New Zealand Dairy Workers’ Union submitted a report on “Milk Price Inquiry”

As a response to the New Zealand Parliamentary Commerce Committee inquiry into the price of milk, the New Zealand Dairy Workers’ Union (NZDWU) reported that the benefits of the co-operative approach in dairy must not be lost.

According to the NZDWU, the benefit that the co-operative dairy model brings to farmers, the provincial workforce and rural communities must not be put at risk by a false understanding of the drivers of milk prices. Dairy Workers Union National Secretary James Ritchie said the principal drivers of domestic milk prices were beyond the farm gate. His submission was as follows:

“We don’t believe that the price farmer shareholders receive for their milk is too high. Rather, the evidence suggests that it is the wholesale and retail margins on the price of milk in New Zealand that are inflated, which Consumer NZ have found is around 70% on the cheapest milk. That margin is much higher, of course, on more expensive, branded milk as the amount that farmers receive per litre is the same. The co-operative basis of the New Zealand dairy industry has been and remains the single most important foundation of this country’s success as a dairy exporter. This model has clearly been in the interests of farmer shareholders.  But farmer income also flows through regional communities, and Fonterra and the two other co-operatives account for thousands of good dairy manufacturing jobs also, exactly the sorts of jobs we need in regional communities”.

He added that Fonterra’s competitors were focussing on the farm gate price because they could not match it and it was in the interests of private investors to reduce the farm gate price to increase profits to their non farming shareholders.

“It is quite simple – either we back New Zealand farmers, workers and regional communities, or we usher in changes to dairy policy which will see profits concentrated among elites – often overseas.”

James Ritchie said milk was just one item of rapidly rising food prices putting pressure on low income families, and there was value in debating whether a domestic milk price should be set for New Zealand consumers.

“New Zealanders support the dairy industry through infrastructure development, investment in bio security, trade policy and environmental protection measures. We believe this support deserves a price discount,” he said.

BACKGROUND: Summary of Dairy Workers Union main points on milk price inquiry.

Milk affordability in context

For some time, food prices have been rising across the spectrum and at a much faster rate than New Zealand families’ incomes. This is felt particularly by low income families who spend a greater proportion of their income on necessities.

When it comes to rising food prices, fresh milk is not the main culprit.  Looking at the five years ending June 2011, the price of fresh milk (20.7%) has moved much less dramatically than other dairy items (eg salted butter increased 124%; cheese 60.3%, and flavoured yoghurt (supermarket pk of 6) 27.7%. Many non-dairy items have increased by more than 40%. In this context, the Select Committee’s inquiry focus of fresh milk prices alone is too narrow.

Excessive farm gate prices or high supermarket margins?

The NZDWU does not believe that the price Fonterra’s farmer shareholders (and the other two co-operatives’ farmer shareholders) receive for their milk is too high. That is because we believe that the principal drivers of domestic prices are beyond the farm gate.

This view is supported by Consumer NZ’s calculation that wholesale and retail margin on the cheapest milk is around 70%.  That margin is much higher, of course, on more expensive, branded milk as the amount that farmers receive per litre is the same. Consumer NZ holds that this margin is high when compared with the USA (54%), the UK (60%) and Australia (64%).

Further evidence of very high wholesale and retail margins can be found in a NZIER (May, 2008) report commissioned by Federated Farmers.  That report estimated that in 2008, farmers received 35% of the retail price of milk;  a slightly higher figure than that calculated by Consumer NZ, but by no means excessive.  (NZIER (May 2008). Food Prices-A Farmers Share. A Report commissioned by Federated Farmers of New Zealand.)

Farm gate price efficiency

The NZDWU has long noted the three co-operatives’ payouts to their farmer shareholders and has monitored Fonterra’s payout very closely since its establishment. The Union has seen farmers take a hit when times are tough and enjoy higher payouts when prices are higher and/or when the New Zealand dollar is low.

The NZDWU has never seen a single scrap of evidence that supports claims that Fonterra’s farm gate price is inefficient.

What the NZDWU has observed is a long litany of allegations and assertions from Fonterra’s competitors. Those competitors’ agitation around Fonterra’s farm gate price has nothing to do with the price domestic consumers pay for fresh milk and other milk products. Rather it appears to be an ideological and commercial attack on Fonterra’s co-operative structure and its better performance by less efficient, independent processors who are finding it difficult to match Fonterra’s payout.

