BUTTER QUOTA PROBLEM

Wanganui Chronicle, Volume 76, Issue 106, 8 May 1933, Page 11

BUTTER QUOTA PROBLEM

VITAL QUESTION FOR DOMINION

SURVEY OF POSITION BY RT. HON. J. G, COATES DIFFICULTIES DEALT WITH IN MEMORANDUM A comprehensive survey of the problems arising should the New Zealand Government agree, or not agree, to the quantitative regulation of exports of butter from the Dominion to Great Britain, is discussed in a memorandum by the Rt. Hon. J. G. Coates and issued in pamphlet form. The following are the remaining questions traversed by the report, the first section of which appeared in Saturday morning’s Chronicle. Mr Coates regards the matter as of first importance before the Dominion. It is, indeed, says Mr. Coates, not merely to-day’s biggest question it stands out as one of the main problems that have arisen in the course of fifty years. Mr. Coates stresses that his memorandum sets out the problem in a purely tentative and provisional way, as a basis for consideration and discussion and not as an advocacy of any dogmatic view. Suggestions for regulating the volume of butter exports to the United Kingdom raise new and complex problems that call for quiet and dispassionate thought. In dwelling more fully on points favouring the quota, rather than on the difficulties and objections, Mr. Coates says that it is because he feels that the points thus stressed have been inadequately presented. Difficulties must arise if the principle of the quota is applied to the Dominion’s great staple exports; but there is need also to pay due regard to the difficulties that must be faced if alternatives are adopted, or if nothing at all is done.

Exchange-Inflation. In glancing at some possible alternatives to the quota, the exchange-rate must be mentioned. It is, doubtless, true to suppose that a mood of disappointment has resulted since the Lon-don-New Zealand exchange-rate was raised in January, 1933. The promise of better prices, through the higher exchange-rate, seems to some to have failed to materialise.

well-planned steps to restore economic health in our own and other countries; and the orderly regulation of supplies on the markets of the United Kingdom is conceived as a step in this direction.

Moreover, we have seen that butter is near saturation point in the United Kingdom, meaning that neither a further price-fall, nor an increase in spending-power, can continue indefinitely to move into consumption the ever-expanding supplies that wc can pour on to the market. Reparations and War Debts. A special point is made in regard to Germany’s purchasing-power, and without doubt the evidence of returning economic sanity amongst nations entitles one to be more hopeful in this matter. However, relief from this quarter must, at best, be somewhat problematical. A Press Association cable from London (29th March, 1933) —states that “The trade ridicules the New Zealand hope of an outlet in Germany. ...” Even if debts are cancelled, and pur-chasing-power responds, will not Germany try to force the expansion of her own dairying industry in keeping with the fashion- throughout the world? (4) Marketing Co-operation with Australia.—Since tho butter-glut first promised trouble, the New Zealand and the Australian Dairy Boards have been in closer touch than before, and possibly their eci-operation wiH show some results. If the irregularity of shipments were tire only cause for concern, this might be a promising remedy. But it is a problem not merely or mainly of regularity of shipments, but of the total.

The explanation is, of course, that prices at the other end of the world happened to slide still lower just ut the time of our raising the exchange-rate. This amounts to saying that the advantage of the exchange-rate has been shown, not in raising New Zealand prices, but in preventing them from falling even lower than they have in fact fallen. If the pay-out for butterfat is now 7d, this figure without the 25 per cant, premium would be barely 51d (and gold prices would be under 4d). The point is that, in fairness to the exchange-rate, comparision should be made between prices to-day and prices as they would have been if the exehange-rate had not been raised. That is not the comparison that is made in popular controversy. The comparison is made between actual prices to-day and actual prices before the exchange rise, and false conclusions are drawn accordingly. The exchange rate is thus apt to suffer aif injustice; but it is also fair to admit that, when Australia, New Zealand, and Denmark have all raised their' exchange-rates, and when all T ”.ust pour I their blitter into the over-supplied English market, the buyers there are able to set off one seller against the other and force down prices, it is a “buyer's market,” and part of an exportbounty in any form will tend to pass to buyers. In other words, the advantage from the exchange rise is being defeated, in part at least, by the oversupply on the market; and this links the exchange-rate with the quota, or with some other means of correcting the maladjustment between supply and consumption. Other Alternatives. When the exchange-rate was adjusted on the Government’s responsibility, a powerful argument was that no feasible alternative was offering. The raising of the exchange brought its disadvantages; but the argument was that there was a net balance of gains over losses, and that no other remedy was in sight. So it is with the quota. It has disadvantages as well as advantages. These have to be weighted and set against all alternatives. That is the reason for here listing, as far as we can, possible alternatives to the quota: —

