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.

New Zealand's State Run Farms: The War Against Private Property.

(I have no affiliation with any farming body, nor do I believe that farmers have a right to pollute at the expense of others, but I believe the best way to achieve the prosperous and free society, and an unpolluted environment, is by relying on the single-most important factor that has made the West the best civilisation to be a part of in man's history: private property rights, and they are being destroyed in New Zealand. Remember throughout history the most audacious polluters have been communist countries.)

I’m in the process of penning a piece regarding Tyler Cowan’s interesting Great Stagnation Thesis, as it may apply to farming in New Zealand, and much sooner than might be thought with a Labour/Green government taxing on-going innovation out of the sector from 2014, however, in the interim, there is one frightening connection between farming in New Zealand and China, that has nothing to do with the Labour/Green/NZ First xenophobia regarding Chinese investment, that may also feed into this: it’s the out-of-control, indebted state, again, and it’s destruction of private property rights as a means for its survival.

Consider the following question, which you may think absurd at this stage of the post: how far is a society that has done away with private property rights, as we have done - and which I shall prove shortly - from the below position in China?

China says it has worked hard to overhaul its judicial system in ways that better protect human rights, but one of the country's most widespread abuses is increasing and is a leading cause of unrest.

The forced eviction of residents from their homes and farmland has quickened over the past three years, human rights group Amnesty International said in a report issued Thursday.

…

Forced eviction "has become a routine occurrence in China and represents a gross violation of China's international human rights obligations on an enormous scale," said the Amnesty report 'Standing Their Ground,' which looked at evictions from February 2010 to January 2012.

Violent forced evictions are increasing as local authorities, often highly indebted, seize land and sell it off to developers to meet bank repayments for funds borrowed to finance projects, Amnesty said.

Income from the sale of land rights to developers represents local governments' single largest source of revenue. And officials looking for promotion also rely on developing land to deliver the high growth rates their superiors demand, the group said.

For those who think me fanciful trying to work New Zealand into this, there is no doubt about the growing indebtedness of local councils (echoing central government, which refuses to put a cap on spending ):

The country's 11 regional councils and 68 territorial authorities recorded a $127 million deficit in the March 2011 quarter, Statistics New Zealand says.

The debt is $50m more than in the December quarter.

As of August this year, local council debt has quadrupled in the last ten years from $1.8 billion to $7 billion.

And more ominous, state officials are as loose with private property rights, as they are our privacy, for they have no culture or understanding over the importance of either: there continues, in New Zealand, the on-going destruction of private property rights by that monster act of statism, the Resource Management Act, under which local councils are now regulating for their right to run the formerly private farms of their ratepayers:

Last week, Federated Farmers appealed the Environment Court's decision on Horizons Regional Council's One Plan.

As it stands, the plan threatens agriculture's ability to operate profitably in the region. Federated Farmers Manawatu-Rangitikei provincial president Andrew Hoggard says the current version would poorly serve the community.

…

The re-introduction of resource consent requirements for other intensive land uses, including cropping, commercial vegetable production and irrigated sheep and beef, is hugely significant to the region's primary sector.
…

The plan as it has now emerged has:

A nitrogen-leaching loss limit assigned to existing and new intensive land uses, based on the land-use capability of the soil

A sinking lid on nitrogen-leaching loss over 20 years

Requirements on farmers to get consent to farm where they have existing intensive land use in the priority water management zone, or if they seek new intensive land use anywhere in the region

Indigenous biodiversity managed at a regional, rather than district, level.

Although all farmers in the region are affected by the One Plan, some are more directly affected than others. For example, it is likely that, given production constraints and limitations to future land use, this plan will cause the value of all farm land in the region to drop.

Mid-Canterbury sheep farmer Chris Allen sums up the impact of this on (formerly) privately run farms, talking of Environment Canterbury’s similar Land and Water Regional Plan:

A Mid Canterbury sheep farmer fears he will need a resource consent to farm under the existing definitions of land use change in Environment Canterbury's Land and Water Regional Plan.

