Wednesday, March 16, 2016

Gerry Eckhoff: Dairying

The question posed by regular columnist Colin James (Otago Daily Times 15 March 2016) – ‘Is dairying too big to fail’ - is one of the more bizarre questions or comments written by a person described as a leading social and political commentator. 

To further suggest as James does, that a very junior Minister in Nathan Guy, commenting that he is hoping to see a doubling of primary exports by 2025, as a part cause of the current dairy downturn is an extraordinary claim. I would doubt that the dairy industry or indeed any other primary industry takes a blind bit of notice of a very junior minister talking up his portfolio.

The parliamentary opposition demand the Government steps in to facilitate a “nobody goes broke outcome” for this industry, despite the dizzy amounts some farmers paid for their land, indicates a serious lack of even basic economics.  Can we soon expect Mr. Andrew Little to demand the Government steps in to support oil companies due to the current oil price downturn? 

Actually Mr. Little, the much maligned invisible hand of the market is working as it should.

There is no possibility of the dairy industry failing any time soon. Yes, the current severe down turn in dairy returns will result in some as yet unknown percentage of dairy farmers exiting the industry, but the industry itself will carry on. It will not fail.

Comments from Colin James can be simply dismissed as a little knowledge being extremely dangerous thing and regretfully contributing to the already too negative perceptions surrounding this industry.

 Those of us with some years of farming experience will recall all farming went through much more difficult times during the 1980s and most survived. During that period, farm values halved. First mortgage interest rates were anything between 20-30%. Currently such interest rates are around 5% with overdraft rates around 7%.  Huge capital sums of indebtedness of many farmers sums were written off by the banks during the 80s creating distortions that were never dreamed of.

“War” stories still abound of how rural families survived those incredible difficult times, but it was the distortions created by the so called “debt restructuring’ that caused seething resentment amongst those who were regarded as too secure to receive any assistance. Some of those who were ‘restructured’ went on to purchase more land a year or so later.

The current Minister of Finance is quite correct to make it clear that there will be no bail out this time.

All primary industries are subject to cyclical price pressures due to a host of reasons beyond our control – both up and down. It is also reasonable to state that rural industries come out the other end as far stronger industries after down turns.

Nobody could describe sheep farming as a successful growth industry yet it continues to generate export income for the country - despite tearing each other to pieces to achieve market share. 

The kiwi fruit industry all but collapsed recently due to a virus (PSA) decimating the crop. That industry is recovering and is tipped to soon reach record returns. 

The apple industry - predicted to fold its tent and move off the land after prices crashed and monopoly exporter ( ENZA ) was opened up to competition - now appears to be going from strength to strength. Apple exports are anticipated to reach a record 900 million dollars this season – up from 700 million last year. 

Even the small goat industry has transformed itself from the time of almost total collapse. 

The cherry industry has also met the challenge of climatic and price difficulties and appears to be headed to record another very successful season. All have met the challenge of hard times and seem to be the better for it.

It needs to be fully understood that one of the crucial roles of Government is to talk up confidence in the economy and therefore industry, regardless of the actual economic reality the country faces.

If dairy farmers or any other business people make decisions to expand their business through debt on the strength of a press statement or a TV interview from the PM on the state of the economy - who is to blame? Most farmers I know would suggest that taking investment advice from politicians is, well, to put it politely - not very smart. It often comes down to timing and overseas events which the industry has no control over.  The performance of Fonterra is however another issue for another day.

Gerry Eckhof is a retired farmer.


Peter Caulton said...
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Just another example of an out of touch politician with no common sense suggesting we encourage greed.

John Third said...
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Gerry demonstrates the wisdom of someone who actually knows what hes talking about in stark contrast to what passes for the main stream media these days who write vacuous commentary without the faintest effort to fact check any thing they write
John Third

Anonymous said...
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I do have some sympathy for the farmers but none whatever for Fonterra. They provide a very good example of how profligate the financial/bureaucratic(parasitic?)side of business can be. Their behaviour - demanding discounts and special terms of payment is indicative of their bloated sense of entitlement.
Auntie Podes.

Peter said...
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I like Antipodes comments. When you pay a CEO over $4 million in salary you expect (a) a better anticipation of dairy trends and (b) better performance of the company. I've asked this before. What does a CEO earning over $4 million do better than the same CEO earning say $500,000? Lots of wasted money.
There is also supply and demand. It is a trend of economics as demand increases prices rise. When supply exceeds demand, at auction, prices drop. This has been shown in our primary industries frequently. Plenty of sheep, the price of lamb and wool diminishes. Plenty of beef the price of beef diminishes. Plenty of butter, the price for butter fat drops. Alumunium was once a precious metal; when it became popular to purchase and manufacture the price went down. What is so hard to understand about that?
Nice for farmers and Fonterra to be optimistic; but were they a little out of touch with reality. I think so.
Should the government bail out farmers? I hope not. Politically it would be in their favour. After all most dairy farmers are New Zealanders. They have paid their taxes and contributed a lot to the New Zealand economy. They are actually more deserving than Rio Tinto was. Rio Tinto begged poor prices for aluminium and got a $30 million bail out. Government reasoning was they provide jobs for Southlanders. Don't dairy farmers also provide jobs for Southlanders and contribute much more to the New Zealand economy than a Swiss conglomerate?

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