Fonterra has just given the economy a $3 billion boost, and nobody will complain. Without the rivers of white gold, New Zealand would be far poorer than it is. But there is a downside to the dairy boom. The environmental cost of the dairy bonanza, for example, has been high. The 50c a kg increase in Fonterra's forecast payout comes just as the world meets in Bali to grapple with climate change. And the fact is that dairying produces a large portion of New Zealand's greenhouse gases. In that sense, the reality of dairying is neither clean nor green and that is a problem for the international reputation of the industry. George Bush and his neocons are doing their best to stymie progress on climate change, but the world cannot escape it. An industry whose greenhouse gas emission is proportionately so large must expect greater and greater international scrutiny. Right now there is no clear way to bring about a dramatic reduction in dairying's methane and nitrous oxide emissions. And at home, the dairy boom has caused much environmental damage to waterways.
Some argued last week that the big Fonterra payout would enable dairy farmers to do more to clean up their act. They need to, and now they have a chance to put their money where their mouths are. Some dairy farmers are, to be blunt, environmental pirates. Many are not, and Fonterra's 2003 Clean Streams Accord was a decent attempt to reduce pollution. But here success has been partial. This year the average dairy farm will have an income of about $800,000. If dairy farmers can't afford to clean up their fields and streams now, they will never be able to.
The wider environmental problems the methane produced naturally by cows, the pressure on increasingly stretched water resources such as Canterbury's will remain harder to deal with. The Greens have rightly argued that the country effectively subsidises dairying by allowing it to use water free. Of course, the same argument applies to other water users. At some point, the country is going to have to recognise the value of water by putting a price on it. The economic implications of this are large.
And there are other economic questions posed by the dairy boom. Dairy prices are part of a commodity boom driven by the booming Chinese and Indian economies. The received wisdom of the last generation that commodity producers like New Zealand are on a long-term hiding to nothing is now in question. Perhaps, it is argued, commodity production is our best bet. Perhaps this commodity boom will be "structural" that is, long-lasting unlike the previous booms. Nobody should bet on it. The Chinese boom cannot last forever: at least, not at 12% growth a year.
This means New Zealand cannot rely on its cows to make it rich. Already its overseas earnings are too heavily dependent on dairying, which makes up about a fifth of our merchandise exports. We have some natural advantages in agriculture and dairying will remain a vital part of our economy for many years. That does not release us from the duty of diversification.
Economist David Skilling is right to warn that dairying is not a silver bullet for New Zealand. We are still too dependent on shipping heavy protein products to foreign markets. He wants us to do far more to join the "weightless" cyber-economy, exporting services and know-how. The resurgence of the "old" commodity economy does not mean the new economy has disappeared. New Zealand has to be competitive in both.
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