Dairy Farming

Early Development of the Industry

New Zealand’s temperate climate has provided the dairy industry with a comparative advantage over many of its competitors since its inception in the late nineteenth century. New Zealand dairying’s costs of production are relatively low due to the ability to feed on grass all-year-round and the absence of a need for winter housing of stock. (A downside of grass feeding is a resultant seasonal variation in milk production that requires greater investment in milk processing facilities to accommodate the peak.)

Dairy farming first commenced in New Zealand to meet domestic consumption needs. The introduction of refrigeration in 1882 provided the opportunity to expand production and export butter and cheese to overseas markets, though initially the supply of refrigerated transport was largely filled by frozen meat. The main destination for New Zealand’s dairy exports was the United Kingdom. Production gradually expanded as suitable stock, land, processing facilities, processing workforce and transport infrastructure were developed. The range of products being exported expanded beyond butter and cheese to include casein and milk powder.

Steady increases in productivity were brought about through improvements in pasture and stock management, selective breeding, technical innovations, and increases in the product mix to use more of the raw product. Key advances included:

• The Babcock test for determining the percentage of butterfat in milk (1890) – this discouraged the practice of watering down milk, and allowed farmers to be rewarded on the basis of the butterfat content of their milk, which promoted the development of higher-butterfat breeds and strains;
• The introduction of milking machines (first introduced in the 1890s and milking half the national herd by the 1920s (Hawke, 1985));
• The application of cobalt to central North Island pasture to address “bush sickness” from the 1930s;
• The use of aerial topdressing following World War II;
• The use of artificial insemination from the 1950s onwards, and
• The introduction of milk tankers in the 1960s, which had a dramatic effect as it made it much easier to transport whole milk to factories. This brought economies of scale and a broader product range.

As an illustration of the gains in on-farm productivity achieved, from 1936 to 1993 there was a 20% increase in cow numbers but an 80% increase in milk produced (Bollard and Pickford, 1998).

Developments from the 1950s

The decision of the United Kingdom to more closely align its economy with Europe adversely affected New Zealand dairy, and the government’s response to these changed international conditions was as outlined above for red meat and wool. The increasingly unsustainable protection measures that were introduced were removed in the mid-1980s, and the sector was exposed to market signals about the value of its products. Unlike red meat and wool, however, increasing world demand and commodity price fluctuations led to much better prices for dairy products in the 1980s. As a result, production rose significantly through the mid-1990s, and this trend is continuing, buoyed by gains through the Uruguay round of the GATT trade liberalisation talks in the 1990s and prospects of further gains to come through the Doha round.

The industry has continued to take advantage of economies of scale and scope. Amalgamations of farming units have continued through the 1980s and 1990s. Comparing figures from 1981/82 to 2001/02, the number of herds has fallen by 14% to 13,649, but the average herd size has increased by 108% to 271. The average number of cows per hectare has increased by 27% over this period, to 2.67 cows per hectare (Ministry of Agriculture and Forestry, 2003a).

This period of intensification can also be seen in statistics on fertiliser use: in the period 1991-2002, the amount of urea fertiliser per hectare applied to dairy rose by 162% (Parliamentary Commissioner for the Environment, 2004). This has been driven by the need to compete on price in international commodity markets with the resultant drive for efficiency, combined with the relatively low price of nitrogen fertilisers.

Dairy farming and processing has increasingly become a high-tech industry and is taking on much more of a corporate character. There is increasing mechanisation on the farm: examples include farm bikes, mechanised irrigation, milking machines, rotary cowsheds, the use of computers to plan fertiliser application and feeding and to track stock health, and technology behind breeding and pasture development. This mechanisation extends through to the highly mechanised processing facilities.

The Dairy Board

The government made efforts to coordinate New Zealand dairy exports from the 1920s, beginning with the Dairy Export Produce Control Board in 1923, which had a focus on international marketing. The New Zealand Dairy Board (the Dairy Board) was established as a single desk exporter in 1961 to co-ordinate overseas sales of dairy produce from a large number of small co-operatives serving local collection areas. Sinclair (1999) explains the rationale for establishing New Zealand’s producer boards, which can be briefly summarised as helping to coordinate exports (both in terms of synchronising producer flows to match demand and transport requirements, and avoiding New Zealand producers competing with one another on the international market) and to concentrate New Zealand producers’ market power to combat the purchasing power of large buyers in Britain.

From 1961 when there were 168 dairy companies operating under the Dairy Board, the industry underwent an extensive period of consolidation throughout the 1970s, 1980s and 1990s. By 1981 there were 42 dairy companies operating in New Zealand, in 1998 there were nine, reducing to four in 2001. It was this period of consolidation that provided the impetus for sector reform; forty years of restructuring had rendered the traditional functions and powers of the Dairy Board essentially irrelevant. The three major dairy processors remaining at the end of this period had objectives that frequently differed markedly from those of the Dairy Board. The legislation existing prior to 2001 did not adequately address governance issues, impeded access to capital, provided little scope for innovation and imposed multiple, often conflicting objectives on the Dairy Board. In effect, the industry had outgrown its governing legislation, and instead of a solution it had now become a problem in itself, impeding the ability of the industry to adjust and compete in a constantly evolving international market.

In 2001, in response to very strong industry support, Kiwi Co-operative Dairies Limited and New Zealand Dairy Group merged with the New Zealand Dairy Board to form Fonterra Co-operative Dairy Company Limited (Fonterra). Fonterra holds a dominant position in the dairy industry, processing approximately 95% of total New Zealand milk supply, with the majority of the rest going to Westland[22] (3%) and Tatua[23] (1%), two independent processors that chose not to join the merger.

The government agreed to facilitate the merger. The Dairy Industry Restructuring Act 2001 (DIRA) allowed the creation of Fonterra as the dominant industry processor conditional on measures to ensure contestability in both dairy processing and the market for farmers’ milk, open entry and exit of farmers from the co-operative, and competition in the domestic market for dairy products. The Dairy Board’s statutory powers as an export monopoly were removed, allowing any entity to export dairy products from New Zealand.[24] The main objectives of the DIRA were to:

• Maximise the industry’s economic performance by allowing it to evolve in response to the market;
• Remove the constraints on industry performance from the existing legislation (e.g. the Dairy Board’s export monopoly);
• Facilitate the emergence of competition and new strategies;
• Limit the potential for adverse effects from monopoly power;
• Minimise regulatory and compliance costs; and
• Increase New Zealand’s strength in international markets in the face of large overseas conglomerates.