What the next government might do about the dairy downturn

See also: Government needs to hold to its line on dairy

Three opposition parties back relief package for farmers and agree they must be supported to ensure foreign buyers don’t have the opportunity to buy up New Zealand’s productive sector.

And Labour leader Andrew Little calls for the government to host crisis summit on dairy downturn, bringing farmers, bankers, Fonterra and government round the table to support rural economy

Mr Little says banks needs to be “stiff-armed and told we’re not going to see wholesale farmers pushed off the land”, while New Zealand First leader Winston Peters says “Foreign banks cutting our farmers some slack? That’s a joke.”

The Labour leader says “there is a case to turn down the tap” on immigration, especially on “semi-skilled migrants."

Mr Shaw says National’s policy to move migrants to the regions is “not actually doing the job.”

Opposition leaders agree as many as 25% of farmers could go out of business.Mr  Peters says, “I see fourth generation ones going to the wall now” but how many depends on government action.

What changes would they make now to boost the economy? Messrs Little and Shaw would cut or change taxes, MrPeters would restructure the agriculture sector.

Messrs Little and Shaw criticise government for encouraging conversions to dairy and more money to be ploughed into agriculture, though Little admits many happened under previous Labour government.

Mr Peters says in three years under National the infant formula industry is now controlled by the Chinese: “These are dramatic mistakes being made right under our nose.”

On the same programme, Bill English ruled out any bailout or other form of assistance for farmers, many of whom won't make any income this year as low dairy prices persist.

RAW DATA: The Nation transcript: Lisa Owen interviews Andrew Little, James Shaw and Winston Peters

Watch the interview here

Lisa Owen: Well, it’s been a trifecta of if not bad, then worrying economic news this week. First Landcorp reined in its planned dairy expansion, predicting increasing price volatility, then Fonterra announced another drop in its forecast payout, and the Reserve Bank cut the Official Cash Rate to a record low of 2.25% with warnings of risk ahead. As usual, National Party Ministers refused to debate on television, so this morning I’m joined by the leaders of the three Opposition parties, Andrew Little, James Shaw and Winston Peters. Good morning to you all.

All: Good morning.

If I could start with you, Mr Little, this week we’ve been told that we’re in the middle of a perfect storm. The Reserve Bank has warned that our economy is facing many risks, it says. So how worried should we be?

Andrew Little: We do need to be concerned, and when the Reserve Bank, having only a couple of months ago said they didn’t expect to cut the OCR until the end of this year and are now doing it, what, here we are in March, then you know that they are seeing something, that there is something that is quite wrong. So we ought to be concerned. When you have a look at Fonterra too, another downgrade of their milk payout. That is a concern too. That’s less cash in farmers’ hands, less cash in the regions. So this is all creating a quite significant issue for the New Zealand economy.

Mr Shaw, the Greens this week have been using the word ‘crisis’, and you’ve actually said that the Government’s putting the economy at risk. Is that responsible language, or are you crying wolf for political gain?

James Shaw: I’m actually just reporting what other commentators have said, so Westpac have come up with a recent report calling the Government out on its strategy. The Reserve Bank itself has said, for example, that the house crisis up here in Auckland is one of the greatest threats to the economy. So I’m not saying that, you know, the country as a whole faces a crisis, but there are some, as Andrew says, very worrying conditions in some of our key sectors, and we do need to pull our head out of the sand about them.

Mr Peters, you’ve said that the Government— well, accused the Government of what you call phoney optimism, so what do you think’s at the heart of the problem?

Winston Peters: Well, first of all, we didn’t learn about it this week. Some of us have been saying it for a long, long time. You see, in New Zealand we have a thing called perception as against reality. The perception is and had a lot of people saying it was a rock star economy. Now, this had to be a joke when you look at the fundamentals, and the fundamentals for New Zealand are real bad and the sooner we address them, the better. But we can’t carry on with the same policies that have so miserably failed.

Is it that bad, though? We’ve still got around 3% growth, unemployment is at 5.3%, interest rates are low.

Peters: It’s real bad. Look, when you say it there, what does it mean? If you say we’ve got about 2.5, 2.8, somewhere in that range now, you say that’s good; that’s better than most of the other world economies. No, it’s not. Norway has an economy— a slightly larger population now than ours, maybe 300,000 people. It has an economy of $600 billion GDP. Ours is $230 billion. Now you see the problem? And Norway, for example, has an economy of $600 billion, the same as Argentina with 40 million people. Now, our problem is we haven’t grown the size of our economy and we have people saying it’s a rock star economy, but no transparency.

