As global food costs rise, triggering protests, it's clear the world needs more production. However, as global demand grows, New Zealand, the world's biggest dairy exporter, faces a hurdle. A cooperative, Fonterra Cooperative Group Ltd, that markets most of the country's milk, has sought to raise $1 billion or more from outside investors to expand production. But to do so, it needs the consent of cooperative shareholders. They are 11,000 individual farmers. And they - satisfied with the coop's structure and fearful of giving outsiders a say in its decisions -have so far stymied the plan. “Farmers didn't build up this bloody great asset to throw it away,” said Frank Brenmuhl, head of the dairy division of New Zealand's main farmers' union. The stalemate at Fonterra Cooperative points to a central conflict in world agriculture. In commodities like oil or metals, when prices rise on a sustained basis, large companies with deep pockets invest to develop new supply. Food commodities have also seen price jumps, on everything from rice to palm oil. But their production, by and large, remains dominated by millions of small farms. Policy makers and social critics generally like it that way: Small farms keep rural communities alive and, especially in developing countries, provide needed jobs. But there are problems with small farms, when it comes to reacting quickly to a rise in food needs. They tend to be less productive than larger ones. And they often lack capital for the heavy investment in new productive capacity that many economists say now is needed. Investors have capital. But, again because of the small-farm structure, those who want to put some of their money into enhancing food output find limited avenues to do so. The result is a world food-production system operating at close to capacity, with grain stockpiles, for example, at their lowest in decades. In dairy products, demand is estimated to be growing 2.5 percent to 3 percent a year - including more than 10 percent a year in China - but output is rising only 1.5 percent to 2 percent, according to Dutch bank Rabobank. The shortfall has eaten up once-large stockpiles and made dairy prices as volatile as oil prices. When drought last year cut production in Australia, another big exporter, powdered-milk prices that had hovered at around $2,000 a metric ton rocketed past $5,000 for a time, according to data from Rabobank. New Zealand lacks many of the pressures that spur other governments to keep farms small - yet investment and the potential for expansion here are limited anyway. Abundant water and rolling grasslands make New Zealand ideal cow country. Dairy farmers in the nation's butter belt formed Fonterra in 2001 by merging its main dairy co-ops, aiming to boost their clout in international markets. About 95 percent of New Zealand's dairy farmers are members. To join, they buy shares in the co-op and agree to sell it their milk. Fonterra trucks collect about 10 million gallons of milk daily. The coop sells some to food merchants such as Nestle SA and distributes its own consumer brands, like Tip Top ice cream. It sends most of the proceeds back to farmers in monthly checks. Cooperative revenue topped $10 billion last year and should rise in 2008 because dairy prices in some cases are double what they were 18 months ago. Cooperative members' average payouts have risen by more than 50 percent over a year. But it would be hard for New Zealand to increase dairy output much more. Much available pasture already has cattle or sheep. And many farmers, having borrowed to expand, are already loaded up with debt. Last November, Fonterra proposed a restructuring plan that would enable it to produce more milk abroad. The cooperative's assets would be transferred to a new company, which would list on the New Zealand Stock Exchange.
