90 Telegram from New Zealand High Commission in Canberra to Ministry of Foreign Affairs

Canberra, 13 March 1980

No 739. REsTRICTED

Australia/New Zealand Economic Relations: The Australian Dairy Industry

It may help if we put in a political perspective some of our recent reporting on perceptions here of trends in the relative competitiveness of the two countries' dairy industries, NAFI'A cheese issues, and the recent stream of complaints from dairy industry spokesmen about New Zealand's export policies. Set out below are the principal political factors we see as likely to guide decisions here on the extent to which the interests of dairy farmers will be registered in the present negotiations for closer economic relations.

  1. It may help if we put in a political perspective some of our recent reporting on perceptions here of trends in the relative competitiveness of the two countries' dairy industries, NAFI'A cheese issues, and the recent stream of complaints from dairy industry spokesmen about New Zealand's export policies. Set out below are the principal political factors we see as likely to guide decisions here on the extent to which the interests of dairy farmers will be registered in the present negotiations for closer economic relations.
  2. Given this background, it is no surprise some industry spokesmen should seek to create an impression that New Zealand represents a 'threat' to their livelihood. You will be aware of statements last year by people like Webster to the effect that the 'imminent' closure of the European market for New Zealand butter was likely to put severe pressure on the Australian industry. Not only have such categorical assertions been at variance with, but they have actively undermined, Australia's own interest in their support for New Zealand's case for continuing access in Europe. The way in which the dairy industry took up the issue of New Zealand's 'preferred' deal with Japan on milk powder was another case in point. Nevertheless they have served the purpose of helping to unify the industry here, and to call up in particular the support of those efficient producers whose interests would not otherwise be served by greater assistance for the industry. If and when the question of post-1980 access is resolved, we can expect the debate here to shift to highlighting in general terms the extent to which New Zealand's greater productivity, geographical proximity and preferential trading access represents a continuing threat to the industry here. We are already hearing rumours about fears that New Zealand will begin shipping UHT milk to Australia once a regime for marketing UHT milk is established. However irrational and unrealistic these fears may be, and however we may seek to allay them at the official and political levels, they remain powerful factors in fuelling the pressure within the industry to ensure that the New Zealand 'hole' in the walls of the protective 'dyke' is plugged. As you know, recent work by the BAE has given a degree of respectability to these views and we can expect them to gather strength as negotiations for closer economic relations between the two countries proceed.
  3. In terms of our own negotiating strategy, we consider that we should bear in mind that our access under the NAFTA in dairy products could not be improved on. Securing a greater volume of exports of dairy products to Australia however, is dependent on the negotiation of a new arrangement between the ADC and the NZDB which would supersede the present 'gentlemen's agreement' not to ship butter across the Tasman. We have been told by ADC officials that all it would need would be a drought in Victoria (which is responsible for about 60 percent of Australia's total butter production) for Australia to require imports of butter from New Zealand. However, the Australian market for butter continues to decline, partly because of competition from margarine, and partly because of poor packaging and marketing techniques. However, the BAE tell us that sooner or later the decline in butter consumption will level off as the butter market finds its own level based on consumer preference and special (e.g. cooking) qualities.
  4. Over the longer-term, while it may be realistic for us to expect no more than residual supplier status for relatively small quantities of butter, opportunities for New Zealand may increase if domestic pricing policies favour the diversion of wholemilk into other more profitable products-e.g. liquid milk for domestic consumption, and cheese. These opportunities would be further enhanced if we were prepared to produce and export the exotic cheeses not subject to quantitative restrictions.
  5. Other opportunities for New Zealand seem likely to be created in other third markets which Australia may be forced to vacate. (We saw only this week, for example, the suggestion that despite buoyant demand in Japan for Australian cheese, because the Australian dairy marketing system yields a higher return for dairy products not pooled as cheese exports are, there was no economic point in increasing sendings to Japan.) In another context, the dairy board and the ADC are also working on establishing an 'Agent' relationship in the US and the UK. Such pooling of resources in third markets makes sound economic sense for both industries. However, the extent to which we are able to take advantage of such opportunities will depend in large measure on the creation of a climate of mutual trust between the two industries.
  6. How will the coalition assess these factors? On the one hand Mr Anthony has made it quite clear that he is confident that he can 'carry' the dairy industry into a new economic relationship with New Zealand when the time comes. This commitment clearly reflects a measure of confidence that as the restructuring process continues, the industry will increasingly be capable of matching any competition New Zealand is able to offer. On the other hand it is equally obvious that the dairy industry has very skilfully mobilised support for its interests, that on the issue of exports of cheese from New Zealand a massive campaign has been undertaken and that ministers and members of Parliament generally are keenly aware of the New Zealand 'dimension' to the dairy industry's problems. We should not assume that just because Mr Anthony has made such commitments, and because he is the leader of the Country Party, other elements in the coalition will be less responsive to the industry's importunations. Many key figures in the Liberal Party, including Mr Fraser himself, have been subjected to intense pressure. We believe that we must assume that Mr Anthony's commitments to us on agriculture are not completely open-ended: They are conditional on satisfactory arrangements being worked out which do not overtly prejudice the interests of the Australian dairy as it is presently constituted. For that reason it is likely that the Australians could find it difficult to be forthcoming to us in providing the same degree of access under new arrangements as we have enjoyed under the NAFTA if we are unable to come to arrangements which Australian ministers regard as satisfactory.
  7. Clearly the sensitivities generated here, particularly on the cheese issue, are related to the election at the end of the year. However, the scope for taking up the sort of opportunities that seem likely to be created for us in the longer term should grow once the Government has the election behind it.

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