Growth and innovation in the Canterbury dairy industry

Abstract

This thesis reports an investigation of factors that have influenced the growth and development of the Canterbury dairy industry over the period 1982-83 to 2009-10. The research initially utilised secondary sources of information to determine physical and financial growth parameters of the industry. In-depth qualitative interviews relating to the production sector were then undertaken with fifteen producers and six key informants. A further thirteen key informants were interviewed from the processing industry. A mail survey of farmers was also conducted to further identify key innovation and adoption influences. The research lens for these investigations was informed by industry development theory and innovation theory.

The development of the Canterbury dairy industry has resulted in a major land use change. In 2009-10 there were nearly 200,000 hectares in dairy farming in Canterbury compared with fewer than 20,000 hectares in 1982-83. During this period, milksolids (milkfat + protein) production grew from 2% to 17% of New Zealand’s increasing production, which was a 25-fold increase. Farm size and cows per herd in Canterbury have grown to twice the NZ average, with Canterbury farms grazing 15% more cows per hectare. Milksolids production per hectare was 1.5-fold the North Island average in 2009-10, whereas in 1982-83 it was 81% of the North Island average. An analysis of profitability from secondary data showed that income and expenses per kilogram of milksolids were similar throughout the country, but because of higher levels of production per cow and per hectare in Canterbury, the operating surplus per hectare was greater. The same data suggest returns on capital were double the rest of the country from 1999-2000 to 2009-2010, averaging 9% versus 4%. The analysis of a case study farm established in 1987-88 showed an average compound return on total capital in excess of 10%, and wealth creation of approximately 20% per annum (compounded in constant value dollars, 2010).

Interviews with industry informants determined that there were three waves of development. In Wave 1 (1980s) farmers tended to be driven more by entrepreneurial motives and were often moving from another dairy region that was not as favourable. The ability to purchase larger blocks of irrigated land at a lower cost than in other dairying areas was the main driver of the move to Canterbury. There were also human elements, as Canterbury was perceived to offer desirable social aspects and many were attracted to the challenge of developing a new industry. Considerable entrepreneurial profits were achieved. In Wave 2, (1990s) many conversions were completed by corporate entities. Due to low operating profits the corporate farmers had largely left the industry by the late 1990s. In doing so, they sold many of their farms to their sharemilkers, thus creating a new generation of farm owners. However, there were also traditional sheep/crop farms converting to obtain higher levels of profitability in Wave 2. Wave 3 (2000s) farmers tended to be established farmers from other sectors, who converted to dairy farming for economic reasons. The rate of growth was influenced by aggressive lending to dairy farmers by the primary and secondary financial institutions. Wave 3 farmers tended to develop large, more intensive farms. This wave also saw investment from non-farming investors, particularly in equity partnerships.

The research identified that factors involved in the development could be classified as drivers, enablers and facilitators – with some factors fitting into more than one classification. Drivers were factors that caused growth and included the lack of profits in other farming systems providing the opportunity for entrepreneurial individuals and corporations to purchase lower priced land to convert to dairy farming. Human reasons for becoming involved in the new industry were also a driver. The development of an underutilised water resource enabled the development, but also became a driver of growth as it encouraged the conversion of properties to the more profitable dairy industry. The majority of the drivers appeared in Wave 1; however increased farm profitability in Wave 3 was a driver of further development.

Enablers were factors that were necessary for growth and initially included government policies and economic conditions. The long history of dairy farming in New Zealand provided an infrastructure that enabled the rapid growth of dairying in Canterbury. The development of a successful processing cooperative was an important enabler as the processing of all milk produced meant that growth continued.

Facilitators are factors that did not drive or enable growth, but had a positive influence on growth. These mostly occurred in Waves 2 and 3 and included new infrastructure and farms that provided supplementary feed for the industry. Innovation and new technology were both enablers and facilitators as innovations to traditional technologies were needed to farm large irrigated farms with large herds of cows. The financial industry was an enabler and a facilitator of growth in Waves 2 and 3. Other facilitators included new business structures such as equity partnerships and family farms operating as corporations. The establishment of a demonstration farm in Wave 3 was facilitator through providing important messages about farming in the new area and offering a forum for discussing management issues. At the end of Wave 3, world trade liberalisation and increased demand for dairy products led to higher prices for dairy products, which was a facilitator of growth and influenced the driver of increased farm profitability.

This research has built upon existing theory by proposing an enhanced framework that integrates a series of developmental waves and influences within Van de Ven and Garud’s instrumental, resource procurement and institutional subsystems. For those concerned with the development of industries, it is important to realise that the waves of development, factors and their alignment will be dependent upon the characteristics of the social system involved.