Chris Allen, who is also the Mid Canterbury provincial chairman for Federated Farmers said unless it was changed, sheep farmers could be among the first to require resource consents to farm.

The nutrient discharge rules outlined in the current version of the LWRP, meant there were incredibly tight tolerances for land use change, he said.

It defined a land use change as when a farmer's nitrate leaching was at 10 per cent more than the average calculated using the Overseer programme from 2011-2013.

A 10 per cent margin was "wafer thin" for sheep farmers. If a consent was required to farm, it would substantially limit land use change and better farming practices, Mr Allen said.

"Such rigid rules risk either freezing farm practice in time or spurring radical high-input indoor farming.

"It also strips away the certainty I need to invest in more environmentally desirable kit. It is based on your farm or orchard's average for the preceding two years so one poor season could seriously skew things," Mr Allen said.

The rules as they stood meant he may have to carry less stock, resulting in his farm underperforming productively and commercially and forcing him to dispose of lambs to remain compliant.

If he had a good season and planted more winter feed, he would have to factor that into Overseer to see if he could run extra lambs to take advantage of the growing conditions.

"That is not being a sheep farmer, that's farming by the numbers, and all I want to do is be a sheep farmer."

He was hugely concerned with Overseer being made central to the regulatory process.

It had severe limitations which had to be be acknowledged in the LWRP, he said

“For me to get an accurate assessment of my farm's nutrient performance will mean a big chunk of my time will be taken up as a data entry operator; data doesn't enter itself."

One farmer told him it took over six hours to create a nutrient plan using Overseer. Mr Allen was concerned at the time it would take for him to complete his own nutrient plan.

His 360ha irrigated sheep and beef farm near Ashburton Forks has four different soil types and has trading lambs on the property over summer.

When these lambs entered his property, he would have to account for that transaction within his nutrient plan as well as factoring in the soil type they were farmed on and whether the lambs were placed on irrigated land.

So we have local councils which seem to be able to make wide-ranging rules without having to demonstrate or conclusively prove the science behind them – I know a farmer in mid-Canterbury who has asked for the science, and nothing has been forthcoming – councils, further, that are running up huge amounts of debt, but which have an open ended source of revenue via the consents process, a revenue source only limited by the amount of regulation they can enact, that will restrict farm productivity, profitability, and thus farm values, leaving individual farmers less and less able to comply, or more importantly, take up the crucial ethical fight against this rampant statism at the place it can most damage the voluntary economy; the (day to day) local (government) level.

How many years do we need to goose step from Environment Canterbury’s Land and Water Regional Plan, and Horizon’s One Plan, to the Soviet Five Year Plans? Back to my original question, how long until the forced evictions and land sales of China? There was only ever the one great wall that stopped that, sacrosanct private property rights, and on the philosophical and political level, the councils have already won; private property rights have long been consigned to history in New Zealand, it’s just taking us (too long) to figure this out yet. Already we have at least one farm held under the Criminal Proceeds (Recovery) Act, which may not sound related, but from that ask yourself how far is it in the bureaucratic mind from ‘punishing’ a farmer for growing cannabis, to punishing him, for the good of the environment, for leaching nitrate, or not getting an appropriate consent – remember the Environment Court is a criminal court. I know another farmer who now has a criminal prosecution from that court, and simply for building a stopbank, without a consent, to protect his farm from flooding. He didn’t realise he had to get a consent, at the time he thought he was simply doing something that made sense. Nor did he understand at the start of the legal process the import of the Environment Court prosecution being a criminal one. The consequence has been, so far, a cancelled family holiday to the US, given he does not know the vagaries of trying to enter that country after having declared a criminal prosecution, as you must, and many tens of thousands on the farm mortgage to fight the case.

Over a stopbank. Think about it.

