Focusing on core business or diversification?
A sheep-farming relative of mine, who shall remain nameless, recently asked a dairy-farming neighbour if he needed a loan. The dairy farmer, with a somewhat wry look on his face, admitted that sheep and beef farmers deserve their time in the sun.
He was right; sheep and beef farmers need a run of good returns, but joking aside, the recent trade of fortunes highlights some important questions for our country.
Milk and meat exporters have warned us for quite some time that we are in for volatility regards commodity prices. That is great when the prices are high, but another matter when prices drop.
The emotive language used to report the drop in dairy prices - ‘Fonterra profit plunges’, ‘Dairy prices, the parachute is struggling to open’, and ‘Dairy drop exposes bankruptcy of economic strategy’ - is enough to send some into a panic, but not most; they have seen it before. Think back to how quickly dairy prices lifted after the 2008 dive.
New Zealand is a small country, but by having one large milk exporter, we have been able to compete at a global level. This has allowed Fonterra to focus on what their core business is, selling milk powder products at the best price.
Focusing on core business generally makes good strategic sense. Some say that Fonterra’s success comes from nothing more than riding the commodity wave, but I think that is short sighted.
Fonterra is growing its supply base and relationships in China. In addition to that, their auction strategy is smart. It enables Fonterra to have a greater visibility of supply and demand, and adjust what they turn milk powder into and what they release accordingly.
It still leaves them room to develop supply relationships with the best partners, but unfortunately, it doesn’t protect them from market volatility that we are currently experiencing.
Emotions aside, the media have raised what I believe is a critical question: is our economy too reliant on dairy, do we have all our eggs in one basket? At the moment the medium-term supply situation looks good, but I believe our greatest danger lies in becoming complacent and not scanning the horizon for changes ahead.
China, the United States, and South America are all scaling up their dairy industries, which means the supply dynamics will change in the longer term.
Large companies like Fonterra have power in a global market situation, but they are a difficult ship to manoeuvre once on a certain path. I have no doubt we will see milk prices rise again but as a country we need to be vigilant about developing other opportunities in other sectors, including sheep and beef and crop-based industries.
A colleague of mine in the Botany Department at the University of Otago, Dr David Burritt, who is working with cropping organisations in Chile, has suggested to me that New Zealand should be looking to better develop crops of interest such as blueberries, which have proven health benefits, are easy to grow, and have few disease issues.
Of course the challenge to developing such novel crops is to do it at a scale where we have enough local production to enable building of appropriate processing and market infrastructure, so such a venture doesn’t languish as a cottage industry. This would require government and probably international investment and a group of committed producers.
Thinking about our agricultural economy and what lies ahead, we must do everything we can to keep scaling our global companies like Fonterra and building on their success internationally. At the same time, we must not be blind to the icebergs ahead. We need to work hard to develop new opportunities, especially in regions such as Central Otago that are sensitive to livestock intensification.
With imagination, government commitment and drive from local communities, these are the regions we should look to develop other scaleable food industries…what they might be is wide open!