Monday, May 25, 2009

It’s a strange old world –

- when those who promote and persuade on behalf of “free trade” start paying market subsidies to support specific producers.

This time around (again) it was kicked off in the EU when the French government started buying dairy products from their farmers and selling it at a loss in the international market. That mechanism, while providing price support for their farmers and depressing the international market prices through increased supply, at least is allowing the market to operate openly and without direct influence.

It is the follow-up from the US that has that rank stench of market manipulation and bare-faced subsidy. And, as is usual in these arguments the cause might well be the EU but the enemy is “in fact” New Zealand. Why? Because after a major drought last year the production levels in this country have reached the same as four and five years back. Those fluctuations have all reflected directly in our supply to the international market.
New Zealand milk production is forecast to increase 8% in MY 2008/09 compared to the drought affected MY 2007/08. New Zealand dairy export volumes fell 9% during the first seven months of MY 2008/09 compared to the same period last year.

The problem for the US, and the EU come to that, is that NZ dairy farmers get no government support; there are no export tax breaks, there are no production subsidies, there is no government tariff relief on imports such as equipment, fertilizer or fuel. The truth of the matter is that NZ makes the best product, and does so cheaper than most (if not all) other contributors to the international market. That “cheapness” is due to two major factors; NZ ingenuity (the number eight wire factor) and the fact that our climate allows for year-round open grass grazing. What is biting the bum of the US and the EC is that NZ is expanding its market influence into other producing countries; specifically at this time into Uruguay where Fonterra is buying large acreages, providing New Zealand management and training skills, and growing their production as a result.

What is becoming abundantly clear is that “top end” producers – both the US and EC in particular – are ignoring the principles of free and open markets when it suits themselves and insisting that the Rules are applied very strictly to others when they are winning; and that is a hypocrisy that has applied to products as diverse as steel, electronics, agriculture, timber and grains.

There is a very interesting analysis of the EU dairy market – both production and consumption - here and follow the .pdf link at the bottom for the full report showing amongst other things that between 2000 and 2008 one country increased its share of the total import to EU from about 19% to over 37%. No, not NZ but Switzerland. NZ increased from 10% to 13%.

Why do the “Free Trade” negotiations at the WTO keep stalling, as the current Doha round has once again? No, it is not just because of India, China, and Brazil. It is also the US (in particular this time around) trying valiantly to make sure that there are Rules that they can manipulate to protect their own from the fact that internationally they are price uncompetitive.

Oh, and “who” is Fonterra? You want to buy shares in Fonterra?

Come to NZ, buy a dairy farm, sign up as a Fonterra supplier, THEN you can buy your shares – the number of which will be based upon your contracted supply volume…


Eugene Tan said...

Oh, stop moo-ing. NZ milk ain't the cheapest in Singapore, the way I see it. Milk powder prices have almost doubled, fresh milk prices have gone up so much I wonder if I should attempt to express myself instead, and UHT milk prices are more than twice they used to be.

And Fonterra! Fonterra! Isn't it the one who blew the whistle on the melamine-laced milk produced by China's Sanlu Dairy? Hm...

The world is turning mad. And if the beef is not causing it, I think it could be the milk. Must be New Zealand...


T. F. Stern said...

You got it right when you point to market manipulation. Government(s) should not be involved in picking winners or losers and should leave that to the real free market based on supply, demand and quality and value as relate to other similar items up for consumer trade.

One area which is of concern has to be the question mark in reason for intentionally slowing down US industrial and manufacturing over the past couple of decades. The only way out of the economic mess is to turn loose the restrictions and penalties for being successful, let industry go full tilt which will in turn stimulate jobs and income enough to let the market revive itself.

The probligo said...


:D Actually, in NZ we pay the same price as our overseas markets for all of the product we export. This is because the NZ market has to compete with the export market for product. So, in USD I pay as much for my milk as you might in Singapore for the same product.

Yes and no. Fonterra was part owner of Sanlu.



It is not a case of picking winners and losers.

Far more important to the politician is the prospect of vote-alienation. If President A did not support dairy/wheat/beef farmers and the US industry went broke as a result do you imagine that A would be re-elected? And when you read that remember France also has a President so don't think I am picking on the US.


It is as much vote-buying as the pork-barrel mentality that generates so much dislike of Congress.

Eugene Tan said...

So, you would agree that free market is really a mirage? Or could free market really be a subversive tool that Communists unleash on the non-believers?

The probligo said...

Eugene, you are lucky that my tea missed the keyboard.

NZ has "free market" disease all over. That is why we rank amongst the top 4 or 5 in the OECD score card for open economy etc. After the likes of Iceland (look what has happened to them!!) Norway and one or two others.

Personally, I am all in favour of it. NZ broke the chains about 15 or 20 years back or so. There was some pain at the time as protected industries adapted or died.

The results, thus far at least, have been to our general benefit. So, instead of buying our cars twice (from a protected NZ industry subsidised from taxes and duties) as well as from our income taxes, we can now buy second hand Japanese cars for 1/10th the price free of duty and taxes other than GST (which adds 12.5% to everything).

What does fascinate me is the fact that so many of those who oppose open global markets do so on the basis that the idea is American and consequently some kind of capitalist trick. Obviously, that has the direct implication that the opoosers must be left-wing or more.

In fact, it is far more likely that America would suffer hugely if free global markets were set in place and left to operate without political intervention. Think it through for a bit and you will begin to see why. Even worse than US, of course, would be the EU. Their tax subsidies go much further than just agriculture and I suspect that without the benefit of taxpayer support many of their industries would be very hard hit by external competition.

So, a free market is not a mirage. There are a great many politicians who try very hard to hide their political machinations within the market behind elaborate smoke and mirror subterfuges. The reason why, I have already stated.

There are as many who are not as covert. Give the French credit. At least they are quite open about their market-messing through the CAP.

"Quelle horreur!! Les paysants sont revoltement!! Vite! Vite! Les subsidies!"