Reducing market volatility with open markets: the opinion of the dairy farmer Andrew Hoggard

Andrew Hoggard - President of Federated Farmers of New Zealand

Andrew Hoggard – President of Federated Farmers of New Zealand

From Andrew Hoggard, President of Federated Farmers of New Zealand

The world of dairy is an interesting one.  On one hand you have great collaboration from all parts of the dairy sector value chain, globally coming together through organisations such as the International Dairy Federation.  We work together in the pre-competitive space on global standards, sharing knowledge on food safety and systems, and linking in with dairy groups such as the Dairy Sustainability Framework and the Global Dairy Platform, which have focuses around improving the environmental outcomes from dairy internationally and the marketing and value of dairy. Yet in the same breath dairy is one of the most political hot potatoes out there when it comes to supports and market access. Why dairy has such a high level of politicization around it? I do not know. If anything, given the hours that dairy farmers have to put in compared to other farmers, you would think they should be too tired to get political. Or is it recognition of the incredible nutritional value that dairy provides?

The impact of the volatility on the dairy farms

I have been asked to share my opinions on some of these contentious issues. One of the things I have picked up in my experience and dialogue with dairy farmers around the world is that market volatility hits us all, and that volatility can have a profound impact on the sustainability and viability of many dairy farms. Unfortunately, what I see whenever this happens is that globally you have farmers calling for actions that quite frankly will only further embed that volatility and make it worse.

If we look at the dairy market globally only a very small percentage of global dairy consumption is truly open to free trade. If we take my country, New Zealand, as an example: we export 95% of the dairy we produce, yet we are only able to access around 13% of world consumption at tariff rates less than 10%.
The NZ milk price effectively mirrors the world milk price and there is very little if any lag. So really this 13% of world consumption we can access is effectively what sets the world milk price.

The international milk market is a big bucket, and this tradeable component is a small glass

Picture this simple analogy: the international milk market is a big bucket, and this tradeable component is a small glass. If we get an increase in supply globally, we don’t put it in the bucket, we instead overflow the glass. Likewise, if there is increased demand it comes from the glass as well. This is where the volatility comes from. Because the level of milk in the glass is varying wildly as opposed to what would happen if we had the bucket available. This is then compounded by the supports that are given to farmers in many parts of the world that create a lag till when the true market signal hits them, meaning they get either the signal to increase or reduce supply well after the event. This creates further distortions in the marketplace, leading to more volatility.

If we had no glass and just the bucket, would we be getting such wildly varying prices? Most unlikely.

Farmers would be better off with open markets

I strongly believe that farmers globally would be better off if markets were more open, and then over time we look at ensuring that any support payments are not linked to production, which could have trade distorting implications.  Are those support payments really required?  We see globally some of the support is linked to outcomes that society supposedly wants, or if there isn’t support payments then this is often used as a reason for non-tariff barriers. Any non-tariff barrier should be based on true science, not just societies’ whim of the moment. The problem with just changing rules, such as banning glyphosphate for example, is that it removes any incentive for the consumer to offer more for the product they supposedly want. In fact, rules that are based on the whim of generally a vocal minority of society only keep milk prices down for farmers.

These rules can take many forms. I know from talking to French farmers they struggle to be able to add to their herds and have larger farms, because there is a view among urban voters that large farms are bad. But really? My grandfather milked at the most around 80 cows, I milk 560 cows.  Have I sacrificed outcomes to achieve this? No, what has happened is that technology allows me to do more than what my grandfather could ever do. The size of the farm is irrelevant; it’s the outcomes that are important.

I often hear from urban people who say that all these rules won’t be a problem for the small family farm, just the big corporate farm. The reality is completely the opposite. The big corporate farm can afford to hire someone to take care of all the compliance and form-filling, whereas the small family farm drowns under the weight of paperwork.

Consumers willing to pay the correct prices

So, I guess to sum up my views, we need a much more open global dairy market, we need rules that are based solely in science and focused around actual outcomes, and we need the consumer to be willing to pay the correct price to enable the farmer to produce the product if they want certain attributes with the product. End of the day, all the dairy farmers around the world currently produce just under 900 billion litres of milk per year.  If the entire population of the planet was to get the recommended daily intake of dairy we would need to produce 1.8 trillion litres of milk. That’s a strong market signal that we need fewer barriers rather than more of them.

Andrew Hoggard 3

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Posted in Farming, Milk, New Zealand