Maintaining the cooperative model

The NZDWU has absolutely no doubt that the co-operative basis of the New Zealand dairy industry has been and remains the single most important foundation of this country’s success as a dairy exporter.

The maintenance of the co-operative model is essential for this country’s economic security. If the industry were to become the domain of private investors, then patterns seen all too often overseas would be replicated here; the price paid to farmers would be driven down with profits flowing offshore to the international investors who would take control of what is a very profitable industry.

The Dairy Industry Restructuring Act

The NZDWU supports unreservedly a regulatory requirement that Fonterra sell milk at a fair and transparent price to processors producing products for the domestic market.

However we strongly oppose requirements that Fonterra supply raw milk to processors predominantly producing export products.

It is ridiculously self-defeating for the New Zealand Government to continue to oblige Fonterra to sell raw milk to private enterprise–increasingly overseas owned–producers that use that milk to compete with this country’s co-operatives on export markets and which remit their profits to overseas investors at the expense of New Zealand farmers, provincial businesses and communities, and the country as a whole.

New legislation is required which protects and promotes domestic competition in milk products while at the same time removing the requirement for Fonterra to provide milk to start up companies that seek access to milk in order to compete with Fonterra in international markets.

International factors – the financialisation of the food industry

The domestic debate that has led to this inquiry has been over-simplified in that too little attention has been given to the complex range of global factors that have resulted in the rapid increase of not only the price of milk but also the price of other food.

In our full submission, the NZDWU argues that those global factors are much more complicated than simply export markets’ demand for New Zealand’s milk products.

Since the mid-2000s, there has been a growing recognition internationally that the increasing domination of transnational companies in the production, processing, distribution, and retailing of food and the changing role of commodity markets-the financialisation of the food industry-are contributing substantially to the rapid rise in global food prices.

We note a recent damning analysis of the impact of the financialisation of food markets by the UN’s special rapporteur on the right to food, Dr Olivier De Schutter.

In examining the food crisis of 2008, Dr De Schutter examines and eventually rejects as “insufficient” demand and supply arguments that attempt “to explain the full extent of the increases and volatility of food prices.” Of interest to the select committee inquiry are Dr De Schuttter’s comments on the price of dairy products:
Nor, as Wahi (2009)  observes is it likely that a group of people suddenly developed a taste for consuming vast quantities of dairy products, driving its price up 157% between 2006 and November 2007, only to lose it starting from July 2008, allowing prices to start falling again.” (De Schutter, O. (September, 2010). Food commodities speculation and food price costs. Briefing Note 02.)

The financialisation of global commodity markets poses serious threats to the New Zealand dairy industry and, beyond it, to all New Zealanders. There is an urgent need for policy makers in this country to understand better the powerful influence of speculative financial actors on commodity markets.

Should there be a domestic price discount?

Domestic consumers should not pay a global price for dairy products.

New Zealanders support the dairy industry through infrastructure development, investment in bio security, trade policy and environmental protection measures.

New Zealanders also pay a largely unrecognised environmental and social cost for the expansion of the dairy industry.  While the co-operatives, principally Fonterra, have taken initiatives to reduce dairying’s environmental footprint, there is still a significant minority of farmers-supported by some of the more extremist farmer politicians–who are failing to meet their environmental obligations to the country as a whole. Too many of this country’s streams, rivers, and lakes are polluted as a result of dairy effluent and chemical runoffs. Thus there is a very real sense in which the monies paid by New Zealanders as taxpayers and ratepayers to clean up those waterways and also to support bio security programmes constitute a public subsidy of dairying in particular and farming in general.

What is required is a ‘new deal’ between the dairy industry (and other agricultural and horticultural industries) and the people of New Zealand. In return for taxpayers’ continuing investment in infrastructure and the clean-up of our environment, Fonterra and other dairy processors need to adopt a domestic pricing model that recognises the real and intangible contributions New Zealanders are making to dairying’s success. Fonterra’s current freeze on milk prices is a step forward; what is now required is a commitment to a long term pricing structure that is fairer to all of our people.