Fonterra: The Free Market is the Solution. Why Has Fall-Back For Everyone Become More Statism?

There currently exists a desperate need for a contrarian view of the Fonterra food contamination debacle. Although some commentators are coming out with their predicable viewpoints, there’s far too many turncoats finding all the wrong words in their scrabble sets and spewing them over their op-eds. It frightens me the majority of journalists seem to think the state must step in with inquiry and oversight, for answers to problems created by the state in the first place. No, nationalisation of Fonterra is not the solution here, free markets are.

As a quick overview, Chris Trotter, famous for his unblinkered view of free markets - that's irony, John Drinnan - opines how Fonterra’s problems this last week proves we can’t be unblinkered about free markets. No surprises there. Fran O’Sullivan; I respect Fran, but she does the statist misstep far too often, to which end I cite the near-nationalisation of Christchurch call after the earthquakes, then gender quotas in politics (fine) and legislated in private boardrooms (not fine), and now telling John Key that a full inquiry on Fonterra is the only option. Then one of my heroines has come out with this shocker:

Never thought I'd say this but the market doesn't work. Too many greedy egos.
— deborah coddington (@debcod) August 9, 2013

And to top it off, National stalwart Matthew Hooton,  assuming the need for an inquiry also, ends his piece with this:

Fonterra exists only because of the support of the government, parliament and ultimately the New Zealand people – which gives all three the right to demand it performs a hell of a lot better than this.

In this paragraph Matthew has unwittingly found the problem, but then driven his $160,000 farm Jeep right by it and up the well-worn old hill track leading to that vertical cliff of farm debt too much of our dairy industry is built on. The view from the top of that cliff is scary, because conscious of economist Tyler Cowan’s great stagnation thesis, which I shall post specifically on at a later date, applying it to our dairy industry, we might hypothesise the major productivity gains, the low hanging fruits of profit, have been made already by this capital intensive agriculture, noting as proof there’s a ballooning $82 million plus, beyond schedule irrigation scheme being built not thirty minutes drive from where I’m writing this. I believe it will be dubious when interest rates are in double figures again, whether return on the asset will outweigh the cost of debt, and when Labour get in and start taxing equity, the party is definitely over. Given the dairy debt cliff, an alarmist could forecast a bust coming, given the right circumstances, to rival 1987. Milk is a commodity, and commodities follow cycles, and even on these historically high payouts, many corporate dairy farms are still hurting: before moving to the contamination scare, that's the major alarm bell in this industry. So, if or when such a bust happens, and everyone will be, as in this debate, blaming free markets, remember you read it here: Fonterra was stillborn of crony capitalism which is to capitalism as sea horses are to horses - which is not the same at all, in case I need to make that clear. Fonterra is not a beast of free markets at all, but a beast of burden.

And that’s the sleight of hand in this debate.

The debate lines have been drawn mistakenly assuming this is an issue between private enterprise and what Orwell called state capitalism, with some commentators pressing the need, even, for semi-nationalisation of Fonterra: no. This truly is Irish, as free enterprise has never had a look in with Fonterra. Matthew stated that earlier: Fonterra is a monopoly product of government, parliament, and the herds at the voting booths.

I’m not a journalist, I write this blog mainly because I enjoy putting one word from my scrabble bag after the other, thus I can’t remember the full regulatory narrative – for the farmers, narrative is a word smart people use, apparently, read feminist discourse - … I can’t remember the full regulatory narrative of Fonterra’s set up, but Matthew’s quotation reminds me of the broad strokes of it, plus Kiwiwit has this great piece on the monopoly powers granted this firm, explaining why, from its inception, I disagreed with my dairy clients over the formation of Fonterra because it was in essence a state granted monopoly, and thus there would be no transparent free market pricing mechanism – for either farm suppliers or the consumers of milk -  or the resource allocation system of a free market, that miracle of economics. That is, no true market signals. These US farmers complaining about Fonterra’s monopoly are correct in essence, although such a claim is 100% pure cowshit when considering how the US farmer is one of the world’s most protected.

This is what I know. A government messes with the resource allocation of a free market with peril. Given the size of the numbers involved in the dairy industry, then as we have gleaned with even this contamination hiccup – and that’s all it was actually – extreme peril. So, think about this: the monopoly given Fonterra gave it an edge over other land use that the banks with their fiat money and cheap credit were then given the confidence to bankroll, and bankroll it they certainly did, even as the cost of conversions rose ludicrously, as did underlying land values unrealistically. Thus dairy grabbed a bigger allocation of resources than it could have under free markets, which would have allocated resource, land, capital, et al, in a far slower manner. That’s one thing the spontaneous order arising from markets is relatively good at: coordination. We have all seen the price of this too rapid expansion: degradation of the environment in New Zealand, and a PR sales machine caught flat-footed in China – bet Fonterra wishes they had more than a single science degree (the CEO is a food technologist) on the board now, and in the PR team.

If readers of this stop and keep very still, you’ll hear a huffing and a puffing: I have just breached Austrian school economics orthodoxy by professing an implied worry over externalities. I confess to being conflicted on this matter, and willing to announce so publicly, because as I mentioned in this earlier post on literature, of all things, I seem embarked in this self-indulgent blog on a futile odyssey to match that of the little fella in Hitchhikers Guide to the Galaxy, trying to piss everyone off; albeit he was doing it alphabetically, I’m being a bit more random.

