Gareth Morgan gives 5 reasons why existing farmers should oppose more dairy conversions

Short headline: 
Why farmers should oppose dairy conversions

By Gareth Morgan

Farmers are waking up to the idea that more conversions in their area will make it harder for them to farm in the future.

That is why we have seen agricultural experts and even the Waikato Fed Farmers president Chris Lewis call for a moratorium on converting forest land to dairy pasture in that region. While Chris Lewis has since back pedalled slightly under fire, other dairy leaders with an environmental focus have backed his call.

Despite some kickback from farmers about moratoria, the idea is not new, nor controversial, in fact within the Land and Water Forum farming groups and environmentalists agreed it might be a useful tool in some catchments. The Morgan Foundation also called for a moratorium when we launched the My River campaign a year ago.

This blog sets out five reasons why all farmers should be concerned and speak out against continuing conversions. We will focus on the issue of converting farms to dairy, but the same argument really applies for all intensification – putting more stock on a certain amount of land.

Catchments can only hold so many cows

Around the country we are starting to see limits imposed on the amount of degradation that we will allow on our fresh water – rivers, lakes and groundwater. These limits mean that only so much water can be taken for irrigation, and only so many cows can be in the catchment, because the nitrogen from their urine eventually ends up in waterways. That means that each new conversion that adds more cows, or uses more water is increasing the chance that existing farmers will have to change the way they farm when limits are imposed.

To put it bluntly, an area can only hold a limited number of cows. That limit depends on how clean the community wants their fresh water to be. If the number of cows in an area is already at or beyond that limit, then every cow added now by a new conversion will mean one has to be given up later on.

This is obvious – in fact if the Government were serious about maintaining or improving water quality when they released their National Objectives Framework last year, they would have put a moratorium on new conversions until water quality limits were set. A moratorium would be necessary until any new conversion can demonstrate that their overall impact on water quality will be neutral (for example, by funding improvements elsewhere).

More milk means a lower price

The second reason to oppose conversions is simple selfish economics, the law of demand and supply. This law states that the more of any good we produce, the lower the price will be. Any farmer in his right mind wouldn’t want more people making milk.

You could argue that New Zealand is a tiny player, and so we can’t really influence the world price of dairy. But you’d be wrong. The vast majority of dairy is consumed locally within borders. Because New Zealand makes so much milk and we drink so little of it (about 5%), New Zealand is actually a big global player. In fact we account for roughly a third of international dairy trade even though we only produce about 2% of the world’s milk supply. In that context, while individual farmers won’t budge the price, large-scale conversions over many years could.

More milk means higher costs for Fonterra

Fonterra is legally obliged to pick up and process all milk that is produced in the country. There are a few exceptions, but that was the basic thrust of the deal done when Fonterra was set up. The idea was to protect farmers in the face of a huge monopoly purchaser.

But this regulation has a nasty downside for Fonterra – and therefore for Fonterra’s shareholders, the farmers. New conversions tend to be in more distant locations (such as the McKenzie Country), so transport costs for picking up the milk are far higher. Fonterra is also obliged to process that extra milk, and has to build the manufacturing capacity to cope with it, regardless of whether that extra milk would improve the bottom line. Since all farmers get paid the same milk price by Fonterra, existing farmers are effectively losing out by new farmers entering and pushing up Fonterra’s costs. This is particularly the case for those farmers closer to factories -their milk has higher value because it is cheaper to pick up, but they are not rewarded for that – unless they switch to one of Fonterra’s competitors.

Many new conversions have higher costs

Conversions tend to happen on less suitable land for dairy farming, and so require greater investment; for example irrigation or housing for the cows. This increases the cost of production for these farms, and increases the risk faced by the new farmer. In a bad year with drought or low prices, there is a greater risk that new farm could fail.

Farmers may not traditionally be concerned about the risk taken on by others, but when bubbles burst the resulting contagion can affect everyone in the sector. Given that dairy debt levels have tripled in the past decade and are now above $30b, the Reserve Bank has recently expressed concern about the ability of some farmers to withstand a low payout. This risk could increase for farms in catchments that face nitrogen limits.

The social contract with the public is cracking

Farming brings economic benefits, but also it damages the environment. Through the democratic process the public ultimately decides how much pollution of their fresh water they will tolerate for the economic benefits that farming brings. But because the economic benefits accrue mostly to farmers and the environmental benefits are spread across all of society, the amount of dairy farming wanted by the public is likely to be less than the amount wanted by individual farmers themselves. The difficulty is that it can take decades to see the environmental impact of today’s activities, so there is a real risk that we could overshoot the amount of cows that are acceptable in a catchment.

The risk here is that eventually water quality would decline beyond an acceptable level for the public, and so all farmers (existing and new) become the subject of a backlash from the public. This would hurt everyone – not just the environment and the public but the farmers too, as they would face much tougher regulations over their farming practices (such as limits to cow numbers or water use). This could have wide ranging economic impacts – it is far better to halt conversions before we reach this critical level. Existing farmers should speak out against increased intensification before they face the risk of regulation from a disgruntled public.

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This article was first published on his blog, Gareth's World. It is here with permission.