Furthermore, there is good reason for avoiding anything that can even give the appearance of being a pact by the dominions antagonistic to the interests of the United Kingdom and her farmers.

(5) Co-operation in selling by the New - Zealand Co-operatives.—To-day, our so-called co-operatives belie their name; they are in cut-throat competition in collecting farmers’ milk and cream, and in selling in the United Kingdom. Recently-issued regulations are designed to prevent the opening of new factories which would be uneconomic; but they leave untouched the problem that we already have. As for the London end, who can doubt that a part of the gap between Danish and New Zealand prices is due to the fact that our co-operatives compete while the Danes co-operate? In the details to be set right, this must be one of the most promising. Whether it can solve the big main problem is another question. (6) Quality.—lt may be that differences in quality also account for part of the gap between New Zealand and Danish prices in London. There is at any rate the clearest of evidence that the quality of our cheese is playing havoc with prices, and unless corrected it may get to the point of discrediting al) New Zealand products, their reputation being contagious. Most obviously, expenditure by the industry without delay in meeting this would be a good investment.

(1) Reduce Foreign Supplies only.—* This, if it were possible, would, of course, be ideal for Dominion producers. But it is not possible. As clearly and definitely as could be, the British Government insist that they will not reduce foreign supplies and leave the Dominions free to expand without limit.

They are, however, prepared to reduce foreign supplies by twice s much as they reduce the Dominions’ supplies —for every box of our butter excluded from tne British market, two boxes of foreign butter would be excluded. Indeed, for each New Zealan 1 box excluded, there would be a total reduction of six boxes on the British market.

The question relevant at the moment, however, is: Will raising the quality of our butter solve the glut? It is difficult to give an affirmative answer. A PRICE WAR SURVIVAL or THE FITTEST The foregoing has sketched the inadequacies of any solution other than a quota. Still the question remains: Is not free competition preferable to the deliberate regulation of exports to the United Kingdom? It must be admitted, again, that regulation has its disadvantages. To-day “regulation” means restriction and reduction, though the friends of the quota in England insist that it normally means “orderly marketing,” and not necessarily a reduction in supply. But it is not disputed that it now means a reduction. Since Britain is almost our only market, less exports thither point strongly to less production. • The surplus may be stored—and that would depress prices; it may be sold abroad, at a few pence per pound, and the whole proceeds pooled—this might well pay, if London prices were raised; we might arrange an exchange of commodities on a barter basis; there may be a failure of supplies elsewhere, through an Australian drought, for instance; purchasing-power in Europe might brighten and absorb our surplus. All these are possibilities; but none of them ran safely be counted on. To put the position at its worst, we ha c to admit, then, that acceptance of the quota may involve reduced production; and what could be more in conflict with our national policy which has been accepted for generations? Less Production? Deliberately to reduce production is a >uggestion that properly causes any

When the British Government’s concern is with their home farmers —and Great Britain has lately become very concerned with her own agriculture—• this insistence on controlling all imports is understandable enough. Moreover, there are British investments in foreign countries as well as in the Empire; and Britain wishes to export to foreigners. These points may raise controversial issues; the point that matters is that restriction of foreign supplies alone has to be ruled out of the question. Either we accept regulation for Empire and foreign, or we leave both unregulated. Compare the rapid growth in Empire production with the small decrease in foreign supplies, and the difficulty of making a plausible case for this first alternative is obvious enough.

New Markets.—The markets of the East are a favourite talking-point these days, and there may be an enormous potential market there: “One ounce per day per Chinese means 4,000,000 tons a year,” etc. But meanwhile the market is only potential, and tho surplus on the United Kingdom market is here and now’.

