Bryan Gould: Egg on Govt's face from overloading dairy basket

There is no tougher job than running a dairy farm, and it can only get tougher when the expected rewards for all that effort do not materialise. Photo / Brett Phibbs

The crisis in the dairy industry is of course a savage blow to many individual dairy farmers. There is no tougher job than running a dairy farm, and it can only get tougher when the expected rewards for all that effort do not materialise. For some - too many, it will mean the end of the road.

The fallout for New Zealand as a whole will also be serious. There will be many suppliers and traders who will suffer, the general level of economic activity and output will fall, and our perennially worrying trade deficit will get worse.

The crisis has of course been brought about by the worldwide slump in dairy prices, caused in turn by factors such as increased European production, falling Chinese demand and the closure of the Russian market, over which we have little control and for which we cannot blame our Government.

But our policymakers cannot escape all responsibility for our plight. They are guilty, to use an agricultural metaphor, of putting too many eggs in one basket and of not using the good times to prepare for a rainy day. We have blithely increased our dangerous dependence on a single commodity and have done little to broaden our economic base, with the consequence that we have little to fall back on when the rains come.

The Government was happy to take the credit for the dairy price boom. They must now look at how well they managed the boom times to prepare for the tougher times that, in a cyclical industry, would inevitably come. Sadly, they did little.

Indeed, the Government has quite deliberately increased our reliance on dairying, by itself providing important financing for capital-intensive projects like irrigation so as to speed up the conversion to dairying - done without regard for environmental considerations and creating exactly the kind of farming that is most vulnerable to falling prices.

It has been far too optimistic in assuming that the Chinese market, on which we have become heavily reliant, would go on growing. Even without the current downturn, it is surely prudent to recognise that the long-term Chinese goal is to make themselves as self-sufficient as possible in dairy, as in other products. Free trade agreements, in any case, do not always deliver what they promise - just ask our exporters of wood to China.

But, the apologists will say, as dairying declines, tourism is booming. The tourism industry deserves congratulations on its success; but we should at least acknowledge that countries that rely on tourism for their foreign exchange earnings are usually found in the ranks of developing economies - countries which struggle to pay their way through selling competitive goods and services into international markets.

Is that where we see our future? And, since our unique selling point is the space, tranquillity and beauty our country offers, can we expect to go on increasing tourist numbers without damaging the very virtues that tourists are willing to pay for?

So, what is to be done? In the short term, it is clearly essential that dairy farmers are able to weather the storm and stay on the land. The banks have a crucial role to play. The Reserve Bank, itself a bank whose primary concern is the health of the banking system, assures us the banks are strong and secure and have the capacity to withstand any likely losses. That presumably means they expect little impact on the more than $4 billion record profits that our Australian-owned banks send back to Australia every year.

That may be reassuring, but in a contest between the maintenance of record bank profits and the health and survival of our dairy industry, there can surely be only one winner. The national interest requires that the banks should exercise some forbearance, even at the cost of some short-term dip in their profits.

Lending and borrowing are, after all, matching parts of a single and voluntary transaction. The borrower understands the risks and penalties of failing to repay a loan, but the lender also agrees the deal with their eyes open. They must be ready to stand by their decision to lend and to bear the consequences if the loan is not, or cannot be, repaid. And we must never forget that the money supposedly lent by the bank is created by the bank for that purpose; they are able to charge interest and require security, not on real money but on a book entry.

None of this dissuades the usual suspects from expressing horror that we might look to the banks to play their part in resolving the dairy crisis. For those commentators, it is clear that the farmers can go to the wall, as long as bank profits at their current level are sacrosanct.

The real lesson, however, is this: we will get through this crisis, albeit at a hefty price in individual and national terms. When we do, we must put in place policies that ensure we are no longer so vulnerable to a downturn in a single commodity.