — the Ki­wis have scored all the tries. While Australia’s out­put has stalled, New Zealand’s milk out­put has more than dou­bled since the mid-90s. Fu­elled by favourable pro­duc­tion con­di­tions, a tax struc­ture that favours in­vest­ment in land, ac­cess to growth mar­kets and a dom­i­nant farmerowned co­op­er­a­tive, Kiwi farm­ers have re­sponded en­thu­si­as­ti­cally, ex­pand­ing and in­ten­si­fy­ing — and in­creas­ing debt-load. Fon­terra was es­tab­lished back in 2001 — with the aim of mov­ing what was al­ready an im­por­tant in­dus­try fur­ther down the value chain to­wards the con­sumer. The crit­i­cal mass of­fered by Fon­terra — which was given a free-kick by the gov­ern­ment’s com­pe­ti­tion watch dog, the Com­merce Com­mis­sion — was meant to make Kiwi farm­ers price-set­ters rather than price tak­ers in global mar­kets. In re­turn, the act es­tab­lish­ing Fon­terra re­quired trans­parency in far­m­gate price-set­ting, and some pro­vi­sions to re­duce bar­ri­ers to en­try to new play­ers and com­peti­tors, to reign in the co-op’s mar­ket power. Many Kiwi farm­ers have no other op­tion but Fon­terra when it comes to sup­ply­ing milk so the reg­u­la­tions are meant to en­sure there is ad­e­quate con­testa­bil­ity and ef­fi­ciency. The New Zealand Com­merce Com­mis­sion re­views Fon­terra’s far­m­gate price cal­cu­la­tion each year, which is based on sale rev­enue from ref­er­ence prod­ucts mi­nus op­er­at­ing costs and an al­lowance for cap­i­tal re­cov­ery. It is on this ba­sis that Fon­terra’s rev­enue is di­vided be­tween farmer pay­outs and div­i­dend, as well as re­turns to unit hold­ers in the Fon­terra Share­hold­ers Fund. It’s a level of trans­parency and over­sight that many farm­ers on this side of the Tas­man may envy — although it’s not with­out its crit­ics. Tak­ing a he­li­copter view of the New Zealand dairy in­dus­try’s de­vel­op­ment over the last cou­ple of decades, a few things stand out. First and fore­most it has al­ways viewed it­self as a global player and its tiny do­mes­tic mar­ket has seen to that. It is still strongly sup­ply-driven — most of the post-far­m­gate cap­i­tal has gone into stain­less steel rather than in­no­va­tive high value prod­ucts. In terms of the op­er­at­ing en­vi­ron­ment, the in­dus­try has en­joyed sig­nif­i­cant gov­ern­ment sup­port — in the for­ma­tion of Fon­terra, in pur­su­ing mar­ket ac­cess and sup­port­ing in­vest­ment in the sec­tor. Com­mu­nity sup­port hasn’t been so stead­fast. Along­side the in­dus­try’s growth and in­ten­si­fi­ca­tion have grown vo­cal and per­sis­tent con­cerns about en­vi­ron­men­tal im­pact. The in­dus­try’s sig­nif­i­cant eco­nomic con­tri­bu­tions have not been suf­fi­cient — or per­haps, shared widely enough — to shield it from crit­i­cism when it comes to the pol­lu­tion of wa­ter­ways and threat­en­ing its “100 per cent Pure” rep­u­ta­tion. Back on this side of the ditch, dairy farm­ers gen­er­ally com­mand sym­pa­thy and re­spect from the com­mu­nity — but mostly be­cause the in­dus­try is per­ceived to be “do­ing it tough” most of the time. The in­dus­try has re­ceived plenty of gov­ern­ment at­ten­tion also, but mostly in the form of over­lap­ping in­quiries and short-term re­sponses to crises. The Aus­tralian pro­cess­ing sec­tor is less co­op­er­a­tive in na­ture and much less con­cen­trated. In south­ern re­gions where most farm­ers have lots of choices to make when it comes to sup­ply­ing milk. Com­pe­ti­tion for milk sup­plies has been a key pre-oc­cu­pa­tion for lo­cal dairy com­pa­nies try­ing to fill ca­pac­ity in the pro­duc­tion-con­strained en­vi­ron­ment and “pick the win­ners” in terms of prod­uct and mar­ket mix in view of their in­abil­ity to com­pete on cost. In at­ti­tude and ac­tu­al­ity, the Aus­tralian dairy in­dus­try is much less a global player than it was — ac­count­ing for around 6 per cent of global trade com­pared to a peak of around 17 per cent in the early 2000s. That said, a vir­tu­ally open mar­ket for im­ports and with around 75 per cent of milk pro­duc­tion con­verted into trade­able prod­ucts — the in­dus­try is not im­mune from in­ter­na­tional mar­kets, de­spite the in­creas­ing share of milk con­sumed at home. Nev­er­the­less, the me­chan­ics of the do­mes­tic mar­ket­place — which is tough and get­ting tougher — and more par­tic­u­larly su­per­mar­ket power is an in­creas­ing fo­cus for an in­dus­try that is with­draw­ing from the world. The re­cent Se­nate In­quiry has called for a lot more in­volve­ment from our own com­pe­ti­tion watch­dog in the way the in­dus­try and do­mes­tic mar­ket works, although it ap­pears to have dis­missed the need for greater price trans­parency. It’s un­clear that a more con­sis­tent ap­proach to in­dus­try struc­ture and reg­u­la­tion would have pro­duced a sim­i­lar out­come for the two in­dus­tries — much is clouded by cli­matic con­di­tions that have cer­tainly favoured the Ki­wis over the past cou­ple of decades. Although it’s in­ter­est­ing to ob­serve how th­ese di­ver­gent path­ways have evolved, and how dis­sim­i­lar the two in­dus­tries have be­come, it makes less and less sense to com­pare them! Still Chart 2 shows how it stacks up for the com­ing sea­son. What’s the rea­son for the gap this year? A more bullish out­look from Kiwi dairy com­pa­nies, and su­pe­rior con­ver­sion ef­fi­ciency; or does it reflect wan­ing lever­age and value cap­ture on this side of the Tas­man? It’s this gap and whether it is sus­tained that is likely to de­cide who is de­clared the “win­ner”, although prof­itable and sus­tain­able growth in a sup­port­ive com­mu­nity should be the goal for both in­dus­tries.

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