In 1954 the United States Department of Agriculture, in its Year Book, defined marketing simply and briefly as “getting the product to the consumer”. This is, however, not a simple thing to do, especially for farm products, the marketing of which is influenced by four special factors:
Farm products are usually produced by many producers, in greatly varying amounts, kinds, and qualities, and over wide areas of the country;
Most farm products are seasonally produced and are perishable (milk, for example). Storage, even where practicable, is costly and needs complex organisation;
Products are marketed in widely variable forms. For example, wheat can be sold for stock feed or as bread; milk can be sold as milk, or turned, by complex processes, into butter, cheese, or milk powder; and
Demand and supply for most farm products is fairly rigid, making it impossible to expand production quickly, as animals have to be reared before this can be done, or crops grown, or trees planted and nurtured. (Conversely, no producer will readily reduce herds or flocks or destroy trees because of a – perhaps temporary – drop in prices.) Further, people will not necessarily buy very much more food because the price has fallen.
New Zealand farm products are affected by one other factor – that most of them are exported to the other side of the world. Even locally consumed crops, such as grains, potatoes, most fruits and vegetables, suffer a similar transport difficulty. The crop may be grain in one island: the grain demand may be in the other, which adds to the cost and risk of loss of perishables.
The marketing and pricing system for New Zealand farm products, though it has varied considerably according to the product or the times, has, in general, developed from a laissez-faire free-enterprise philosophy towards one of centralised control and some measure of price fixing or stabilisation. This has been a world-wide trend which has been carried to very great lengths in the bigger industrial countries, often to the detriment of countries, such as New Zealand, which depend on exporting farm products.
Any form of price stabilisation or control was never seriously considered in the early days of organised markets. Such an idea would have seemed revolutionary, politically and economically. And, more concretely, the market prices of export products could not be controlled, nor did the community have the money to subsidise them. Politicians and administrators before the First World War would scarcely have entertained the idea of withholding part of the receipts when prices were good to cushion later price falls (a method which then could have applied to wool). It is likely, however, that, as taxes then were relatively low, New Zealand gained through the ploughing back of profits into farm improvement and land development. But farmers were sometimes most dissatisfied with the violent fluctuations in the prices of farm products (just as they are today) and whenever prices fell, they tended to blame the middleman. The dairy industry was especially dissatisfied; and it is worth noting that organised marketing has developed most fully with dairy produce, with pip fruit next, and wheat, the latter being practically under State control.
Social, economic, and some technical reasons lie behind this organisation of dairy produce marketing. Dairying generally and traditionally takes place on small farms. For when dairying areas were opened up, the size of the farm became adjusted to the needs of people with limited capital who wished to be owners and who felt that farming alone could fulfil their needs. It is worth considering briefly their economic and social backgrounds. Many, perhaps most, dairy farmers were immigrants from Britain. Some were originally attracted by the goldfields; many sought freedom from wage drudgery, independence, and better economic opportunities. As a class they had little money; to gain capital they had to squeeze the last penny out of the heavy labour and long hours demanded by dairy farming. Their social background led them to be impatient of a nineteenth century laissez faire philosophy and they were hostile to what they regarded, rightly or wrongly, as the excess profits of the middleman, who seemed to be richly rewarded for little apparently useful work. It soon became clear that the New Zealand dairy industry would outgrow the stage where farmers' wives made a few pounds of butter in a hand churn in the kitchen and sold it in some open market once a week on market day. Factory manufacture was inevitable. The first factories were established by private enterprise; but, when refrigeration showed the clear possibility of rapid future expansion, cooperative enterprise quickly became popular. Though reasons of economic and social background underlay this popularity, there was also the economic and social background of the farmers themselves. Moreover, the success of similar movements in Denmark and Ireland and, perhaps, the fact that the necessary capital probably could not have been raised by any other means meant that cooperative organisation was almost inevitable.
