Monday, August 10, 2015

Fonterra, Cheap Central Bank Funny Money and Malinvestment.



As far back as 12 August, 2013, writing on the milk contamination debacle, and before the announcement of Fonterra’s historical peak pay-out, I wrote the following:


… 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:

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 …

And, pertinently:

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 …


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


No comments:

Post a Comment