Alan Barber: Gloom, boom in Fonterra’s world outlook

Andrew Ferrier, Fonterra chief executive, outlined two alternative scenarios for the dairy industry in 15 years at the recent large herd conference.

In both, Fonterra will be "big in the world" but, in the more pessimistic case, New Zealand dairy farmers will not be the main source of supply.

The background to this gloomy view of this country's future supply potential is the picture of New Zealand's productive capacity being submerged under urban sprawl and lifestyle blocks, while water restrictions, energy costs and resource consents for every aspect of dairying will make it uneconomic for all but the largest farmers. The alternative picture is to commit to a strategy and an action plan to counter the doomsday scenario.

At the same time, European and British dairy farmers are facing dwindling subsidies and falling milk prices which are forcing many to give up dairy farming altogether.

So the next big question is: "Who is going to pick up the supply shortfall and become the world's milk producers?"

Fonterra has clearly identified South America as a source of supply and has already invested in dairy companies in that part of the world.

It seems inevitable that production increases will have to come from countries with enough farmland at a realistic price, an equable climate and lower input costs.

New Zealand is no longer a low-cost producer and the success of the industry has only pushed up the price of land.

More than 15 years ago, dairying started to outperform sheep farming. Sheep were squeezed from above and below - forestry on the hills; dairy on the flat land - especially when irrigation made it possible to convert the land use.

But sheep farmers have fought back to the point where, in combination with beef, it has reasserted itself as the most profitable farming activity.

It has also become evident that Australian dairy-farming costs are lower than New Zealand's and, as their efficiency continues to improve, this comparative state of affairs will continue to get worse.

I am not suggesting that dairy farming in this country will become a thing of the past, but it is important to keep it in perspective.

For too many years since 1990, irrigation and increased use of fertiliser have fuelled the potential for land-use change, according to the latest trend in global commodity prices, with the result that the price of land has sky-rocketed and the pressure on resources has risen enormously.

So Ferrier's warning to New Zealand's dairy farmers may not be the disaster that they seem to think.

Fonterra's best outcome may be to become "big in the world" on the back of of suppliers from other countries whose productive capacity is either bigger, cheaper or less resource-demanding than ours.

Another matter for consideration is whether Fonterra will set up a co-operative structure for the farmers of South America.

If the model works so well here, there's a good chance it would work equally well over there.

This latest debate signals another step in Fonterra's evolution into a marketing business on a global scale, rather than a production-led company whose owners - its suppliers - dictate how it is allowed to grow, as has been the case until recently.

New Zealand's 13,000 or so dairy farmers should see this as a great opportunity to increase the global reach and profitability of their company while ensuring that their own domestic production methods meet all reasonable environmental and quality requirements.

This is an opportunity, not a threat.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.