A further step, the control of the actual disposal of the butter and cheese overseas, was a different problem. It demanded that dairy companies cooperate, not an easy thing; and, in retrospect, it is clear that the time was not ripe, even though dairy farmers were at times dissatisfied with the disposal of their products. Payouts per pound of butterfat ranged from nearly 10d. in 1901 to about 1s. in 1912 – a not unsatisfactory price considering the value of money then, though one must allow for the lower productivity of those days. The First World War brought the “commandeer” of produce, which probably led farmers to some appreciation of the benefits of controlled marketing, associated, of course, with fixed prices. It is difficult to say how long this apparent satisfaction with the status quo would have lasted if such conditions had continued. They did not. The depression made an enormous impression on New Zealand agriculture and on its dairy farmers. It came immediately after a two-year land boom, one of New Zealand's biggest. During the boom many returned servicemen had been settled on farms under what proved in many cases to be impossible conditions for debt repayment. The effects of the depression, therefore, led farmers to demand further steps towards the control of the sale of their produce. In 1923 the New Zealand Dairy Board was established by statute. (The Meat Board and the Fruit Export Control Board were also set up in the same year.) The Acts gave the Boards power to control marketing, not prices. The main idea was to try to regulate the flow of supplies on to the British market and so avoid successive gluts and shortages as far as possible. The Board investigated shipping arrangements through freight contracts and the phasing of supplies. It also began organised advertising and studied marketing methods.
It was felt, however, that something should be done to control operations. The product was still actually bought and sold by merchants for their own profit rather than for that of the producer. The Board tried to control marketing and fix prices in 1926 – a bad time, when large stocks of butter were held in Britain and New Zealand was thus not placed to dominate the market. Prices fell and, in the following season, the experiment was abandoned. Prices were reasonably favourable for the next few years, until the depression of the 1930s. This prompted a renewed interest in controlled marketing. A measure of partial control, depending largely on a voluntary arrangement with the merchants, was attempted; but the price of all primary products dropped so much and for so long that in 1934 the Government set up a Royal Commission to report on the dairy industry. The Commission recommended a plan for the more effective control of marketing. Before this could be put into practice the Labour Government came into power (1935) and, in 1936, began the “Guaranteed Price” scheme.
The Labour Party had promised guaranteed prices for butter and cheese and this promise in its election campaign won it many votes in some rural and traditionally Conservative electorates. The great popularity of various monetary reform policies, reinforced by the more academically respectable views of Professor Keynes, made the guaranteed price scheme attractive to the farmers' minds and easier to accept. There was not the understanding that there is today of the effects of the issuing of credit on an almost wholly trading economy like New Zealand's.
A Primary Products Marketing Act was passed giving the Government power to control the marketing of any primary product. In practice, control was confined to dairy produce and certain commodities produced purely for local consumption. For the first year, before the Act was passed, the guaranteed prices were based on an average of the preceding 10 years, which gave a figure a little above, but not too far away from that of the previous year and fairly close to what would have been the payout without any scheme. The Act listed four criteria for determining guaranteed prices:
the necessity in the public interest of maintaining the stability and efficiency of the dairy industry;
the costs involved in the efficient production of dairy produce;
the general standard of living of persons engaged in the dairy industry in comparison with the general standard of living throughout New Zealand; and
the estimated cost to the Marketing Department of the dairy produce concerned and also the cost of the general administration of the Act.
After considering these matters prices were to be such “that any efficient producer engaged in the dairy industry under usual conditions and normal circumstances, should be assured of a sufficient net return from his business to enable him to maintain himself and his family in a reasonable state of comfort”.
Of these items (b), cost of production, became the most important. The cost of 1936–37 was derived from data submitted to the 1934 Royal Commission. The “cost of production” approach (with the belief of many dairy farmers that they would receive something substantially above realisations) led to considerable argument and bitterness between the dairy industry and the Government. Nevertheless, while there was a small deficit in the first year (met for the first and only time by the Consolidated Fund), and a credit of £577,000 in 1937–38 (a year which in many respects presaged a further economic depression), there was a very large deficit of £2,515,000. By this time the guaranteed price was financed on 1-per-cent interest by a special account at the Reserve Bank, this being the only really “social credit” aspect of the scheme. It was agreed that future surpluses would pay off the deficit. It is hard to say what the future would have held for the scheme if the Second World War had not come about. It would probably have become what it is now, a stabilisation scheme, with profits from some years meeting losses of others, with the farmers receiving, in fact, market realisations, but being protected from extreme market fluctuations.
