Editorial: Dairy price decline an urgent warning

There is, unfortunately, nothing askew in the news that international dairy prices are falling. Such is the way of the world with commodity exports. Cycles of demand are inevitable for unadorned products such as logs, wool, butter, cheese and milk powder. When prices are high, increased production can be orchestrated relatively easily by those wanting to join the good times.

Thus, increased dairy export subsidies in Europe were all that were needed to encourage farmers there, as were bigger subsidies for skim milk powder in the United States. The upswing in world production means the grass is no longer so green for New Zealand farmers.

That would not be so bad were it not that last year's resilient economy was borne so much on the fruits of dairy exports. As the world's major economies slogged through downturns, the New Zealand economy was remarkably buoyant. Included in the benefits were the lowest unemployment rate in 13 years and the smallest deficit for seven years, thanks to New Zealand's traditional mainstay, the pastoral economy.

Good growing conditions helped as export volumes shot ahead 5.5 per cent in the September year. First rural areas flourished, then the cities, creating a confidence that even the events of September 11 could unhinge only temporarily.

Now, the world dairy trade has gone off the boil - as was bound to happen. Commodity prices, measured by the ANZ Bank's world price index, peaked last May. They have slid since, with the momentum increasing over the past two or three months. Further falls are expected. Forward sales contracts and hedging have negated some of the damage but farmers will start to feel the fallout later this year. As will, soon thereafter, the rest of the country.

This provides yet another lesson, if one were needed, of the ongoing need for New Zealand to diversify its export base. With a balanced economy we would be far less a hostage to the vagaries of international trade. Such, of course, is the thinking behind a knowledge economy. Brainpower is not a product that can be duplicated almost overnight. Expertise in an area of research - say, agriculture in New Zealand's case - gives a country a product for which the rest of the world must come calling.

It would help also if we paid more attention to adding value to our exports. Many countries have favourable conditions for growing trees and exporting logs. Not all have the skills or capacity to develop logs a stage further before they leave their shores.

Similarly, there is now, more than ever, a need for manufacturers to develop niche markets. New Zealand manufacturing cannot match the cheap production costs of Asia but it has the skills to find its own small, but highly profitable, place in the sun.

The souring of dairy prices also illustrates why no restrictions can be placed on those who will deliver diversification. Research scientists must not be shackled. In the field of genetic modification, this country has the background and potential to be a world leader in food production and medical discovery. Restrictions will cause those advantages to be lost.

Likewise, New Zealand must not lose any chance to push the case for free trade. Commodities markets will always be cyclical but an element of danger would be removed if export subsidies ceased to be part of rival countries' arsenals. A free trade agreement with the United States would obviously help. But the new World Trade Organisation round of trade liberalisation negotiations offers New Zealand its best chance of reducing such obstacles to agricultural trade.

The breaching of protectionist barriers may encourage a belief that this country can continue to rely on commodity exports; that the golden days of the 1950s could be resurrected. That is wishful thinking. The unique circumstances underpinning that prosperous period will never be replicated. To rediscover a prosperity that offers the comfort of constancy, New Zealand must embrace a knowledge-based economy.

The swingeing impact of the dairy price decline is further warning that there is no time to be wasted.