But we’re higher up the food chain than a lot. There may be some above us, but there’s plenty below as well.

Peters: Can I just say one thing? If you look at the OECD small countries – in the OECD that are doing well – they’re all doing far better than us.

Little: We shouldn’t kid ourselves about the growth. We’ve had growth because we’ve had record immigration. We’ve grown our population. People have brought cash with them. That’s helping with consumer demand. And we’ve had the rebuild of Canterbury. Now, rebuilding Canterbury after a major disaster is not an economic strategy. When you look at the real level of underlying growth and also if you have a look at what’s happened with exports as a proportion of our GDP, it’s actually fallen under this government. It was roughly 32% in 2008 at the end of the last Labour Government. It’s now down to just over 28%. This Government’s doing nothing in terms of the stuff that’s going to generate wealth, create job opportunities and grow the economy.

If you look at the figures, though, exports are up. They’re up to December last year $1.9 billion despite what’s happening with dairy. So, actually, other exports are doing the heavy lifting for us. It’s not just all about dairy.

Shaw: They are, but a lot of that export growth is tourism dollars. Andrew’s right. If you actually minus out the effect of record high immigration and you minus out the effect of the Canterbury rebuild, then the rest of the economy is as in in aggregate not growing at all. And so Winston’s correct, the underlying fundamentals, the, kind of, the real economy, isn’t actually doing what it needs to do. The wheels are spinning. Manufacturing is having a really good time at the moment, but even that is being driven largely by the construction sector, so even that is a temporary thing that’s tied to the Canterbury rebuild.

So what are you all saying? That we need to diversify?

Peters: I’m saying there’s too many false prophets in this country, and you just repeated one of their statements, that exports are up. No, they’re not.

Last year they were – to December of last year.

Peters: No, compare our exports with, again, Singapore per capita or, for example, Norway per capita. They are dramatically nowhere near what these other countries are doing. Now, one time we used to be way ahead of them, and we’ve failed to keep ahead with smart policies. We’ve adopted, of course, a non-transparent system of economics. We don’t compare ourselves with any other economy but just insiders saying everything’s fantastic, everything’s fine, in fact, we are living through a rock star period. But I notice they’re not saying that any more, are they?

Little: In terms of your issue about diversification…

Yes.

Little: …that’s absolutely the key. And what we’ve had in the last few years, every incentive has been about ploughing more and more money into agriculture, particularly dairy, and so they’ve had a free ride in terms of the emissions trading scheme, in terms of water standards and in terms of tax treatment. So no wonder and we shouldn’t be surprised when not only the investors but the banks themselves who have aided and abetted all this this have seen, you know, billions of dollars ploughed into the dairy sector when we know that largely it’s a sector dependant on commodity prices and we’re now in the situation that we’re in.

All right, if you’re all in agreement that we need diversification—

Peters: Now, the problem with that is Andrew’s quite right, excepting this. You have to have ploughed money in, to do what? To sell at the lowest common denominator of the product, milk powder.

Little: That’s right.

Peters: Now, the infant formula—

It’s what we’re good at, though, Mr Peters. It’s what we’re good at.

Peters: Can I just give you some information from the farming community, where I come from now?

Now, yes.

Peters: Well, yeah, but I come off a dairy farm. I know one end of the cow from the other.

But we’re good at dairy, so why not stick at what we’re good at?

Peters: Excuse me. We’re not good at added-value dairy, where all the money is. Infant-formula industry, for example, in three years flat, under National, is now controlled by the Chinese. That’s the- These are the dramatic mistakes being made right under our nose.

Shaw:  You look at the strategy, right? It’s only- Only now Fonterra’s starting to offer farmers an actual market rate for organic, and organic’s selling for about $14,000 a ton as compared to about $2800 a ton for regular, and so there’s been a mismatch in the price that farmers have been rewarded for that between what we’ve been able to get on the international market, and this is something that we’ve been saying for a very long time.

So has Fonterra got it all wrong? Is that what you’re saying?

Peters: Of course they have, and for a long time.

Shaw: Well, so Fonterra’s got part of it wrong. I actually think that Andrew’s completely right – that the Government incentives have completely skewed the economy here. The other subsidy that he didn’t mention was about $400 million to go into massive irrigation projects as well, which has incentivised farmers to take, frankly, quite risky investments and to be farming in areas where they’ve got high production costs, and now their production costs are well in excess of what they can get on the international market.

