As we trawled the news this week we found an interesting juxtaposition of old world and new.
In New Zealand there was a real buzz about the potential for a Free Trade deal with the USA. In his article "US trade deal is gold to our farms" Chris Gardner (Waikato Times, November 16) reports that farming leaders were "rubbing their hands together at the prospect of a free trade deal with the United States". The article goes on to report that the Prime Minister has been invited to Washington by President Obama in the new year. There were also numerous affirmations of the benefit of such a deal by industry leaders ... and it would be good for NZ farmers ... and we all need hope - especially after the past year.
Alongside this news was a letter to the editor in a US on-line news service: "Solving the low-milk-price problem", Leon F. Perry, The Daily News Online, November 16. The letter talks to the issue of MPC import and use in US cheese production. Mr Perry does raise questions about the nutritional value of this practice but that is something of a distraction from the real issue. The major point of his letter is that imported MPC is undermining the utilisation of US milk supply, affecting milk price, and strangling the opportunity for growth. According to Mr Perry:
"MPC's were already a serious problem when the Quality Cheese Act was first introduced in 2000. Farm milk prices had collapsed after a flood of unlimited, duty-free MPC imports swamped U.S. dairy markets."
He goes on to say:
"... farmers have programs to reduce the milk supply and have been told by the experts that it is the solution. I believe that is wrong. That's exactly the problem in this country and the economy. We cut production and jobs, increase imports and help China. This is counterproductive. .... When farmers cut production processors just increase imports, even if imports cost more. Cheap milk prices greatly off set any higher cost imports, which is cost effective."
Mr Perry describes himself as a "retired and tired farmer" (there must be plenty of them around the world!). His arguments may be somewhat illogical and easily refuted but I would say that Mr Perry's point of view is entirely rational and furthermore, he is most likely entitled to vote.
And what do I mean by "entirely rational"? Well, when Mr Perry's vested interest is taken into account why on earth would he be in favour of dairy imports to the US? For that matter why would any dairy farmer in the US vote for a dairy free trade agreement?
As it stands New Zealand and Australia beat the US and Europe hands down when it comes to the cost of production. For evidence of that just take a look at the farmgate milk price comparison over the past 15 years (http://www.xcheque.com/data/charts/us-annual-milk-price.html). Until the recent dairy price boom, Oceania farmers have been operating at $US 6.00 - 8.00 / cwt. This compares with a price for US Class II and Class IV milk of $10 - $15 / cwt. The gap has closed in the past few years but that is because international demand and the reduction of EU / US export subsidies has allowed global commodity prices to rise. Oceania farming costs have risen alongside this revenue boom but there seems little doubt that Australian and New Zealand farmers still retain a significant advantage in cost of production when compared with the US.
The story is similar for EU / Oceania dairy trade and comparative economic advantage. EU and US farmgate milk prices have been reasonably close over the past 15 years and so Oceania farmers also hold the same production cost advantage over the EU. It is only the presence of EU export subsidies that has allowed Europe to compete with Oceania in global dairy markets. In recent years the intent and action of the EU in agricultural reform is to be applauded but it is a tough sell, especially when EU Agriculture Commissioner Marion Fischer Boel is faced with the drama of farmers rioting in the streets and millions of litres of milk being poured onto European fields ("Farmers create chaos with spilled milk in Brussels" The Associated Press, 5 October 2009). The political power of the farm lobby should never be underestimated in these matters.
So three cheers for the aspirations of Mr Obama, Mr Key and EU Commissioner Fischer Boel. From an Australian and New Zealand industry perspective there is definitely need for reform, but it may be good advice for NZ farmers to rub their hands together because they will certainly need tough hands and a fair swathe of calluses to work the field of global dairy free trade.