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My heart is in dairy farming, which I did for 35 years, and have worked within the industry for much longer, and still do. I helped start and then managed the NZ National Fieldays and did their marketing on a shoe-string budget for the first decade, founded and then chaired the Waikato Marketers for years, was international marketing director for the Gallagher Group Ltd, increasing sales from $3m to $23 m in five years, and lectured in marketing at universities, so learned a bit
Since Fonterra took over the marketing our dairy products and they deserve an A for trying, and a Z for results. Their sole job is marketing, but they are more interested in massage their ego so chase growth at any cost, borrowing billions of dollars to do it. Success comes from profits allowing growth, not from borrowing for growth outside of New Zealand and losing millions. They've tried everything, changed back and forth, showing it didn’t work, had obvious, but unforeseen to them, catastrophes, and not achieved the results they told their suppliers to expect. They think that their new (June 2010) financing system will solve things, but it won’t unless they can increase payouts consistently, and reduce their colossal debt. When they took over the NZ Dairy Board (the envy of the world's dairy industry), they were going to reduce costs and increase payouts. They’ve done neither, and have, sadly, become the laughing stock of the world's dairy industry, by lowering world prices in a different way, i.e., underhand subsidies on product prices by making our farmers produce at below their cost of production. Fonterra has not even achieved its targets in organic milk production, simply because they pay only about 20% above the non-organic milk, while in USA where most is sold, organic farmers get 50% above non-organic. They don’t even know their own organic milk production rules. In one of their boasting outbursts in October 2009 they told the media that they would double organic production by Christmas, showing that they don’t know that it takes three years to become organic approved. Also, in the Waikato, with organic producers on our door step, organic milk often runs out on supermarket shelves. There are two main reasons why overseas milk producers get upset with Fonterra - 1. Their marketing is a failure by selling at below NZ production costs and below overseas production prices which then lowers their prices. 2. They have boasted to the world that their aim is to be the world's biggest dairy supplier. What a typical North American conceited statement from Fonterra’s CEO, when in New Zealand we produce only 2% of the world’s milk production. The world's dairy farmers know that New Zealand has low costs and sells on price, so they fear world milk price drops. Fonterra's aim should not be to become the biggest, but to pay their producers (share holders), the highest payout. If we want free-trade with other countries we must increase our selling prices of all our products to above the markets in which we sell. When I was marketing director for the Gallagher Group, we sold electric fence energisers into USA for NZ$300 each, when USA ones were only US$60, so they ignored us, and we doubled sales annually. New Zealand’s low export prices for milk and lamb have been the cause of tariffs being imposed and bans being threatened for decades. New Zealand has been blamed by dairy farmers in the Northern Hemisphere and South America for selling too cheaply, thus lowering their milk prices, and from what I've seen, I agree. The following, from USA in 2009, showed what New Zealand under-cutting prices caused. "The US National Milk Producers Federation said it would seek the full exclusion of New Zealand’s dairy products under the newly-announced Transpacific free trade agreement, because of the New Zealand dairy industry’s unique structure and excessive manipulation of dairy markets globally, and in the USA". They would not worry to do this if our prices were above theirs. A USA trade delegate here in Hamilton in 2005 told our agricultural journalists that USA would eliminate all subsidies within seven years, but they haven’t. Their 50% subsidies on maize that their dairy farmers feed, accentuates their surpluses which help lower world prices and create surpluses. So our farmers suffer a enforced double disaster. There is a centimetre thick book printed in USA that lists all subsidies, such as on some fencing. Fonterra boasts about having a level playing field and transparency for their buyers, with nothing about same for our farmers, who have been paid well below the cost of production. In the 2008/9 production season, the average NZ dairy farmer lost $56,000 and received nothing for their capital invested of at least $1m so at 5%, lost a further $50,000. In marketing, we learned and saw examples of the fact that it takes only a 5% excess to create a surplus, which can cause price drops, especially if you tell the world about your surplus, and rely on fire sales (auctions), as wool has done for decades and Fonterra is doing now. Every week we read in papers from astute companies that their information is "price sensitive" so secret, while meat, wool and now dairy, almost boast proudly about their surpluses. Auctioning wool decades ago was successful when the demand was greater than the supply - and there were no synthetics. World-wide, New Zealand dairy produce is recognised as the best, so why auction it? Always set its price above the rest. In London while my wife was