Dairy’s quick and artificial growth - artificial because government initiated and protected - looks to have done harm; real harm. It has led to an allocation toward this single agriculture at the expense of diversified land use by a range of complementary, biodiverse agricultures that couldn't catch the banker's eye, given they were so smitten by the big sad bovine eyes of the large herds. Dairy has outpaced its resources of capital and skills, despite how it has saved our economy through the world financial crisis – and all the naysayers don’t ever forget that or that it remains the lynch pin of our economy.

Speaking personally, though hypocritically, as I have done well off the cows back also, I would love to still be living in at least a partially pastoral landscape in South Canterbury; a landscape of fields, woodlots and carefully planned hedgerows for stock to shelter behind. I’ll repeat that for the factory farmers reading this:

FOR STOCK TO SHELTER BEHIND. That is, humane animal husbandry - (remember that; it's what real farmers do).

I say the above because instead of the pastoral idyll, driving around I see a War of the World’s movie set with giant pivot irrigators striding across paddocks denuded of trees and shelter, and far too many reports, lately, and growing, of starving and abused herds because of the lack of skill-set in farm labour, and sometimes just straight cruel bastards. Look at my posts against animal testing over last month, and you’ll see that animal welfare is the chink in my rationalist armour. Though more than that: I can’t think of a quicker way to destroy milk sales in all of our markets other than images of animal neglect.

That’s my spleen vented. From it, the answer to this latest Fonterra debacle becomes obvious.

The way to ensure Fonterra takes on rigour, right down to the basics, is to take away every piece of law delivering them any sort of monopoly, whatever those rules, regulations and laws are – I’m not looking them up, I only need to know they exist. Look at how well competitive private enterprise in New Zealand handles food safety issues in the dairy sector. My little township of Geraldine has a cheese-maker, one of many hundreds across the country: they’ve poisoned no one. On my apple pie this Sunday lunch-time I’ll be eating Clearwater’s – the original organic dairy co, ten minutes drive away – glorious new clotted cream product, and Mrs H has been eating their organic yoghurts for years without being poisoned also. Private enterprise lives by the fact that the best way to keep a customer, is not to kill them, or even piss them off.

In league with this, I suspect one thing the commentators have got right, is looking askance at the culture of Fonterra, remembering further its a co-op, not a private company, and the culture may well be more in the nature of a bureaucracy protecting its statutory monopoly, than using its full resources for innovation; and its eye may be too much on Parliament, not enough on its customers, suppliers and basic processes. Think, even, when Campbell Live was covering escalating dairy prices for consumers, how much energy this firm had to expend explaining its idiotic price setting book: hint, no company needs to run a little red pricing formula book where you have pricing under the transparency of competitive free markets. And speaking of a nascent competition, it exists already, just let it live: I’ve heard of Fonterra suppliers shifting to Synlait before this scare, based on little more than an annoyance with the arrogance from Fonterra's head office over sharing-up issues.

So don’t go the nationalisation route. Fonterra doesn’t require more oversight, and I don’t want my taxpayer money wasted on government inquiries. In a free market, the government has no place at all in Fonterra governance issues. Simply open the Co-op up to full competition and management will realise pretty quickly, just like the cheese-maker and the clotted milk makers down the road, the importance of a food testing regime that delivers the test results before product leaves the factory, rather than when it’s being bought off the supermarket shelves. And if proof were needed on why government would be no help with that, well this is the government that has just set up an expert panel to assess the necessity or not of animal testing for stoners, after they have passed an Act enacting animal testing for stoners. You can no more sell food on such an uninformed basis than you can pass legislation.

In ending, just so I can truly offend every party in this: to the Chinese Embassy councillor on The Nation this Sunday: you idiot. Some important final facts on this current issue:

Number of people who have died: none.

Number of people who got a tummy ache: none.

Indeed, Fonterra’s main incompetence may well end up there was no harmful contamination at all. So I enjoin the Chinese councillor to leave Fonterra product on the shelf, if he is so worried about their food safety record, and consume instead Chinese dairy products: perhaps you could buy them from that part of your country where you displaced millions of your own people to build that dam; or any of the villages in China I saw on some doco or other recently the inhabitants of which were dying from pollution.  The land of the world’s biggest state monopoly is only drinking Fonterra milk, because they don’t trust anything produced in their own country.

Right, let’s see:

Journos pissed off – tick.
John Drinnan - tick (not above, some sort of free hit on Twitter last night via John not being able to see into the depths from the shallows he must be writing his op-eds on).

Fonterra – tick.

My farming clients – tick. (Nah, not really: by clients are 'real farmers' to a last one).

Government – tick.
US farmers - tick.

Libertarians – tick.

Statists – tick.

Statists and socialists – tick.
Statists and Gareth Morgan - tick.

China - tick.
Ireland - tick.

Yep, my work is done. It’s an Oyster Bay 2013 for lunch.

Oh, Deborah, I forgive ya ... this time. Outside of that, I've really got to start pushing some work through, so my blogging has to be scaled back for a little bit.