From 1939 to 1954 all butter and cheese was purchased by the British Government under bulk-purchase contracts, small tolerances being permitted to retain other market connections. Costs in New Zealand were held down fairly well by economic stabilisation, but the cost of imports inevitably increased. Britain recognised this and raised the bulk-purchase price of New Zealand produce. Farm organisations in New Zealand agreed, under stabilisation arrangements, not to press for the full payout of these sums. Thus much money accumulated in the various industry reserve accounts. When bulk purchase finally ended in 1954 the dairy account had a credit balance of some £25 million invested in Government securities.
Meantime, there had been important developments in marketing. Differences of opinion on prices between Government and industry enabled producers to demand a greater say in marketing. The Labour Government's popularity in rural electorates fell sharply; and the public was becoming increasingly dissatisfied with the much greater than usual State control and regulation which had resulted from the war. In 1947 the Government established the Dairy Products Marketing Commission, a quasi-Government body with representation from industry and Government, and gave it wide powers over both marketing and price fixing. The criteria for determining the guaranteed price were widened by adding: “The promotion of the general economic stability of New Zealand”. But the Government still undertook to underwrite the price.
Bulk-purchase controls were replaced in 1949 by contracts. By 1952, however, it had become clear that these contracts would not be renewed, and that the market for dairy produce, especially butter, would be threatened by margarine. The dairy industry set up a special committee of inquiry, which included Government members. The committee's report, which was approved by the Government, was published as Parliamentary Paper H. 49, 1952, and became known as the 1952 Agreement. It stated, in essence, that the industry was too big to be given any but minor support by the Government and that, though the guaranteed price system would be maintained, it would be on the basis that, over a period, the Dairy Industry Account must be self-balancing.
Most, but not all of the assumptions of the agreement, were written into the 1956 amendment of the Dairy Products Marketing Commission Act. There was a longer and more subjective list of criteria for price fixing and, of more importance, provision that the prices be fixed by a special Price Fixing Authority, comprising equal representation from Government and industry, headed by an independent chairman. The part of the Act relating to price fixing runs as follows:
the necessity in the public interest of maintaining the stability and the efficiency of the dairy industry;
the cost of production for the time being involved in the efficient production of dairy produce;
the amount which butter and cheese acquired by the Commission is realising;
the ruling level of prices for farm products other than dairy products;
the estimated cost to the Commission of marketing the butter and cheese concerned, and also the cost of the general administration of the Act;
any recommendations made by the Dairy Board;
any other matters deemed relevant.
The amended Act had scarcely begun to work when the drastic fall in prices of 1958 took place. The price had already been reduced, but it appeared that the deficit in the account was likely to be so great that the statutory limitation of 5 per cent on any price reduction was temporarily suspended. The price was fixed at 32d. for butterfat for butter and has remained unchanged for some years.
In 1959–60 the price of butter rose unexpectedly and steeply. The extra revenue not only paid off the deficit of 1957–58, but also gave a surplus, which was paid to the industry as a retrospective payout in 1960. For full details see the annual reports of the New Zealand Dairy Products Marketing Commission.
The Dairy Board was established in 1923; the Dairy Commission in 1947. Thus, since 1947, there has been partial dual control of the dairy industry – the Commission dealing with the marketing and the Board with Board policy issues. The industry had long felt that there would be merit in having both bodies control one organisation. This was done in 1961 when an Act set up the New Zealand Dairy Production and Marketing Board with effect from 1 September 1961. The Act also made changes in price fixing and the industry's financing.
The criteria for price fixing are now:
the necessity in the public interest of maintaining the stability and efficiency of the dairy industry;
the amount which butter and cheese acquired by the Board is realising, the market prospects for the season in respect of which prices for butter are required to be fixed;
the state of the accounts established under subsection (1) of section 32 of this Act;
any submissions made by the Board;
any othe matters deemed to be relevant.
Cost of production as a factor in price fixing is no longer referred to. The criteria stress the need to consider, for example, market prospects and the state of the industry account. This carries out the agreement with the Government that the dairy industry accounts must be self balancing over a period. An important related consideration is that the industry appreciates the need to avoid criticism of Government subsidies, for these are the basis of New Zealand's criticism of the agricultural policies of many industrial countries – policies which adversely affect the prices of its exports.