(3) Increase Consumers’ Buyingpower.—Not much need be said on this, except a word to insist that it is a point of very great importance, whether regard be paid to the United Kingdom or to the local market. But how is buying-power to be increased? There can be no magic trick in solving this problem, no simple solution by distributing money. The possibilities by way of a purely monetary approach are severely limited. There is, on the contrary, need for proceeding with

one to pause. It sounds revolutionary when wo recall that so many in tho world are going short; and it runs counter to all the more-production counsels that we have ever heard. It may seem enough to condemn tho quota. However, there is another side, even to this. If, instead of a quota with reduction by arrangement, we have a price-war, does not this mean that we will have less production brought about, however, by economic weapons? The choice, in other words, will not be one of less production versus more production, but rather a choice between regulation by a quota and regulation by a price war. Not whether to reduce, but how to reduce. That is tho main reply to the first objection to the quota, and it is, itself, enough to put the quota in a less revolutionary light. As for the fact, which is not to be questioned, that deliberate regulation of the volume of New Zealand’s exports of farm-produce does not square with our historic policy —with our policy for the past 50 years —the simple answer is to recall the point made at the outset of these notes —conditions have changed drastically. Proceeding further along the line that the merits of the butter quota consist largely in the demerits of the alternatives, let anyone think out the consequences of relying on prices to regulate production.

.1932-33 Tons. Export, if unrestricted .... 120,000 Quota, if 6 per cent, reduction 112,800 1933-34 Export, if unrestricted .. .. 132,000 Quota, as above .. .. .. 112,800 Surplus to dispose of, say .. 20.000 Prices— Unrestricted market: 132,- £ 000 tons at 70s 9,240,000 Restricted market: 112,800 tons at 70s, plus 20 per cent. (i.e. 84s) 9,475,000

This calculation shows only a small gain, and two passing comments are to be offered on it: (1) No allowance is made for tho price realised for the 20,000 tons that are estimated as withheld from export to the United Kingdom; and (2) it is assumed that 70s per hundredweight will be the average price if no restriction is applied and if our exports to the United Kingdom increase still further. Is this a reasonable assumption? The Surplus. Merely to limit the export would be easy enough, and no new statutory powers w’ould be required to permit this; but if the surplus were poured on to the local market, prices here would collapse far below London parity. Butter locally could conceivably be a few pence per pound. Something could be said for this—a butter-producing country with butter extaordinarily cheap for its own people. If the proceeds from export and local sales were pooled, producers and the country would be better off than if export prices also had collapsed. But 25,000 tons, or anything like that volume, of extra butter would not simply depress the local market: it would produce absolute chaos. (The estimated local consumption now is 25,000 tons a year.) The scheme would be the opposite of the Australian Patterson plan, under which local prices are held above export parity; and clearly enough it would be impossible to apply or justify a scheme. Control of exports must almost inevitably be accompanied by control of internal marketing also. The possibility of export markets, other than the United Kingdom, would necessarily be explored; and the sale of the surplus at the best available price would be one course.

