A recent newspaper article on the New Zealand dairy industry was headlined "Fonterra gets a pass mark but there is still a long hard road ahead".
This must have been disappointing to Fonterrra, as there has been a recent outpouring of "good news" stories about the industry from the company itself and supporting commentators, including a $4 million PR campaign through Dairy NZ funded by dairy farmers.
In justifying this large expenditure, a spokesman for Dairy NZ said they could not understand why the sector was thought of so poorly by many New Zealanders, so their sometimes misleading campaign had been designed to correct that impression.
If this lack of understanding is genuine, it shows a very serious lack of empathy for the obvious damage done to our waterways and lakes by dairy cows.
This failure to recognise the cost of the sector's environmental footprint has been well illustrated by Dr Mike Joy, of Massey University. Unfortunately the industry, aided and abetted by much of the rural press, has taken the position of shooting the messenger rather than confronting the message.
From the point of view of the general economic wellbeing of the country, these real concerns are often diminished or ignored, because criticism of an industry contributing 25% of our GDP is seen as disloyal.
But unfortunately, the dominance of our primary sector as the so-called backbone of our economy, particularly dairying, in the past 30-40 years, has coincided with a very rapid fall in our relative economic performance in the OECD.
This is largely because our primary sector businesses show a lousy return on investment. In sheep and beef enterprises it varies between 1% and 3%, and even on dairy farms the return on all capital employed rarely exceeds 4%. The bank would provide a better return. The only reason we keep on farming is because of the high rate of capital gain on farmland, with the doubling of dairying land prices between 2004 and 2008 the main cause of the $30 billion debt now carried by the sector.
This is not a sustainable position for a wealthy New Zealand and the banks must take some responsibility for this development. However, the situation is not new and the obvious solution of improving product prices has been suggested many times.
But Fonterra remains largely a commodity trader trapped in low and volatile returns. What is needed is a much stronger incentive for farmers to demand a higher payout from the companies, but this will only come about if the return from land inflation is reduced.
This could be achieved by a gradually increasing capital gains tax on land, which has generally been welcomed by most commentators, but not by Federated Farmers and some academics. This is not to suggest that Fonterra and other New Zealand dairy companies try to become a Nestle, but just diversify sufficiently into added value products to significantly lift returns to farmers.
This would also have the advantage of reducing price fluctuations, as it is generally recognised that the price of added value products is less volatile than commodities. Certainly, I have not noticed the price of Kikorangi blue in my local supermarket fluctuating wildly!
Unfortunately, unless the dairy industry and the country do not seriously discuss this dysfunctional situation with the primary sector, then New Zealand must start to look at alternative forms of investment.
The industry has also been very slow to seriously confront environmental issues which are the direct result of our dairying systems. The high-profile "clean streams accord" is really only the ambulance at the bottom of the cliff and does not confront the fundamental problem of an out-of-date production technology.
This is based on the research by McMeekan, Levy and others more than half a century ago, which highlighted increased stocking rate and per hectare production as the key to pasture improvement and financial success. This is still at the core of industry advice to farmers and has led to many of our increasing production and environmental problems as we approach limits to this biological system.
That this philosophy is deeply embedded was illustrated by a Dairy NZ speaker at a recent a "Pasture Persistency" symposium in Hamilton, who said the industry "could not tolerate a reduction in stocking rates". Ironically, when New Zealand-bred cows are fed to appetite in United States systems they produce at least twice as much milk as genetically similar cows in New Zealand grazing systems .
The dairy sector should take a lesson from the sheep industry. Despite a fall in sheep numbers from 70 million to about 30 million with a concomitant reduction in stocking rates, lamb production has been maintained by the simple procedure of feeding improved plant and animal genetic material to much higher liveweights. As a result, the environmental footprint of the sheep industry including emissions has been significantly reduced.
This emphasis on per animal production, which surely could be a "win -win" for the dairy industry, has been proposed by Dave Clark, of Dairy NZ in Hamilton, to suspicious industry conservatives for a several years.
Fortunately, the message has finally got through so at least the concepts are judged worthy of research. A trial that includes reduced stocking rates, partially funded by the dairy industry, will shortly start at Lincoln University and other sites at Hamilton, Massey and Telford. It has the potential to take the sector, together with more added-value products, to an environmentally acceptable level, and become a real wealth generator for New Zealand.
• John Lancashire is the immediate past president of the NZ Institute of Agricultural and Horticultural Science
