Fieldays week should be a time to celebrate the sector that has underpinned the wealth and prosperity of this nation for more than a century.

No matter how sophisticated urban New Zealand gets, it is an inescapable fact that the primary sector still accounts for more than 50 per cent of our export earnings. And much of our manufacturing and technology sector has been built on the servicing of the sector.

So this week business and corporate leaders, bankers and brokers from around the country will be putting on their gumboots and heading for the muddy tent town that springs up annually at Hamilton's Mystery Creek.

It is always a lot of fun, a chance to do business, share ideas and get inspired about the sector.


Unfortunately though, this year's conversations are likely to be dominated by talk of the commodity downturn.

In dairy especially, it has been a bad year and one that has surprised with its severity.

The big question hanging over this latest slump in dairy prices is whether it is a cyclical or structural fall in prices. In other words, how worried should we be about this?

To what extent do we need to look at the way the industry is working - from production to exports, marketing and sales - and consider major changes?

It is impossible to predict with certainty where prices will go next. If they were to turn upwards at the next global dairy auction and keep rising for the next few months then the sentiment in the industry would shift fast.

But another few months of falls could cause some serious panic.

The length of this downturn is the key. One year of pricing below the profit line is manageable for most farmers, two gets difficult.

And three? Well three almost doesn't yet bear thinking about.


Except that we need to be prepared for the worst. What we do know is that dairy farmers and the whole New Zealand economy remain highly vulnerable to the ebb and flow of global dairy supply and demand.

The way to get better control of dairy returns is to increase the extent to which we process product in this country, to turn more product into branded consumer goods and add value. We all know this. We've known it for decades.

There are no prizes for economic commentators berating Fonterra management about the need to shift in that direction.

The Fonterra Brands business remains part of the larger Fonterra machine and despite best efforts of management it still faces conflicting pressures of competing for resources with the rest of that machine.

The Brands business is meant to offer farmers a hedge against commodity slumps.

When commodity prices are low this should lift the value added business. It should be firing.


Perhaps it is starting to. But if so it is clearly not yet on a scale to offer farmers the protection they need. And it is not obvious from its current NZX performance.

The 20c to 30c per share that farmers will get as a dividend payment this year is in exactly the same range as it was in 2009 when the value added payment was first separated out.

Meanwhile the valuation of Fonterra's NZX-listed tradeable units offers no comfort to farmers or external dairy industry investors.

The virtual shares which farmers can sell to outside investors have traded as high as $8.09 on the NZX.

In the past two years they have drifted back 35 per cent to Friday's close at $4.76. That's a terrible return when measured against the NZX-50 average return, which is up by about the same amount over the same period.

It is hard to avoid the conclusion that the record bull run for dairy commodity prices masked the performance of the Brands business and this has now been laid bare.


It is true that in that period there have been some damaging food safety issues to deal with.

But fundamentally Fonterra management is still stuck with a structure that forces them to juggle two very different businesses. It is an unenviably difficult trick to pull off.

Former chairman Henry van der Heyden tried valiantly to convince farmers their best bet for added real value for their milk was to fully spin out the Fonterra Brands business and float half of it on the stock exchange.

The proposal was voted down and watered down to what we have now. A structure that is yet to deliver.

Perhaps commodity prices have bottomed out, perhaps they will turn upwards soon and take the pressure off once again.

But, if that doesn't happen, if the pressure continues to mount on farmers and Fonterra management, then perhaps the time has come again to consider the fundamentals of this industry which has served the country so well for so many years and must continue to do so.


The time is right for the conversation about these issues. It should make for a fascinating week at Mystery Creek.