Corrections and Returns to Sanity

Roiling Dairy Industry

In Australia, the mining industry is in crisis.  Well, no, not really.  It's in a cyclical downturn which has been seen so often, it's boring.  Anyone who thinks that industries do not cycle up and down has blinkered himself to centuries of data.

Every year ten pupil (that's fourth form, folks) learns that markets--where goods and services are bought and sold--are subject to supply and demand.  If the supply increases, prices will fall as demand becomes satiated, and tails off.  That "economic law" cannot be broken.  Often raw commodities face this market reality more than other goods.  There is very little "value add" possible in raw commodities--not without substantial investment in processing and manufacturing--which often only serves to makes the proposition even more risky.

In New Zealand, we are facing the same market reality now in dairy.  Milk prices have slumped.  There is an over-supply of milk on the world market.  Too many cows, too many litres of milk being produced. The result is falling milk prices.  In time this will correct as marginal producers go out of business, unable to make profits in a low-price environment.  Supply will fall.  Prices will stabilise then begin to rise again.  It is brutal.  There are many sad cases down at the farmgate to come to light.  But it is the real world.


In the former generation, the government would have taxed other citizens more to ease the pain of the dairy farmers. It would have socialised the losses.  It would have subsidised the farmers' product (remember Supplementary Minimum Prices), paid emergency compensation, introduced compensatory loans and low-interest debt restructuring--and so on.  So it used to be.  Once it was said that the farmer was the backbone of the nation; then trying to avoid the cycle produced the the inevitable result.  Eventually the taxpayer became the backbone of the farmer.

Finally, after the imposition of mandatory price and wage controls and a country teetering on bankruptcy, about to be crunched by the International Monetary Fund, our economy was liberated and allowed to trade in a free market.  We were made to face the actual market price, market demand, and market supply.  Lots of farmers went to the wall as the taxpayer subsidies and supports were stripped away.  Some farmers will do the same in this latest downturn.  But this time, because the dairy industry has already been subject to the market's supply and demand, the adjustment will be quicker and less painful.

On the other hand, this is a downturn we really needed to have.  The whole country had bought into the hype that the developing economies in Asia and the Middle-East represented endless increases in demand for New Zealand milk.  Market prices were only going to go one way--upwards.  A nascent farmer could take on debt up to his eyeballs, and within two years the inevitable rising milk price--and the rising land value of the farm--would have removed most of the risk.

The current dairy price "slump" is a much needed market correction.  It will help restore the dairy industry to sanity so that reasonable optimism and investment prudence can once again take hold--for a time, of course, before the inevitable hype and recklessness return.  And so it rolls.