The dairy industry has been treated at length because it is highly organised. The meat industry is simpler in these respects, with only a limited amount of cooperative marketing. Most livestock for slaughter are bought by private companies, some of which are associated with large overseas concerns. Social, economic, and technical reasons underlie the relatively slow growth of cooperative marketing. The meat industry, which for all practical purposes is the sheep-farming industry, has been wealthier than dairying, with larger units, more independence, and, perhaps, a certain suspicion of controlled marketing. The industry is extremely complex. The farmer sells not meat but livestock; the export firms have to assess carefully the likely values, not only of the meat, but also of the many by-products which might not be sold until much later. Again, the types and quantities of fat stock that farmers sell vary greatly. Some sell large numbers of fat lambs and sheep and cattle; others depend more on store stock; and all sell wool. Export meat is divided into 70 or 80 grades and types. The meat industry's more limited development of organised marketing is, however, probably due mainly to the early establishment of the present system. Nevertheless, sheep farmers had been dissatisfied, especially after the First World War and the 1921 depression; the Meat Producers' Board resulted from this. Although the Act apparently contemplated control of marketing, the Board only recently considered this step seriously. It has controlled shipping to place supplies; it has advertised widely, especially in Britain; it controls its own system of grading export meat; and it is general spokesman for the industry. The Board ensures that farmers receive a return for their meat which is satisfactory when compared with overseas realisations.
Fat stock are marketed in many ways, but usually “on schedule”. Each week most importers prepare a schedule listing the prices per pound of the various classes of stock. Farmers send in their stock on the understanding that they will receive these prices. The farmer can, if he wishes, sell in the open saleyards by public auction (a system still extensively used for stock for the local market), or he can sell for export on “his own account”. Under this system the freezing companies are obliged to process and export the farmers' stock for standard charges, but do not own the meat or by-products. The farmer himself receives the market price and so takes any market risks. The Board keeps a close watch on the schedule and, if it thinks that the prices offered are too low compared with what the exporters will receive, advises farmers to sell on their own account. The Board does not often do this; but the existence of the provision safeguards farmers. Between 1939 and 1948 the Marketing Department handled the export of meat under bulk purchase. In 1948 the Board took over this work, as agent for the Government, until the termination of bulk purchase in 1954. Private trading was then resumed.
In recent years farmers have become increasingly dissatisfied with the returns for meat. Farmers have been concerned about “middleman's profits” and, more significantly, the need for market expansion. In 1959 the Board had its Act strengthened to give greater control over exports of meat, and in 1960 the Meat Export Development Co. was established. Both the Board and the industry is represented in the company which has statutory authority to control the marketing of mutton and lamb in North America to ensure continuity of supplies, and the gradual building up of a potentially valuable market.
A guaranteed-price scheme for meat has never been developed, although the Primary Products Marketing Act provided for the control of any farm product and it was Labour Government policy at that time to put into force a guaranteed-price scheme if any industry wanted one. There is, however, a system of minimum prices for export meat. This arose from the fact that when bulk purchase expired the Meat Industry Reserve Account stood at £39 million (invested in Government securities) which successive governments agreed should be used for the benefit of the industry. Some has been invested in essential enterprise related to farming, for example, fertiliser works, freezing works, and aerial-topdressing planes; the industry demanded that other funds be used to support prices if they fell. The Government agreed on the condition that if the reserves ran out the Government would not be obliged to finance the scheme.
The Meat Export Prices Act establishes a committee, comprising Meat Board and Government representation with an independent chairman, which each year determines a schedule of minimum prices for export meat. Each week the Meat Board assesses the f.o.b. value of the meat content of the schedule prices offered by meat exporters and, if this should prove less than the Committee's minimum price, the Committee can declare a deficiency payment equivalent to the difference. Meat exporters then pay this amount to the farmer in addition to the schedule price and recover the amount from the Meat Board, which in turn receives the necessary advance from Treasury, as the meat industry reserves are all invested in Government securities.
