Putting our environment under increasing pressure for a marginal or lower net return really makes no sense.

Why are dairy prices falling? Well, if you read industry commentary from places like the United States and Europe they know who's to blame. It's us.

New Zealand, the world's largest dairy exporter, is dramatically increasing its supply year after year and burning off demand.

That raises some pretty interesting questions about where we are going with dairying in this country. Not least of all, why we are putting our environment under pressure by increasing commodity production if the result is a marginal or lower net return.

On Wednesday Fonterra's next Global Dairy Trade auction will reveal whether prices are still falling.


The price index dropped 8.9 per cent last auction, down a cumulative 35 per cent since early February's record high.

There are hopes the slump will bottom out before the local season hits its straps in spring. But no one is quite sure how far supply and demand are from equilibrium.

One thing is for sure, unless we have a drought, there will be no let-up in New Zealand supply growth.

As it announced a big drop in payout last month Fonterra noted that the price falls would be offset by record milk volumes - up 8.3 per cent last season compared to the year before.

It's that kind of statistic that worries our international rivals. It probably worries some of our established dairy farmers too.

This is not a high-value strategy.

Still we are forging ahead converting traditional sheep and forestry areas into dairy farms even as public anger about the state of our waterways grows.

Unfortunately, at a political level the dairy debate has become tribal. You're either for or against the dairy industry.

That's nonsense.

The smart people in the dairy industry understand that issues like river pollution are serious.

Even Fonterra chief Theo Spierings has acknowledged that.

But the Government doesn't get it yet. Or, if it does, it is doing a bad job of communicating it - as evidenced by Nick Smith's woefully adversarial stand-off with Fish and Game last week.

The partisan nature of the debate is not helped by the Greens who don't seem to recognise the value that Fonterra brings to this country.

Obviously dairying success has been fundamental to New Zealand's economic growth over the past decade and a half. It will continue to be for many years to come. When we talk about the transition to a technology economy we have to include food technology and dairy in the mix.

But if this Government thinks New Zealanders will accept polluted, un-swimmable rivers as an economic reality then they are dreaming.

Converting land to dairy is understandable when economics point to it being the most lucrative use of the land.

But where conversions are marginal and predicated on historically high dairy prices, they are risky.

And if the public is expected to bear the environmental costs then they are subsidised. Taxpayer subsidies only make sense when they take an industry in a direction with long-term benefits for us all.

Our smart manufacturers have stopped building assembly plants in Auckland. Companies like F&P Appliances build them close to markets in low-cost economies like Mexico. They invest in R&D here and in the services side of the business.

In fact, this is what Fonterra does too. Its investment in new farms is focused on joint ventures in China and South America.

The future for dairying in this country has to be further up the value chain.

Commodities have delivered good returns for a decade but they don't deliver the jobs we want, they don't offer payout security to farmers and chasing more volume is damaging our environment. Fonterra understands this but its obligations to farmer shareholders make it risk-averse and its transition is slow.

Fonterra needs competition. We need more companies like Tatua and Open Country cheese.

We need to be open to foreign investment in the manufacturing and processing of dairy. We need to keep working on the agricultural science that delivers better pasture, more productive animals and better environmental outcomes.

But converting more and more land just to produce ever-higher commodity volumes - no thanks.

If the Government wants to ensure the future growth of the dairy industry then it needs to show some leadership. It needs to change the message before it burns off public goodwill.