Mr Little, a lot of dairy conversion happened under the Labour Government. Between 2003 and 2007, the Reserve Bank said that dairy debt almost trebled because of a flurry of conversion,  so doesn’t your party have to wear some of that?

Little: Yeah, and it was under the Labour Party that Fonterra was created as a statutory beast, so, yeah, and that was- At that time, there were prospects for dairy, and it was the right time to grow the dairy sector. It has carried on for the last eight years in complete ignorance of actually what’s happening in the world. So Europe has now lifted its dairy quota. It’s now ploughing more and more dairy product into world markets. The US is about to become a significant dairy exporter. We’ve got Fonterra now geared up to play in a paddock with much bigger players and just flooding the market. The whole promise of Fonterra was that with scale, it would not only be a good international marketer; it would get into the high-value products – the lactoferrins, the specialty cheeses. Most of its increased capital that is borrowed to increase its processing capacity has gone into more production of whole-milk powder, the commodity product that we actually should be getting out of.

So does Fonterra need to be totally reformed? Do their need to be changes at the top, Mr Peters?

Peters: Well, you’re a bit late to be asking that, Lisa. I’ve been saying it for about two or three years now, and the reality is that what we’ve got here, of course, is people now blaming New Zealand’s volume of production. It’s not it’s a volume of production; it is what we are doing with it. We are selling at the lowest end of the market. If we were selling at the top end of the market, like Scandinavia does, like Holland does, we’d be right in there and outcompeting Europe and all the rest, but we face billions of dollars of subsidies when we face the competition from Canada, for example, competition from United States. And here’s what’s going wrong here – you’ve got, as I say, a lot of false profits. Mr Key says, ‘But the TPPA will fix this all up.’ Now, this is mindlessly stupid in the extreme. The TPPA will see us facing those three countries, $110 billion of subsidies. We can’t compete that way; we can only compete by having the top end of the market.

I want to talk about that more soon, but very quickly, tell me, each of you, which is the one thing that you would do right now that would boost the economy. Start with you, Mr Little.

Little: I would introduce tax changes. The two things – accelerated depreciation,  so we get- other manufacturers and producers are getting access to investment and- productive investment, and research and development tax credits for the innovation.

Mr Shaw.

Shaw: We’d lower company and personal income tax rates, paid for with a proper charge on carbon and other greenhouse gas emissions.

Mr Peters.

Peters: Well, first of all, I’d change a lot of the structure of New Zealand agriculture industry. I’d change Federated Farmers, who have been out there apologising for this for so long, and I’d change Fonterra’s thrust as well. But you’ve got to have a range of policy in research and developments, right? You’ve got to have long-term tax incentive for new product and new market, and I mean long-term, to attract money, because we haven’t got it, and above all, you’ve got to have the currency settings to help the people that matter in this country – exporters, not consumptive importers.

All right. We’re going to talk more about this after the break. We’ll talk about the wider economy, immigration, taxes and debt. We’ll be back soon.

You're back with The Nation and our economic summit of opposition political leaders. Before the break, we were talking about dairy. Mr Shaw, if I can come to you; there's been estimates — 10%, 20%, 30%, 40% of farmers will go to the wall with these prices. What do you think it will be in reality?

Shaw: I'm gonna have to take the advice that's been given. We are in what Treasury terms 'the crisis scenario' now for dairy, and they say that what that means is that up to 44% of farmers are at extreme risk. I don't think it will be that high but you could be looking at about as many as a quarter.

Mr Little?

Little: Yeah. I think that one of the most credible rural economic commentators, Peter Fraser, has given the figure of 25%. I think that is credible. If you look at where dairy farming has expanded, it's gone into the high-cost areas. They're the ones that have taken on the most debt. And we have to understand the significance of the issue too because if they— The pressure now on dairy farming that is now pushing down land values, the banks sort of get nervous very soon, then we expose a whole heap of our productive land to predators from offshore.

Hang on, though. Mr Peters, the banks will surely cut these farmers some slack.

Peters: I beg your pardon. They're going to cut them some slack? Foreign banks cutting our farmers slack? That's a joke. The reality is, in Australia they're forced to go through debt mediation by law. We've had a debt mediation bill up there for New Zealand farmers and the Government won't even have a bar of it, even though they get the farmers' vote, and that's the paradox of this. The second thing is, how many go to the wall, and I see fourth generation ones going to the wall now. It's a tragedy, and you'll see suicides and things like that. The dislocation of country communities. But how many go to the wall depends on whether this government or any government who's prepared to back the farmers as they were prepared to back the banks. Remember the finance companies? South Canterbury Finance? $800 million of—

So do you think there should be a relief package for farmers?