In farming, the price of produce is a very poor regulator, far worse than in any manufacturing business. With the latter, the employer can slacken down, dismiss his hands, even close the works and later resume when profits are available. The farmer’s business is his home, and not so readily closed. His employed labour ifi mostly himself and his family, and not so readily sacked. Production from the land is extraordinarily unresponsive to pricefalls, and a war of prices to curtail production must be long and weary, especially when individuals and governments seek, at all costs, to keep up farm production, and even to increase the volume in the hope of compensating for the falling value. Rubber in 1924 was 4s 8d per pound. In 1932 it was IJd. That may be a danger-signal for butter The Quota Tho conclusion up to this point, inferred rather than proved, is that tho deliberate arrangement of a quota on imports of butter into the United Kingdom is definitely to be desired. The alternatives by way of action are hopelessly inadequate to cope with the future as it promises to develop. The alternative of doing nothing is a disastrous one. It must mean ruin for a great body of producers. It will not bring victory to New Zealand over Denmark or to any country; it will ruin many producers in all countries, and will bring all producers nearer to impoverishment. For a time tons of butter will be produced, cows will be milked, their milk separated, the cream carted to factories, and endless hours of work will be poured into producing butter which will find no consumer. What could be more futile, what could be a more pitiful confession of failure? The quota has its difficulties, and it raises new problems; but it promises nothing so uncertain and futile as the alternative. It means a step towards deliberate organisation and control where there has hitherto been no organisation. It will doubtleess be assailed. and appeals will be made to irrational prejudice and fear, on the score that it departs from the law of supply and demand, that it spells interference, that it savours of socialism and worse. But if regard be paid to present realities, surely it is better to organise and to co-operate over a wider field than it is to drag all down to lower standards in a senseless Drice war. If the Quota, What then? Supposing we accept the quota, either through being attracted by its merits |or (moro likely) by fear of the consequences of inaction, what is to be done here in New Zealand? We picture ourselves in the position of having agreed that in a future year tho export of butter to Britain will be reduced from an estimated 130,000 tons to, say, 105.000 tons. That leaves a surplus of 25,000 tons, a figure that is exaggerated beyond the probable. Wc may assume, too. that the effect lias been to give a London price of, lot us say Is instead of 8d per lb. On Such figures,— £ 130,000 tons at 8d .. .. 9,7(10,000 105,000 tons at Is .. .. 11.800,000 or 20 per cent, more money for 20 per cent, less butter. The figures are guesswork, but there is no room for doubting that a larger return for a smaller product exported is possible and is distinctly probable. The acting-chairman of the Dairy Board (Mr Dynes Fulton, in press statement of April 3, 1933), uses the following figures:—

Storing the surplus would be possible, and (in spite of its effect in depressing prices if the volume held in storage were known), this might well bo the course adopted, for a time at least. Then, if new markets opened up or consuming-power were increased, in Germany or elsewhere, the stored butter could be sold. In fact, if hopes in this direction are likely to be realised, is there not a case for accepting the quota to meet the temporary emergency? One other possibility is to be mentioned in connection with storage of the surplus, and with the quota generally. Australia is overdue for a bad season. Mr. Bruce said at Ottawa:—

For two years we have had remarkably good all-round seasons for export production in a country notoriously liable to great variations of climate. A rough generalisation is that we get, on the average, one good, one middling, and one bad year in every three ... An average season would reduce the volume of exports by about 20 per cent. ... A bad season would reduce the volume by 40 per cent If quantitative regulation were agreed upon, and provision were made for an increase to New Zealand to the extent of any shortage in Australian exports, this might absorb our surplus. Meanwhile we »vould have had the advantage of higher prices and of avoiding a further price-collapse. I am not to be understood to advocate the storing of butter on any considerable scale. There are pitfalls and dangers in that course; but it is proper to mention the possibility, if only to bring its limitations under notice. Produce for Unemployed. More immediately promising, perhaps, would be tho direct provision of increase butter-supplies to our own people who may be supposed to stand most in need. The purchase of temporarily excessive supplies, for distribution to the families of unemployed and other deserving persons might, with necessary safeguards, he adopted as one expedient. It is at least interesting to note that, according to Press reports, this course has been taken m Denmark with respect to bacon-supplies held in excess of the available foreign markets. Similarly, the increasing of local consumption of fluid milk and cream is a suggestion which has been advanced, and deserves serious attention.

There uro thus some prospects of having a quota yet avoiding absolute reduction; but it is baulking the question if we take it for granted that, this will be the case. The quota may involve reduction, and it is fair to