The Committee establishes its schedule of minimum prices by the following criteria:
In preparing any such table of minimum prices the Committee shall have regard to:
the average of the prices received by the owner for each class of meat exported from New Zealand during the preceding three seasons;
the ruling level of minimum prices under this Act.
In addition to the matters referred to in subsection two of this section, in preparing any such table of minimum prices the Committee shall have regard to:
the trend of prices for meat exported from New Zealand during preceding seasons and during the current season, together with future overseas market prospects for the sale of meat or particular classes of meat;
the ruling level of prices for farm products other than meat;
the general level of costs and prices and wages in New Zealand.
It will be seen that the Committee has considered market prospects and had indicated to farmers the relative trends in demand for beef and lamb. The following relatively small payments have been made under the scheme for the years ended 30 September: 1956, £367,000; 1957, 112,000; 1958, nil; 1959, £79,000; 1960, 935,000; 1961, nil; 1962, £2,412,000; 1963, nil; 1964, nil. The existence of a minimum price has helped to give farmers confidence to invest in farm development. With annual meat exports of £80–90 million, a conservative level of minimum prices is essential if the funds are not to be quickly wiped out by sudden price falls.
New Zealand wool has always been marketed by auction, except during the two world wars. This seems the most satisfactory method for a nonperishable commodity, though it has been criticised at times. No guaranteed price scheme has ever been seriously considered, though it has been possible to set up a minimum price scheme as an aftermath of the Second World War. Wool funds of £25 million were accumulated indirectly, mainly from profits on wool remaining unsold at the end of the war. These funds form the basis of a minimum price scheme. The Wool Commission was set up by statute to give effect to the scheme. The Commission (like the Meat Export Committee) determines a yearly schedule of minimum prices for each class of wool, but because of the auction system only the general average (not the detail) is published. This average has been 33d. a pound since 1957–58.
The Commission employs buyers to buy wool which might otherwise fall below the minimum price. This wool is stored and resold when prices improve. Thus the fund could be self-perpetuating if there is not too severe and too prolonged a drop in prices. The Commission bought heavily in the 1958–59 season, but, because of a later price rise, finished up with a profit. This is possible with wool, partly because it can be stored and partly because the minimum prices have been set conservatively in relation to likely trends in market prices. As with meat, the Government is not committed to finance the scheme if the fund is spent.
Marketing apples and pears presents special problems. They are highly perishable; production is about twice what can be sold in New Zealand. There are many different kinds of fruit ripening at different times and used for different purposes. Apples must be stored if they are to be available for most of the year. This is clearly an industry for which rationalised marketing is essential. The Fruit Export Control Board was set up at the same time as the Meat and Dairy Boards. It worked through the Fruitgrowers' Federation and was successful in export marketing. Its powers, however, were limited.
Apples as a food did not have a high shipping priority in the Second World War, and in 1946 the industry was in a rather critical condition. The Department of Agriculture carried out an extensive cost survey, following which the Government established a guaranteed price scheme for pip fruit. This is administered by an Apple and Pear Marketing Board, which has wide powers to requisition and sell apples and pears locally and to export. The price to the grower is based on cost of production. There is no doubt that the Board has been very successful. Its success depends, however, on fluctuating overseas markets. It has built up reserve funds, most of which have gone to build cool stores to provide for more orderly marketing.
There are some other commodities, mainly by-products of the livestock industries, for which there is no form of guaranteed price and no, or only limited marketing control. Although the New Zealand Dairy Production and Marketing Board organises the export of most processed milk products, the guaranteed price scheme does not apply. By-products of the meat industry, such as hides and skins, tallow, and sausage casings, are all sold by public treaty.
Many agricultural products are produced only for local sale, although occasionally there may be small surpluses for export. The marketing of some is largely controlled; others are sold entirely by private trading.
Wheat, the most important cereal, is the only farm product in New Zealand under a system of virtual State trading. A Wheat Committee, comprising representatives of the Government, the growers, the flourmillers, and the poultry-industry producers, disposes of all milling wheat at prices fixed by the Government and also arranges for imports of wheat.