Peters: Of course there should be because in the end, these are still the biggest drivers of our economy in the future. Not like tourism. They are high-paying in terms of returns.

I just want to see. Mr Shaw, Mr Little, do you agree with that? If you were there now, there'd be a relief package for farmers?

Little: If I was the prime minister right now, there would be a meeting with four parties in the room. There's got to be the farmers, Fonterra, the banks and the government. There is some relief that the government can provide as they do with farmers during periods of drought or flood — provide some income support. But the pressure's got to go on the banks. The banks have to be stiff-armed and told we're not going to see wholesale farmers pushed off the land and expose our land to predatory purchasers from offshore.

Aren't they private businesses, Mr Little, though? Aren't they private businesses?

Little: There's a national interest. As Winston has said, the primary production sector is too important to New Zealand, and our land is too important to us to have it exposed to the real likelihood that as land values fall, as farmers get pushed off the land, overseas interests will come and purchase them. So the Government should step in.

So you think there should be a crisis summit, basically, now?

Little: Yes. I think the Government needs to step in and marshal the forces and put the pressure on the banks. 'You're not going to kick people off them.' The Government can play its bit. The banks can play their bit. There's gotta then be a deal about the future of Fonterra — how it's structured and what it does. You get an agreement along all those lines, it's long-term and produces some stability and stops the land values falling and gives farmers a chance.

Mr Shaw, do you really think foreign buyers, as Mr Little has suggested, are going to be swooping in to buy our farms?

Shaw: Well, there is a great risk of that because what happens is, you know, you've got all these poor farmers who are leveraged up the wazoo, who are going to be, if they do have to walk off the land, they are going to be obviously looking for the best price that they can get in order to be able to pay back the banks. Where are they going to be able to get that money? Largely, it's going to be offshore.

But that's anecdotal, isn't it? I mean, do you have any proof to suggest that that's what will happen?

Shaw: Well, you just need to look at the amount of land sales that we've had in previous years. I mean, it's very hard for a small economy like New Zealand to compete against the amount of cheap money that's floating around offshore at the moment. Interest rates aren't just low here in New Zealand, they're also incredibly low in the rest of the world. And you've got tons of money sloshing around in other economies.

Because, Mr Peters, the statistics on the number of people who have applied for IRD numbers since this bright-line test came in, there's only about an average of 340 a month who have applied for those for the purpose of buying or selling land or property.

Peters: No. Property. The property is quite a lot.

Shaw: 340 a month is quite a lot.

Peters: Not land. Property. When you say that it's not a big matter, well, which first-world country would have a government that doesn't want to know what's going on? In Australia, if you're coming in to buy, you've got to register. You've got to register as a foreign owner. But not in New Zealand. Mr Key doesn't want to know because it's so embarrassing. And when you say there's been no foreigners swooping in, well, what about Shanghai Pengxin. That was 28 farms all in one whack. And it's happening all over the country, and we're still— The offshore buyer, particularly if they come from China and other countries like that, have a long-range view. They can sustain 30 or 40 years. They see it that way. And we've got a short-term government and economic plan run by Treasury, who can't see past yesterday, and with the greatest respect, this is a perfect storm for overseas ownership unless we stop it now.

All right. Well, you raised the issue of immigration there. I think all of you are in agreement that you'd—

Peters: I didn't raise immigration, I raised foreign ownership. It's a different matter.

Immigration — you would like to put on the handbrake for the number of immigrants who are coming to this country. You're all in agreement?

Peters: Well, no, no. Let's be honest. Which party stood for that for a long time? And I'll tell you why. Where is the economic analysis—

Wouldn't that lead us into a recession...?

Peters: Excuse me, Lisa. Lisa, it has led us into recession as we speak. Here's the point. Where is the economic benefit for massive immigration to the country?

3% growth, Mr Peters. That's not a recession.

Peters: 3% consumptive growth gets what you've got now — massive inequality and an Auckland house bubble going through the roof, transportation stress, health, education — all in Auckland. Get on the motorway in the afternoons or on a business day that they've got any plan to fix it.

Do you want to ease up on immigration, too? Do you share Mr Peters' view?