concede this fact to its critics: How then could a reduction be effected? New and difficult problems suggest themselves when the restriction of volume by arrangement, rather than by relying on low prices and abandonment of farms, is contemplated. But such problems, new though they may be, need not be insuperable. In the last analysis the knowledge of the exact tonnage required for export could load to fairly exact estimates of the tonnage required from each factory, and thence from the various suppliers. At that point we are up against the danger of attempting to stereotype production on the precise farms now producing and in the proportions of their supply at the moment. That would be inequitable and wasteful; but recognition of this danger should go far to ensure its being avoided. Nevertheless, this is the heart of the problem. Once we depart from prices as the sole regulator of production and commerce, the necessity for introducing a measure of control and authority is inescapable. The argument for the quota, in a word, is that the objections to the required control are less potent than the objections to the distress and waste that arc otherwise inevitable. Quantity-Reduction. The possible limitation of quantity by applying a test of quality must at least be given attention. If such an approach were feasible it should be entirely satisfactory. A reduction of quantity by any required percentage could thus be effected by rejecting the poorest in quality up to that percentage. Common Grading Standards for tho Empire.—This matter, which could be of tremendous importance, was raised and dealt within a preliminary way at Ottawa. A subcommittee there tried to find the basis for advancing towards common grading-standards (at least as to minimum grades) for farm-produce. In the less spectacular work of the conference this was one of the most interesting details. Second-grade and Whey Butters. The removal from the market of inferior butter might well provide an acceptable solution of the problem raised by a decision to regulate and reduce total supplies. A reduction by some thousands of tons could be effected under this heading—perhaps enough to satisfy the requirements of a quota to which negotiations would lead us. But in this regard, also, there are obvious advantages in our acting not in isolation, but in step with other suppliers. Freedom to Choose.

A point to be stressed in considering the quota-proposal is that it is up to New Zealand to make a decision. The power to choose is in our hands to an unusual degree. By reason of the Ottawa Agreement a quota on dairy-pro-duce cannot be applied by Great Britain until 1935 without our express consent. Thereafter, for the remaining two years of the currency of the Ottawa* Agreement. it mav be applied in consultation with the Dominions (this permits Britain then to apply Lhe quota in spite of the Dominions’ opposition). But for the moment we control Britain’s legislative power. If New Zealand says, “No,’ tne quota cannot be applied; if we say “Yes,” it may be—for Australia’s assent is also required. The clear indications are that in or after 1935, if not now, the United Kingdom will apply the quota to all imports of dairy-produce. The proviso in the Ottawa Agreements to permit this was carefully weighed in every word; and it was insisted upon by tho United Kingdom representatives in the face of objections from all the Dominions. Britain’s Fanners. If there were any doubt as to tho probabilities for the early future, one would only need to call to mind Great Britain’s new-found enthusiasm for promoting her own agriculture, and for introducing regulation of supplies as a means of raising and maintaining pricey. The production of butter in the United Kingdom was estimated at 42,500 tons in 1924. with little change since. Up to 1928 and 1929 Australia sent, this quantity of butter, or less, to the United Kingdom; this year the Australian supplies in tho United Kingdom are estimated at 120,000 —nearly throe times the Home supply. Is it any wonder that the British Government must pay heed to the protests of their home farmers? Or is there any doubt about our freedom to choose being only a temporary right? If -we choose to accept the quota now, and to take a share voluntarily in working out a plan, wc may avoid the worst of the debacle that otherwise promises, And even if it will be some embarrassment to us to work under a quota, it will certainly be a groat gain to us if other sources of supply are regulated, and this will not happen unless wc, too, accept regulation.

PRICE RAISING

REGULATION OF SUPPLY FOREIGN AND EMPIRE PRODUCTS Continuing his statement regarding the butter quota tho Hon. J. G. Coates said:— AU those everywhere who discuss tho sickness of the world agree on one thing: prices must be raised, for otherwise our economic and financial problems will become more embarrassing. But how are prices to be raised? Wc can supply one answer by quoting words used by the Chancellor of the

Exchequer (the Right Hon. Neville Chamberlain) before tho Monetary and Financial Committee of the Ottawa Conference. Following on the very frank statements by Dominion and Indian representatives in which all stressed the difficulties of their countries, Mr. Chamberlain said:— . . . Every speaker dwelt with the utmost conviction upon the necessity for a rise in wholesale commodity prices if his country was to be rescued from grave embarrassment. . .

Upon tho desirability of raising wholesale commodity prices, the United Kingdom Delegation is in full sympathy and agreement with the fDominiong and India. . . There is disequilibrium between production and consumption. . .

