[ This post was first published in the New Zealand Sunday Star Times on 17 November 2013]
It is often argued that New Zealand needs the Trans Pacific Partnership (TPP) trade agreement so it can gain access to the US dairy market. Less than five years ago this may have made sense, but the world has now moved on. The USA is now the world’s second largest exporter of dairy products.
It no longer matters what rules the TPP comes up with, the reality is that the USA has very limited potential for New Zealand’s dairy products. The new American dairy mega farms, with at least 2000 cows and in some cases more than 20,000 cows, can produce milk at competitive prices to New Zealand. With feed prices now moderating in the United States, these farms are back in expansion mode. It is easily conceivable that within five years the USA will overtake New Zealand as the nation exporting the most dairy products.
Accordingly, there may still be valid reasons why New Zealand should join the TPP, but it will not be to help our dairy industry sell its products in the USA.
A key question is whether our trade negotiators have caught up with this new world. Even the Americans are only now catching on to this new situation. Of course their trade negotiators will not publicly admit that their dairy world has changed. Rather, they will use dairy access as a bargaining point for other concessions from countries like New Zealand, knowing full well that they are not actually giving anything away.
Apart from the USA, there are two countries seeking membership in the TPP for whom the dairy rules are very important. These are Canada and Japan.
Canada has a highly controlled industry, where producers have quotas to produce milk. Several years ago when I researched their industry, I found that the majority of farm capital was the value of the quotas. One effect of these quotas is that visiting a Canadian dairy farm is like a journey back in time. Technologies that elsewhere in the developed world were discarded thirty years ago are still alive and well in Canada.
One of the dairy industry ironies is that despite the high farm gate price for milk in Canada, the retail price is not much different to New Zealand. But that is another story, with retail prices for New Zealand milk, as a result of limited competition throughout the supply chain, greatly exceeding those in countries like the USA and Australia.
If Canada did deregulate its dairy industry, then it would be painful for the existing producers who would lose their quota assets. But New Zealand would not benefit significantly. Once deregulated, a new model of large scale industrialised dairying would emerge, with the USA picking up any slack.
Japan is a different situation again. Food security is a particularly sensitive issue in Japan given that Japan only produces about 40% of their overall food requirements. Japan will be very cautious about anything that further impacts on local food production.
The important countries for New Zealand’s dairy trade are in the developing world. China and the ASEAN countries such as Indonesia, Malaysia and the Philippines are the most important, with some Middle East counties including Saudi Arabia and the United Arab Emirates also of major importance. Some of the ASEAN countries will probably join the TPP but their dairy arrangements are already covered by the important free trade agreement between New Zealand and the ASEAN countries. Our other important markets lie outside the TPP.
So the key point for our TPP trade negotiators is that we will gain few dairy trade benefits from such an agreement. Dairy still needs to be included and it would set a bad precedent if it were not. But New Zealand should be particularly wary of offering concessions in other fields such as Pharmac or intellectual property in return for such limited benefits.