Little: There is a case to turn down the tap when the pressure is on, and we are a country that has been dependent on bringing in skilled labour from overseas, certainly at the high-skill end. Actually, a large number of those who are coming in, settling here, are in the semi-skills sort of category, which we can actually source that labour internally. So I think there is a case – turn the tap down-

Well, Mr Shaw’s obviously in disagreement, so I want to hear… What’s your view?

Shaw: I think that we need to manage our immigration better in terms of the locations that people end up in. So the massive immigration that we’ve had in recent years has largely ended up in Auckland, which is helping to fuel the house-price bubble that we’ve got going on in Auckland. Meanwhile, you’ve got other parts of the country where you’ve got a population static or decline.

So would you make immigrants go to a particular centre?

Shaw: I’d look at ways of incentivising them down there. So I was down in Dunedin recently, and they were desperate to get more people down there.

But hasn’t the Government already done that? Because they’re giving extra points for people who are prepared to go into the region, they’ve already done it.

Peters: It’s only for two years.

Shaw: It is, and it’s clearly not- It’s not actually doing the job. So this is typical of this Government, right, is that they do something to take the political heat out of a situation without actually solving the problem, and they do this over and over and over again, and immigration’s one of the areas where they’ve said that they’re trying to solve the problem, they said that they’re doing something to solve the problem, but the solution that they’ve picked isn’t working, and it’s been demonstrated that it isn’t working, and we need to try a different attack.

Well, the Government would argue that they are doing stuff, that they’re investing- that they’re investing in infrastructure – the City Rail Link, for example. Do you think the economy is at a point now that we need stimulus? Is that where we’re at? Because they’re doing it.

Shaw: It depends what you mean by stimulus, Lisa. I mean, there’s a whole lot of different things that you could be talking about. Yes, they’re finally getting with the programme in terms of Auckland’s infrastructure-

Well, significant government intervention, with spending.

Peters: With respect, they’re shutting down the Palmerston North-to-Wellington line, right? They’ve shut down the Napier-to-Gisborne line. They’re shutting down the Northland line. These are serious export-production areas. And they’re investing in consumption in Auckland – which they have to do, let me admit that – because people-

But they’re investing billions in roads, Mr Peters.

Peters: No, no. No, no. They’ve invested millions in roads of national significance. Meanwhile, rural roads are being run down everywhere. I invite you and the commentariat to get out there and find out what’s going on in provincial New Zealand and not just sit here in Auckland saying it’s all beautiful.

Shaw: A lot of those motorways—

But the biggest road spend is in Taranaki, so that is the regions.

Little: No, they’ve had money taken out of Taranaki, and the Government’s recently committed to money for a piece of roading that has been overdue for attention for many, many years but without a frame on it, so we just don’t know. It’s not just roading too. You look at Dunedin Hospital – desperately needed for an upgrade. Of course, they’re not going to get it for a while because the Ministry of Health has so badly misspent its funding. So, yes, there is scope for infrastructure spend as a stimulus to the economy, but it’s also attracting private investment too, which is why things like accelerated depreciation and research and development credits are so important.

Okay, I’m sorry to interrupt you, but we’re running out of time, and I did want to get to taxes. So you seemed to suggest earlier in the year that you haven’t ruled out raising taxes to pay for things under a Labour government, so is that what we need, higher taxes in order to support more government spending?

Little: Well, what you need to do is have a long-term fiscal plan for government and—

No, higher taxes, Mr Little? It’s a straightforward question.

Little: Yeah, so what I’ve said we said is we won’t make any material change to the tax system without going to the people first. So we don’t have any particular plan at the moment, and there are whole heap of issues—

But you don’t rule it out, do you?

Little: Well, there are a whole heap of issues on the table about tax and the tax system that are better dealt with in government so you get the resources of the government and you can actually lead a debate with people, rather than the kind of half measures that this government tends to promote.

All right. Mr Peters, should we have tax cuts still? Because Mr English is saying we can have increased spending and we can have tax cuts.

Peters: Well, look, Mr English’s use-by date has gone a long time ago. This is the guy that’s been telling us everything’s fine, only a few farmers are going to feel the agony. I mean, he’s so out of touch. I thought you might have picked up the numbers. Here’s a point, though. If you want tax cuts—

We’re running out of time, Mr Peters.

Peters: Well, okay, what are the views I’d use? The tax regime in this country to seriously incentivise investment in our provincial economies in particular.

All right, thank you all for joining me this morning, Andrew Little, Winston Peters and James Shaw.

Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.