Yes, a new scheme where the New Zealand Government guarantees a certain minimum price per kilo of milk solids to dairy farmers, much like the US Dairy Price Support initiatives and the Indian Minimum Support Price scheme, is the need of the hour
And what else you can call it if a sector - which along with All Blacks gives the nation its international identity while also accounting for a third of its exports - but has come to be known for suicides in recent years.
While drastically reduced dairy payouts and seemingly never-ending drought has certainly exasperated the problem, figures from Statistics New Zealand indicate that the general uncertainty that surrounds the country's dairy business may be the culprit.
According to Federated Farmers, the number of farming-related occupation suicides between July 1, 2007, and June 30, 2014, was 169. Of these, 22 cases are still active cases – meaning suspected suicides, and as such are provisional pending the Coroner's official finding.
Moreover if somebody thinks that the problem started just last year with fall in dairy prices as China stopped drinking our milk, the figures clearly show that the number of suicides (including the suspected ones) have consistently been 20 or above every year in the last seven years.
And these were the years of “white gold rush” or the dairy farming boom!
This points towards a systemic lacuna in the way dairy business is managed by the Government in New Zealand, which invariably lets few farmers slip through the system, incur huge debts and take the extreme step.
It is – as demonstrated by Fonterra's consistent reduction of payouts to farmers in the last six months - total dependence of dairy margins on the market forces with no safety nets at all.
Sure, there are few stop-gap arrangements in place and the Government and its various agencies do take some measures. These include Rural Assistance Payments programme (RAPs), Farmstrong by rural insurer FMG and the Mental Health Foundation, community funding by Rural Women New Zealand, and highlighting the shortage of doctors (for treating mental health of farmers) in rural areas by the Rural Health Alliance Aotearoa New Zealand.
Federated Farmer also initiated When Life's a Bitch campaign few years back, which was aimed at helping rural communities open up about mental health issues.
But all the above measures are at best reactionary in nature, with little potential to make any systemic impact in the diary business.
So what's the solution?
Simple, really. Remove the dependence of dairy margins on market forces!
For those who hope to make it an argument about capitalism vs socialism, the idea of this actually comes from the most capitalist of all countries – the US.
Its Federal Department of Agriculture (USDA) has a Commodity Credit Corporation working under the Farm Service Agency, which runs various Price Support Programs including one for the dairy industry.
It is called the Margin Protection Program for Dairy (MPP-Dairy) that “is a voluntary risk management program for dairy producers” and “offers protection to dairy producers when the difference between the all milk price and the average feed cost (the margin) falls below a certain dollar amount selected by the producer.” MPP provides various levels of buy-up coverage, along with catastrophic coverage, to dairy farmers.
A similar scheme is run by the Indian Government called the Minimum Support Price (MSP) programme. “Under this scheme the Government of India declares the minimum support prices of various agricultural produces and assures the farmers that their agricultural produce will be purchased at the MSP, thereby preventing its distress sale,” explains the Indian Ministry of Agriculture.
In simpler terms, both MPP and MSP, assures farmers of a minimum level of returns on their investment even before they embark on farming. They can then manage and plan better.
For example, according to the industry body DairyNZ, the industry average break-even milk price is $5.70 per kg of milk solids (MS). Now say if the Government fixes the minimum support price of milk at $6 per kg/MS, every dairy farmer will be assured of at least 30 cents return per kg MS.
So much milk
Now the obvious question is what will the government do with all this milk?
It can either sell it to Fonterra, or do what Fonterra does – export it.
But not only to China. Putting all your eggs in one basket is always a bad idea and New Zealand's dairy industry has learnt it the hard way.
This graph here by Statistics NZ gives a good idea of why China loosing its appetite for our milk has shaken the country's economy to such an extent.
In 1992, China's share in NZ dairy exports was just 0.5 percent. In twenty years, i.e. by 2012, it had risen to 22.4 percent. And in 2014, it was almost 33 percent.
Thus, going by what the National Business Review published in May this year, titled Asia's Other Billion, exploring and expanding in markets of Bangladesh, Myanmar, Cambodia, Laos, Philippines, Malaysia, Mongolia, Vietnam, Papua New Guinea, Timor Leste and Oceania, seems the right way forward.
And if we add India's I.3 billion to that as well, it becomes Asia's Other Two Billions.
Touching upon the subject whether New Zealand has diversified its dairy export markets sufficiently, Graeme Wheeler, Governor of the Reserve Bank of New Zealand, in a speech to DairyNZ in Hamilton in 2014 had noted, “By 2050, India’s import demand for dairy products is projected to be USD48 billion – more than three times China’s USD15 billion, given the projected growth in China’s domestic production.”
All the above-mentioned countries are expanding economies, much like what China was over the last two decades. This growth brings consumerism and an increasing demand for protein-based commodities, which New Zealand can fulfil while providing a much-needed safety net for its dairy farmers.
After we have settled what to do with so much milk, one question still remains.
How is MPP and MSP different from Fonterra's existing Guaranteed Milk Price (GMP) scheme?
Very different actually!
MPP and MSP are guaranteed prices assured by the respective governments of those countries that are calculated based on the input costs, and are available to all farmers.
Whereas GMP is not guaranteed by the New Zealand Government, its value is dependent on global market pricing (nothing to do with input costs of the dairy farmers), and is not universally offered.
This year, when GMP was oversubscribed, Fonterra scaled it back.
So while GMP was certainly a step in the right direction when it was initiated in 2013, it has not resulted in preventing farm suicides in New Zealand.
Thus, other measures such as a Govt-sponsored Price Support Scheme are necessary.