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.

Guaranteed Prices for Butter and Cheese

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:

1. the necessity in the public interest of maintaining the stability and efficiency of the dairy industry;

2. the costs involved in the efficient production of dairy produce;

3. the general standard of living of persons engaged in the dairy industry in comparison with the general standard of living throughout New Zealand; and

4. 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.

Price Fixing

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:

1. the necessity in the public interest of maintaining the stability and the efficiency of the dairy industry;

2. the cost of production for the time being involved in the efficient production of dairy produce;

3. the amount which butter and cheese acquired by the Commission is realising;

4. the ruling level of prices for farm products other than dairy products;

5. the estimated cost to the Commission of marketing the butter and cheese concerned, and also the cost of the general administration of the Act;

6. any recommendations made by the Dairy Board;

7. 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:

1. the necessity in the public interest of maintaining the stability and efficiency of the dairy industry;

2. 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;

3. the state of the accounts established under subsection (1) of section 32 of this Act;

4. any submissions made by the Board;

5. 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.