What is at stake here is everything, with a prosperous farming sector being the least of it. When individual property rights are usurped by the state, we all lose our freedom. We’re simply the generation witnessing the movement back to the Gulags of Forced Altruism in a collectivist West where political will seems determined to replay, again, the brutal surveillance states of the twentieth century when the state was man’s master, not his servant. And I thought we won the Cold War: apparently not. The pity is, there was one philosopher of the twentieth century who figured this out, but she has been as misrepresented as she has been reviled by the voter whose main concern has been the (illusory) free lunch offered by irresponsible politicians of both the Left and Right. As the philosopher, Ayn Rand, wrote:

When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

So when you read of the first farmer villains being taken through the Environment Court for not being able to comply with this new regulation that might well force them off their farms, and mark my words, they will be put through the show trials for us all to read about and be made examples of, also remember Ayn’s further words:

There's no way to rule innocent men. The only power government has is the power to crack down on criminals. Well, when there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.

It’s about time farmers understood it’s time for a revolution in their heads, and I’m not just talking about the vote in 2014, I’m talking about the coercive society which is now our social democracy, where you don’t own your farming operations anymore.

Update:

If more proof is needed of out-of-control expansionist councils, then Rob Hosking provides it over at NBR.


Update 2:

The shocking impact of Horizon's One Plan on agriculture - a must read

Quoting:

"Upwards of $15 million of ratepayers' money has been spent on a plan that will make farming here damned difficult," says Hew Dalrymple, Federated Farmers Grain & Seed vice-chairperson and an environmental award winning farmer.

"Thanks to Landcare Research's research, we now have a good handle on the One Plan as it stands following the Environment Court decision. It scarily confirms the impact upon farm profitability will be at the upper end of 22% to 43%.

"If you are a member of the public, take up to 43% off your post-tax income and you'll understand why we are angry. That grows when one of our policy staff members described even this high level of impact as potentially 'optimistic'.

"In spite of this Landcare Research report, the council is acting like someone who has been told they have a terminal disease. It is in denial. How many times and how many ways do they have to be told the current plan version is a dog before the penny drops?

"Instead of being an officer's mouthpiece, the elected council needs to 'grow some' and take charge. Councillors appear to have little understanding of which version of the One Plan they are talking about, let alone its effect upon agriculture. They appear to treat what council officers tell them as gospel.

"The council must listen to proper research that comes directly out of the work done for LawF. Given LawF got a positive reception by almost all parties, is Horizons really thumbing its nose at it now?" Mr Dalrymple asked.

.

Immigration: Cutting Off Our Noses Because The Law Says To.

Only time for a fleeting post this morning, in the form of a question. We currently have the 279 peaceable - by all accounts - Chinese students of the story that broke yesterday, spending their parents' hard earned money in New Zealand, while getting an education.  What’s the problem with this?

Our immigration department, if they can extract themselves from nosing through the private lives of their clients, are now going to spend unknown quantities of my taxpayer money, rounding these individuals up, hounding them, and deporting them.

The result will be everybody involved loses. The students (whom seem to be innocent victims of a fraud in China, and will be devastated to have their studies interrupted), the educational institutions they're at in New Zealand, and all those local businesses providing goods and services to the families involved.

In a free, classical liberal society, so long as immigrants do not initiate force or fraud and comply with the rule of law, and do not tap into our welfare system, then we can only gain by their presence, and thus they are welcome. There’s too many laws. Laws upon laws upon laws upon laws. Save us from this rule bound moribund Social Democracy.

(Postscript: I’d welcome someone who can give an update to the English family that featured on Close Up last week. The parents and one daughter, in that case, have been given citizenship, but a second, remaining daughter, was to be sent back to England because ‘she had been working here,’ which was a technical foul under law applied immorally, and with no compassion. Yet another appalling decision by Kate Wilkinson on the back of her 380 page Food Bill. I can’t find out what has become of this family.)