There is no price control of these, which are sold by private trading. With barley for malting, oats for milling, and linseed, a system of contract growing, between the industries concerned and the farmers, ensures an adequate and regular supply of the required quality. There are some similar arrangements for peas and seeds, although many seed crops are grown as surplus pasture growth on the chance of a good sale.
Vegetables for canning or deep freezing are mainly grown on contract. Vegetables grown for the commercial markets are sold by auction, which, with climatic changes in supply, makes for violent price fluctuation.
These are marketed by auction and by direct purchase. There is no organised marketing system and no price control, but some berry fruits are grown on contract for processing.
Potatoes present a difficult marketing problem. Variations in yield lead to unforseeable gluts and shortages; and potatoes will not carry over from one season to the next. A shortage of potatoes noticeably affects the Consumer Price Index and can therefore be of great economic importance. Shortages also encourage excessive planting, with a possible glut the following year. There are very limited possibilities to export and import potatoes. In 1950 the Government established the Potato Board, with producer and grower representation. The Board contracts at agreed prices with growers for an estimated necessary acreage. It levies all suppliers to build up a fund. If there is a surplus, the fund is used to pay growers a minimum price sufficient to meet basic costs of seed, fertiliser, and cultivation. The Government does not subsidise the industry, but will, if necessary, guarantee its overdraft.
Tobacco is grown under contract to the tobacco manufacturers, who work through the Tobacco Board. The price is fixed by the Trade Practices and Prices Commission and is based largely on cost of production. Hops are not grown under contract, but the price is fixed in the same way as that of tobacco. The Hop Marketing Committee sells the crop.
Locally grown lemons and oranges, but not grapefruit, are marketed through a Citrus Marketing Authority. There is no guaranteed or any other form of controlled price.
Honey production varies considerably with the season. In a normally good season there can be a substantial surplus for export. The marketing of honey is not strictly controlled, though there is a Honey Marketing Authority. Growers can sell where they wish, but all honey sold locally bears a levy of 1d. a pound, which the Authority uses as a fund to compensate any loss on exports. The Authority has to take any honey which growers are unable to sell and dispose of it, mainly by sales to institutions and by export. The retail price of honey sold locally is controlled by the Government.
Egg marketing also has its special difficulties. Production fluctuates with the season. Eggs are perishable and, being an important item in living costs, are subject to price control. The Egg Marketing Authority, set up in 1953, tries to see that all districts have a constant supply of fresh eggs. This means adjusting prices over the year, moving eggs from one district to another, and, to ensure an adequate winter supply, budgeting for a surplus the season before. This surplus is pulped and most of it sold to bakers and pastrycooks.
Ninety per cent of New Zealand's milk is used in the manufacture of butter, cheese, etc. The remainder is sold locally. Selling milk needs careful and complicated organisation, for it must be supplied to almost every household. Supplies often come from a distance. The Milk Board which comprises representatives of the Government, producers, vendors, consumers, and local authorities, is the central authority. Suppliers are grouped into local cooperatives, which guarantee daily quotas to the Milk Board. Prices to producers, margins to sellers, and prices to consumers are all fixed.
Marketing and price policies for New Zealand farm products are complicated. They vary among the products. The general trend has been away from free marketing towards varying measures of control and price support. This is a world-wide trend which shows no sign of being reversed. It is difficult for New Zealand, with only a few main products, to operate complete and continuing price-support measures against prolonged falls in prices. It has been possible, however, to shield the producer from the worst effects of price variations. The essential features of the schemes for the main export products are the limited amount of Government assistance, often merely a statutory blessing; the schemes are financed essentially from producers' money; and, in the main, the producers control the marketing of the product.
With products for local sale, such perishables as milk, potatoes, eggs, and some types of fruit present most difficulties. Since 1936 these products have been subject to varying degrees of control by a State Department or by a producer authority. The practical effect is substantially the same. At times there is a longing for the “good old days” of free marketing, and in one or two products “open markets” have been set up to try to bring the producer and consumer closer together. But this move is largely anachronistic in western countries. With people concentrated in cities and products coming often hundreds of miles, there is limited opportunity for direct contact between producer and consumer.
by John Vaughan White, B.A., Rural Economist, Department of Agriculture, Wellington.