It seems to us that if we are to restore j stability of price and confidence in i the future of the market for the great primary commodities, we must look for I some means of regulating supplies in such a way that they shall not be from time to time completely out of relation to the absorbing capacity of their markets. . . When we come to consider commodities which are sold almost exclusively in the sterling market, the United Kingdom Delegation wish to suggest to their fellow-dele-gates the advisability of considering the regulation of supply, . . To form a stable working scheme it is obviously necessary that all the main sources of supply—home, Empire or foreign—must bo brought into the plan. . . This quotation is a reminder of the prominence given at Ottawa to the principle of the quota. It shows the absolute baselessness of tho contention that the suggested butter-quota arose in any way because of the recent adjustment in the London-New Zealand exchange-rate. Nothing could bo more ridiculous. The exchange-rate and the butter quota are two important questions of the hour, but they are. separate and distinct issues; there is no sense or reason in pretending that one is the result of the other, or in deluding ourselves into believing that any reduction in the exchange-rate would touch the fringe of the problem to which the quota relates. Such a reduction would merely mean that the already low sterling prices for all our exports would he converted into even less New Zealand currency than they now command. Our Protective Tariff.

Equally baseless is tho suggestion that bv some manipulation of the Nvw Zealand Customs tariff the whole problem of the quota could be disposed of. and our producers thereby guaranteed for all time unlimited access (and at satisfactory prices’! to the markets of Great Britain. I do not underestimate the need for our proceeding with a proper overhaul of New Zealand’s protective tariff. We afe committed under the Ottawa Agreement to do so. The

commencement of the inquiry was postponed at the direct request of the British Government. Apart from our obligations under the Ottawa Agreement, there is every reason, in our own interest, for our undertaking a careful review of the tariff.

But, again, the tariff issue cannot be confused with the butter-quota. From time to time letters and published statements show that reasonableminded people are confusing the issues. I am sure that, if they were in possession of the facts —and my hope is that these notes will serve to some extent in giving the facts—they would recognise that, ’even though the New Zealand Customs tariff were revised and scaled down to the full extent they 1 might suggest, the main problem that has been sketched in these pages would still remain for serious attention. Summary. Objections to the Quota on butter can be summarised:— (1) The quota will involve reduction of exports to Great Britain; hence, unless other markets are found, restriction on production is threatened. (2) This runs counter to the whole accepted policy of New Zealand, which rests on expansion of production from the land. (3) The quota would be difficult to apply: it would involve more control and interference in private enterprise. (4) Control of exports would lead to control and forward planning in production, and this would raise novel and difficult problems. For the quota, we can argue:— (1) The alternative is ruin. Not merely a price-decline but a debacle is the immediate danger. This will enforce less production, so that the first point above is an unreal one; we arc threatened with less production, quota or no quota. (2) The raising of price-levels, especially for farm-produce, is agreed by all to be urgently required; and regulation of supplies is a necessary step in this.

(3) Thff proposal is generally in line' with the efforts that are being mada the world over to bring order out of chaos. This spells the doom of laissez* faire, and an increasing measure of con< trol and regulation. These efforts wil? not cease even though our producer! hark back to the days of unregulated competition. We will have merely thd empty satisfaction of protesting, oi vainly seeking unregulated competition: in a world that is everywhere turning to more complete organisation. (4) To-day there is a great contrast between the lack of organised control of production in agriculture, and thel increasing control in other industry, irf commerce, and in banking. The contrast can itself be regarded as a substanial reason for the unbalance in thel world. If the balance is to be restored, this cannot be brought, about by destroying the co-operation in industry and throughout the whole world of commerce, but only by bringing mor< organisation into agriculture. Th® quota is in keeping with that requirement. (5) Although to-day wc arc free t(J reject quantitative regulation, this freedom will expire in little over two years’ time. It is short-sighted policy to bang the door against intelligent and reasonable organisation. Wc may decide 14 “meet tho market,” and thereby do« cline to meet (freat Britain. (6) Finally, whether tho quota will bring more gain than loss is a question that must depend for its answer on the actual details as they are worked out; it cannot be answered in the abstract. Tho possibilities of very greaf improvement, and of avoiding still more loss, are there. That it raise! also novel problems which call fot courageous action, and which contain ominous possibilities if the situation ii not wisely handled, has not been disputed in these pages. The correct attitude is to get. down to details and examine the possibilities of the quota, accepting the fact that conditions havi changed, and that new conditions call for new ways of thinking.