shopping, I did a survey of the shops selling butter and cheese. Briefly, all shop keepers said that they liked selling New Zealand dairy produce because it was the best, with no returns. UK and Danish products were on their shelves and I was told that sometimes had quality problems. Auctions need two or more strong buyers to bid, or prices can be at give-away levels, as Fonterra’s has been. Another marketing rule is to never upset local producers, because they'll beat you. Fonterra does that with its low prices and boasting. Fonterra on-line trading sessions are held on the first Tuesday of the month. What do buyers do if they need product urgently on the day after? The Fonterra auction manager told me they have to wait until the next auction! Partly because of the very high payout in 2008 encouraging expensive supplement feeding and Fonterra encouraging more milk production, our dairy payouts halved. The NZ Dairy Board had an excellent cushioning system that avoided the ups and downs that nobody likes and are disruptive. At the same time, cars were overproduced, but their retail prices hardly dropped, but they didn’t boast about surpluses. Google for ‘Unsold cars’ to see many photos of thousands of unsold cars in many countries. Another reason for feeling sorry for Fonterra is the Labour government rules under which they have to operate, which will eventually mean that Fonterra milk supply will come from outlying areas, because intensive areas will continue to break away, form new companies and produce and market their own products. Before the change was finalised, National (The farmers party!?) was elected and they continued the same crazy change. I predicted that within 10 years there would be 10 dairy companies, and its happening. Within 20 years they’re likely to go back to one New Zealand Co-operative (I hope they call it) running 95% of them again as one. Fonterra’s sheer stupidity investing $200,000,000 in China and losing it, and now the same amount in South America, is also risky. The USA dairy farmers are paranoid about New Zealand putting them out of business, which is impossible with our small amount of milk produced (2% of the world’s). Canadian dairy farmers are not worried because of their even higher subsides and complete import protection. I also feel sorry for dairy farmers because the new growing number of fragmented companies will compete for sales and buyers will beat them down in price, like the NZ meat industry has suffered for decades. It is ironic that while the NZ dairy industry is fragmenting, the NZ meat industry is trying to emulate the old dairy industry of one marketer. For a picture of trends, when lamb was at the bottom of its trough a few years ago, sheep farmers got only 14% of the Smithfield, UK price, whereas in 1890 the first lamb sent there returned 90% of the Smithfield price to the lamb producers. With modern transport and ‘possible’ efficiencies it should be the opposite. In the 1950’s milk was $14 per kg milk solids and the average herd size of 60 cows gave a good living. In the 1960’s a 100 cow dairy farmer could put three children through private boarding school. In 2010, 500 cows couldn’t do that, partly because costs have increased. Farm costs have gone up way above the published inflation rates. Draw a forward graph and it’ll show that the milk payout in another 50 years will be zero. One can say that this slide can't continue, but it is. To stay in farming farmers should invest outside of farming. See www.grazinginfo.com Investing. The positive side is that Fonterra can save themselves - if they are smart and quick, which to date, they have not been. If they don’t see the light, the only thing up for auction, will be Fonterra. Producing milk overseas won’t help New Zealand dairy farmers because subsidised and other overproduction caused the “Butterberg” surpluses decades ago and over-production caused the drop from the NZ$7.60 payout to $4.50 payout in 2007. If only all New Zealand farmers would combine, they could form and own a New Zealand Farmers’ Bank into which more than half New Zealand’s annual overseas earnings would go. They could then control the exchange rate on what they held, and give interest rates more like the Western world, rather than our excessively high ones that farmers pay. New Zealand, apparently, has the least fraud in the world and is recognised as being safe and stable. No banks collapsed in the 2009 downturn, while dozens collapsed even in USA, so overseas investors now investing with our major banks at about 3%, would do so in the Farmers’ Bank. Farmers could then borrow at about 4% which is a 33% margin. TSB, New Zealand’s best bank by far, lends at a margin of The current situation in New Zealand, with all the major banks Australian owned, and sending up to $11 billion annually (2008) in profits to Australia, could change to the Farmers’ Bank earning half the overseas funds, or about $5 billion a year, for their 50,000 farmers, which would average $100,000 each. What are our farmers waiting for? Currently farmers buy retail, sell wholesale, and lose millions because of a high exchange rate which penalises exporters and favours importers, allows high borrowing interest rates, all influenced by New Zealand’s stability, which is created largely by farmers. In April 2010 the slight increase in some dairy export prices caused an increase in our exchange rate, so farmers can’t win, unless they work on it. The solutions are so simple, but not easy, and won’t happen without farmer drive. Best wishes. Vaughan Jones |