Fonterra's Unsustainable Thirst

The caption that ran with this Fonterra story: The dairy industry has a lot to smile about given New Zealand's advantages....



On Saturday June 18th, NZ Herald's Business pages carried a useful article with a set of indicators which explain why Fonterra's current activities in New Zealand are fundamentally unsustainable...

At our annual investor conference last week, one of the presentations was from Fonterra. Feedback from the 600 private client attendees was that this was one of the most interesting talks of the day....

The first point made by Jonathan Mason, Fonterra's chief financial officer, was that New Zealand is a great place for dairy farming, if not the best in the world. The key reason is simple. We have an abundance of water, which makes us great at growing grass and gives us a distinct cost advantage over many countries.

According to Water NZ, New Zealand receives the same amount of rainfall that lands on the entire Australian continent each year, despite Australia being 28 times our size. This ample rainfall underpins New Zealand's position as a low-cost producer of protein.

Our rainfall averages 2m a year, more than double the 0.8m world average.....

Now, while this might be true, the reality is that New Zealand ranges from being water rich to water poor. In fact using international metrics, the rainfall in Canterbury and Otago is low. Yet this is where Fonterra and its legions of farmers are attempting to establish these water hungry enterprises. Eere is what Environment Canterbury says on its website:

The Canterbury Plains themselves have relatively low rainfall and the normally fast-draining characteristics of the soils and rock mean large seasonal fluctuations in the soil moisture content.

Rainfall recharge is therefore critical to maintain groundwater levels and thus the supply of water in these drier areas during spring and summer.

Christchurch has an average annual rainfall of 648 millimetres (roughly half that of Auckland and Wellington). So. To talk of average rainfall in the vicinity of 2 metres a year is plain misleading.

And Otago is no better.

Met Service data says this about rainfall in New Zealand:

The mean annual rainfall ranges from as little as 300mm in a small area of Central Otago to over 8000mm in the Southern Alps. The average for the whole country is high, but for the greater part lies between 600 and 1500mm. The only areas with average rainfalls under 600mm are found in the South Island to the east of the main ranges, and include most of Central and North Otago, and South Canterbury.

These are the very driest parts of New Zealand. Otago and South Canterbury - but these are just the areas that are being targetted for conversion to dairy in what amounts to one of the most damaging tragedies of the commons that New Zealand has ever faced. And it is supported by Central Government.

The Herald article continues:

This level of rainfall has a huge bearing on our ability to provide pasture for grazing dairy cows and gives us a strong competitive advantage over other parts of the world that have to supplement their stock with various types of feed, which are usually grain-based. While few local dairy farmers use grain-based supplements, as much as 90 per cent of the rest of the world's dairy cows rely on this, and face its consequently higher cost structure....

Australia and some parts of South America and South Africa operate in a similar way to us, and certain areas in the United States have begun to adopt our model. However, New Zealand still offers a superior environment. We have a stable political landscape and a reputation for safe, high-quality food products in our favour, too....

You see what I mean about "Government support". 50 years ago New Zealand was wealthy because we had 70,000,000 sheep that stripped vegetation to bedrock in the high country (no more soil left, it all washed away), and Great Britain bought most of the meat while NZ benefitted from Fergusons and Vanguards and washing machines. Now it's milk fat and China buys a lot of it and we get all those plasma screens and cheap stuff to buy in the Warehouse. But does that make it alright?

A co-operative owned by 10,500 farmer shareholders, Fonterra is the world's largest exporter of milk powder, has revenue of $17 billion and operating earnings of $1 billion. It has 432 tankers across 17 depots, operates 86 plants in New Zealand and has the largest milk dryers in the world. It uses 11 New Zealand ports to send 140,000 containers each year to its millions of customers in 140 different countries.

While New Zealand only accounts for about 2 per cent of world dairy production, we export 95 per cent of this. This is in contrast with most other dairy producing nations around the world, where the vast majority is consumed domestically.

Unsurprisingly, China is a key export market, taking nearly a third of Fonterra's milk products last year.... China's growing demand for high-value agricultural products bodes well for New Zealand. The local agricultural sector, blessed as it is with high rainfall, is well placed to benefit from a China that is expected to become a major importer of food....

And so it goes, and it gets better....

In addition to the growing demand, water shortages could see China become a major food importer in future. China has only one-third of the freshwater per capita of the global average and, unfortunately, the worst water shortages often coincide with the populous northern region.... As urbanisation continues, a higher proportion of fresh water will be required for residential consumption, further limiting what is available for use in agriculture.

This good news story makes no mention of the enormous long term damage that is being done to New Zealand's waterways, rivers, and lakes. I don't know how this environmental damage stacks up alongside what happened to NZ's high country, but it is not good, and it fundamentally affects our own enjoyment of our country - let alone what's happening to fresh water ecosystems. And it is dishonest to suggest that the very areas where dairy farming is expanding have "ample water". They do not. They fall into the category of "water impoverished". And the more water that is sucked out of the ground in these parts of New Zealand to force-irrigate grass, the quicker we will kill the country's rivers.

It can't last, and it needs to change.

But in the meantime, Fonterra's bosses will make hay...

Any land-based venture is not without risk and cyclical ups and downs are to be expected. It should also be noted it does not provide specific exposure to dairy farms or the commodity milk price - rather, it is a manufacturer and marketing company of dairy products. However, the long-term growth potential for Fonterra is enormous.