Visions of greener pastures

ROD ORAM
Last updated 05:00 14/11/2010
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Photo: Taranaki Daily News
New Zealand is leading the way on dairying issues.

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OPINION: Abundant opportunities, towering challenges and gut-wrenching volatility were the three biggest themes on the minds of 2000 attendees from 56 countries at the World Dairy Summit in Auckland last week.

No one country, group of farmers or processors had all the right answers. But the New Zealand dairy industry was clearly one of the best-placed on some of the issues.

With hope outweighing fear, a strong sense of optimism pervaded the conference. This was particularly evident in the leaders' forum, which brought together seven senior industry figures from around the world with some 1500 delegates.

Thanks to interactive technology, it was possible to instantly poll the delegates on a range of issues during the session. The results gave a rare glimpse of the thinking in a global industry.

Rightly, world dairy prices focused their minds. Asked what they believed the price of whole milk powder would be this time next year, 70% of the delegates picked a price above $US3000 ($3800) a tonne, while only 30% suggested a lower price.

The most popular pick, attracting 27% of the votes, was the price band $US3250 to $US3500. That was close to current prices and forecasts by the likes of Rabobank.

Such price strength augurs well for the New Zealand economy over the next year, giving some relief to dairy farmers from the high Kiwi dollar. But nobody can afford complacency. Prices of products, and inputs such as fertiliser, have also become extraordinarily volatile in recent years.

For example, whole milk powder peaked around $US5000 in October 2007 then collapsed to around $US1750 in mid-2009. Most people believe the wild gyrations are here to stay and so they are learning to use futures and other new tools and disciplines to cope.

Fonterra is playing a useful role with its globalDairyTrade internet auction which is bringing to the global market commodity price transparency and futures contracts for physical delivery of products. Similarly, the NZX has introduced dairy futures with cash settlements. And Fonterra's new capital mechanisms give farmer-shareholders some more tools for managing their investment in the co-op.

As for the industry's biggest strategic opportunity, reaching new consumers was the most popular choice of delegates, attracting 27% of their votes. They believed India would be the fastest-growing market in volume terms, followed by China.

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The next three most popular strategic options were: scientifically proving the nutritional benefits of dairy products; communicating better with consumers; and increasing production in developing countries.

There are pluses and minuses in this mix for our industry. On one hand, Fonterra is investing in farms and developing its sales forces in India and China. Clearly, it sees the investment as a way to build consumer confidence in local production, particularly in China after the melamine scandal.

But farming is a new, non-core skill it has to learn. Worse, this will have a limited payoff because the real assurance challenges are downstream in processing, food manufacturing and distribution.

Fonterra would be far better off investing its capital and abundant skills in those areas to build utterly secure supply chains right to consumers. It has got to do so because it can't continue to meet burgeoning demand with big increases in exports to China. We can't produce enough here, nor can the co-operative's own farms in China. At some point it will have to recommit to processing milk from Chinese farmers, in China.

Fonterra is also less than ideally placed on the other two big strategic opportunities. When it comes to communicating with consumers it is typically one stage removed from them in sophisticated, developed markets such as Europe and the US.

Similarly, it is running far behind the food manufacturers which are pioneering high science, high value new products.

When it came to threats to the dairy industry globally, delegates were asked to identify their single biggest challenge: 29% picked efficient production and profitability; 22% climate change; 20% changing consumer behaviour; and 16% alternative sources of food.

Again, there are positives and negatives in this quartet for New Zealand. We are still among the lowest-cost, most efficient producers in the world, but competition is increasing from farmers abroad with much lower land and labour costs.

Our responsiveness to consumer demands is good in conventional products but we lack the science to meet their needs for sophisticated new ones; the higher milk prices go, the more food manufacturers will substitute non-milk ingredients in their recipes where they can; and we don't produce substitutes such as soya.

Over the past few years, climate change has become a major issue for the summit, an annual event organised by the International Dairy Federation. Last year in Berlin, the IDF committed itself to a seven-point climate change agenda. In the following 12 months, scientists, farmers, processors and other parties under the auspices of the IDF initiated more than 300 related projects.

Delegates to the Auckland summit were updated on progress, such as a way for the dairy sector to measure and manage its emissions, and compare performances across the world.

Some 200 farmers and others delegates from around the world participated in a day-long farming conference. They, too, were instantly polled on a range of issues:

Is human activity contributing to climate change? Yes, 95%; no, 4%; don't know, 1%

Is dairy farming contributing to global climate change? Yes, 75%, no, 17%; don't know, 8%

Is dairy farming part of the solution to climate change? Yes, 85%; no, 15%.

The day was full of presentations of research by scientists and practical applications by farmers on their drive for much more efficient use of water and nutrients and reductions in greenhouse gas emissions.

There are, of course, enormous scientific challenges, the biggest being finding ways to help reduce farming's greenhouse gas emissions and other climate change impacts. New Zealand is playing a leading role.

Although the complexity of the science means the pay-off won't come for many years, the conference was full of current and near-term actions dairy farmers can take. And they are willingly embracing them, seeing them as business opportunities rather than burdens imposed by governments.

Overall, it was clear from the summit that the New Zealand dairy industry is a global leader in many areas such as pastoral farming, processing and trade and is playing an important role in the push for sustainability.

By playing to those strengths, the industry will help lift the New Zealand economy. But it won't maximise its true potential until it is also a leader in downstream science and overseas investment, two expensive and difficult disciplines it has yet to master.

Rod Oram moderated the leaders' forum and co-moderated the sustainable dairy farming conference at the World Dairy Summit.

- © Fairfax NZ News

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