Ashburton, New Zealand, May 8 - As global food costs rise, triggering protests from Egypt to Indonesia, it's clear the world needs more production. What is happening here shows one reason that response may be slow to come.
New Zealand is the Saudi Arabia of milk, the world's biggest dairy exporter. With global demand growing, a cooperative that markets most of the country's milk has sought to raise $1 billion or more from outside investors to expand production.
But to do so, it needs the consent of co-op shareholders. They are 11,000 individual farmers. And they -- satisfied with the co-op's structure and fearful of giving outsiders a say in its decisions -- have so far stymied the plan. "Farmers didn't build up this bloody great asset to throw it away," says Frank Brenmuhl, head of the dairy division of New Zealand's main farmers' union.
The stalemate at Fonterra Co-operative Group Ltd. points to a central conflict in world agriculture. In commodities like oil or metals, when prices rise on a sustained basis, large companies with deep pockets invest to develop new supply. Food commodities have also seen price jumps, on everything from rice to palm oil. But their production, by and large, remains dominated by millions of small farms.
Policy makers and social critics generally like it that way: Small farms keep rural communities alive and, especially in developing countries, provide needed jobs. But there are problems with small farms, when it comes to reacting quickly to a rise in food needs. They tend to be less productive than larger ones. And they often lack capital for the heavy investment in new productive capacity that many economists say now is needed.
Investors have capital. But, again because of the small-farm structure, those who want to put some of their money into enhancing food output find limited avenues to do so. The result is a world food-production system operating at close to capacity, with grain stockpiles, for example, at their lowest in decades.
In dairy products, demand is estimated to be growing 2.5% to 3% a year -- including more than 10% a year in China -- but output is rising only 1.5% to 2%, according to Dutch bank Rabobank.
The shortfall has eaten up once-large stockpiles and made dairy prices as volatile as oil prices. When drought last year cut production in Australia, another big exporter, powdered-milk prices that had hovered at around $2,000 a metric ton rocketed past $5,000 for a time, according to data from Rabobank.
As the drought shows, capital isn't the only limit on a swift response to rising food prices; so are water, soil quality, roads, storage and trade restrictions. But in a recent report, the World Bank argued that "sharply increased investment" in agriculture is needed to meet the world's food needs, especially in places like sub-Saharan Africa, where it said food imports are expected to more than double by 2030 and agricultural productivity has lagged.
U.S. agriculture saw major consolidation a couple of decades ago, and it was painful. Many Midwestern farmers, burdened by debt and low prices, had to sell out. Small-town merchants suffered. Yet the farms that survived, usually larger and better-capitalized, were by and large more productive, able to afford technology that increases yields: better pest control, seeds, fertilizer and machinery.
U.S. farms average 450 acres and generate more than $50,000 in annual output per worker. In China, 95% of farms are under five acres and generate an average of about $1,000 per worker, according to the United Nations.
In a few cases, farms in the developing world are consolidating and finding outside investment, but these are exceptions. In many countries, such as Mexico and Thailand, governments have restrictive land-ownership rules or limitations on foreign investment. The rules are often intended to forestall formation of big farming companies that might cut jobs.
In China, farmers have limited rights to their land, which usually can be transferred only to others in the same village. In India, rules meant to curb the concentration of wealth limit holdings to as few as 15 acres in some areas.
One result: Despite high interest from investors, "there's very little" in the way of companies they can bankroll, says Thomas Murphy, head of investment research at Deutsche Bank AG in Australia.
New Zealand lacks many of the pressures that spur other governments to keep farms small -- yet investment and the potential for expansion here are limited anyway.
Abundant water and rolling grasslands make New Zealand ideal cow country. Dairy farmers in the nation's butter belt formed Fonterra in 2001 by merging its main dairy co-ops, aiming to boost their clout in international markets. About 95% of New Zealand's dairy farmers are members. To join, they buy shares in the co-op and agree to sell it their milk.
Fonterra trucks collect about 10 million gallons of milk daily. The co-op sells some to food merchants such as Nestle SA and distributes its own consumer brands, like Tip Top ice cream. It sends most of the proceeds back to farmers in monthly checks.
Co-op revenue topped $10 billion last year and should rise in 2008 because dairy prices in some cases are double what they were 18 months ago. Co-op members' average payouts have risen by more than 50% over a year. In Ashburton, on New Zealand's South Island, Porsches and Range Rovers prowl the streets. A travel agency's windows show posters for trips to Egypt, Borneo and Fiji.
"Ten years ago, agriculture was a sunset industry in New Zealand," said Willy Leferink, a farmer who had a boat and a Mercedes in his garage. "Now people can't run to it fast enough."
But it would be hard for New Zealand to increase dairy output much more. Much available pasture already has cattle or sheep. And many farmers, having borrowed to expand, are already loaded up with debt.
Last November, Fonterra proposed a restructuring plan that would enable it to produce more milk abroad. The co-op's assets would be transferred to a new company, which would list its shares on the New Zealand Stock Exchange. Analysts estimated the move could raise as much as $1.5 billion from investors.
The co-op would use the cash to create "mini-Fonterras" in other countries, including China and parts of Eastern Europe and Latin America, their structure depending on local laws and other factors. They would boost Fonterra's presence in markets where demand is rising fastest and let it produce more milk, which is hard to transport long distances.
Where possible, Fonterra would export New Zealand's advanced dairying methods to areas where practices are less sophisticated. It already has invested in two experimental farms in Chile and in a distribution company there. The co-op also is developing a 3,000-cow farm in China with a local partner.
Co-op Chairman Henry van der Heyden unveiled the plan at a meeting in November, linked by satellite to seven packed meeting houses. He said this was the only way to achieve the co-op's growth goals. After the share sale, Fonterra's farmer members would still own roughly 80%.
But some farmers questioned the co-op's ability to produce profitably in other countries. They worried that investors from elsewhere would pressure them to accept lower milk payments, to generate cash for stock dividends. "Before long, we'd become the little guys to the corporates," says Peter Williams, who has a herd of about 11,000 cows. "They'd squeeze our milk checks."
The plan required approval from 75% of Fonterra's farmers. Opposition was so strong that in February the co-op canceled a referendum on the plan. Officials intend to return later with another expansion plan, hoping to have one in place by 2010, though it's unclear if that will happen.
Until then, New Zealand will make what production increases it can. Taking a break over cheese-and-sausage sandwiches one morning, farmer Norman Stewart said he was adding about 200 cows to his herd of 800. But he's also spending more than $600,000 to increase his shareholding in the co-op, and so he can't easily expand further.
"How are we going to feed China?" he asked. "I honestly don't believe we have the capital to do it."