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Being milked: when CEOs and Ministers disagree over dairy protection[FT 9 July 2004]

28/03/2012

 Of course, the public would like to help the two hundred or so small dairy farmers who make a living from selling milk to Rewa Dairy Cooperated Limited.

But are the tax-payers and milk consumers of Fiji being milked by the larger shareholders in Rewa Dairy Cooperative Limited?

Because, instead of helping the dairy farmers directly, Government is silly enough to protect Rewa Dairy’s imports of milk powder and other products.

Rewa Dairy makes the bulk of its profits from imports, not from the processing of local milk.  And most of Rewa Dairy’s profits go to the dozen or so large dairy farmers, who control Rewa Dairy and its board.

And Rewa Dairy also very unprofitably converts local liquid milk into milk powder, and goes in for blending of mostly imported butter, cheese etc- just to qualify for incentives.

The Government CEOs in Finance and Agriculture probably know that it would be more sensible and economically rational to help the small dairy farmers directly, in a transparent fashion.  But what happens when Ministers decide otherwise?

Government must end its protection of Rewa Dairy’s imports, which simply hurts the consumers of milk, a necessity for poor people.

Why protect imports?
Rewa Dairy is allowed to import milk powder duty free.  And either convert it into “long life” milk, or simply package and sell the milk powder.

Other importers of milk powder have to pay 10% duty.  So all consumers of milk powder and liquid milk made from the milk powder, are paying at least 10% extra.  And they pay extra for imported cheese etc.

Over the years, the dairy industry enjoyed low interest rates from the Fiji Development Bank; government (the tax-payers) wrote off loans to Rewa Dairy; and even gave direct grants.

These measures have all added to the very generous profits of Rewa Dairy.

And most of the generous dividends paid out by Rewa Dairy have gone into the pockets of the majority shareholders of Rewa Dairy, the larger farmers.

The two hundred or so small dairy farmers, who contribute a very small proportion of the total local milk processed by Rewa Dairy, receive a very small share of the taxpayers’ funds.

Local milk not profitable

  Of course, Rewa Dairy buys milk from the local dairy farmers.

Unfortunately, the majority of the local dairy farmers are small and scattered, mostly in the Tailevu rural area.

It is extremely costly for Rewa Dairy to buy milk from these small farmers, have local chilling stations, and then bring the milk to Nabua for processing.

The harsh economics is that it is cheaper for Rewa Dairy to import milk powder from abroad and convert it locally into liquid milk.

Sometimes, Rewa Dairy has found that it could save money by pouring local milk down the drain, rather than processing it.

The financial incentive therefore drives it to import milk powder, rather than encouraging local farmers to produce more milk.

And while there has been some increase in the production of local milk, imported milk powder has steadily increased its proportion of the total local milk product market.

Most of the Rewa butter is in fact imported butter- not locally produced.  Most of Rewa cheese is also imported cheese, not locally manufactured.

Hence the bulk of Rewa Dairy’s profits are made from imported milk powder, impprted butter, and imported cheese- all through Government’s preferential duty rates, all at the expense of the consumers.

And, strange as it may seem, Rewa Dairy also imported machinery to convert local liquid milk into milk powder- merely to qualify for some of the incentives.  But the losses in doing so must also be paid for by Fiji taxpayers and consumers.

The unequal sharing of profits

  The problem is compounded that the shareholders of Rewa Dairy are the dairy farmers themselves, whose shares of the dividends are decided by their share of the total milk supplied to Rewa Dairy.

The voting power on the board is also decided by the share of local milk provided.

Thus a small number of the larger dairy farmers have for decades enjoyed the bulk of the profits and dividends of Rewa Dairy.

And a few have also enjoyed another benefit- preferential access to a Revolving Fund which was supposed to provide credit to the hundreds of small farmers.

Except that a large part of the benefits have gone to a select few.

Where’s the whistle blower?

  A few years ago, one of the concerned directors of the board of Rewa Dairy, blew the whistle on the goings on at Rewa Dairy.

Unfortunately, instead of the dairy industry being investigated, the matter was white-washed.  (Ross, you must be a masochist, going to another industry to be caned).

And Dairy Councils come and go.

While the privileged persons in the company continue to enjoy the benefits from that company, all provided by tax-payers and consumers.

What to do?

  The CEOs of the Ministries of Finance and Planning, Commerce and Agriculture probably know what the problems are- word has it that there are very sensible reports lying around in their Ministries gathering dust.

The CEOs probably know that the Government should stop protecting the imports of Rewa Dairy- whether of milk powder, butter, cheese or any other milk products.

That the best way to help the small dairy farmers is to transparently give them direct assistance which encourages them to efficiently produce more milk.

They know that Rewa Dairy is unlikely to ever produce milk powder as efficiently as NZ, Australia and other world producers, and they should stop this unprofitable exercise.

The CEOs probably know that the interests of hundreds of thousands of consumers of milk products (including the poor) should be placed above that of a preferential importer of milk powder like Rewa Dairy.

The real problem is for the Government ministers to accept the recommendations of the CEOs.

Unfortunately, there are a few politically powerful individuals associated with Rewa Dairy, who continually lobby the Government and public (witness the many full-page advertisements in the dailies).

Will Sam & Ram, our multiracial rhyming dairy couplet, ever appreciate that the public interest requires them to give thanks for the great times they have had, stop placing expensive ads in the papers (at tax-payers’ expense), and accept reform of government’s support system for the dairy industry?

Will Government be able to stop the milking of the Fiji public?

Or will a powerful few continue to prevail?

Time will tell- or rather the next Government budget will.

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