Opportunities, Threats and Sustainability: New Zealand’s Primary Industries
February 2007
Opening address presented by Murray Sherwin,
Director-General, Ministry of Agriculture and Forestry
to the Australian Agricultural and Resource Society’s (AARES)
51st annual conference.
Queenstown 13th – 16th February, 2007
Introduction
Thank you for the invitation to make the opening address of your 51st annual conference.
Your conference theme “Australasia’s Resource-Based Industries in a Future World” is certainly a subject that MAF has been giving much consideration to. So I would like to share with you some of my perceptions about the place of agriculture, horticulture and forestry in New Zealand’s future economic performance, and some of the influences that will help shape that future performance.
I should say at the outset that I am very optimistic about our capacity to deliver a successful, sophisticated, high performance economy and society, delivering the higher living standards our people expect while drawing increasingly heavily from our primary industry base. I believe New Zealand has a unique package of tangible and intangible values to offer the rest of this world from this small, isolated, island base. But it won’t come easily or automatically – it will require us to pay increasing attention to a range of values that are increasingly important to our customers around the world. That challenge is a key theme of my comments today.
First, a little personal context. I grew up as a farm boy – son of Waikato dairy farmers, attending a small rural school. Even as a youngster in the 1950s and 1960s, I recall the drive for profitability through productivity, seen in the growth in farm size and herd numbers, the introduction of new technology, and the impact that all of this had on local schools and service towns through rural depopulation.
There is nothing new in any of this, and variations on these themes will persist into the future.
I spent most of my career as a central banker. In that realm, one has the luxury of chasing a single primary objective – price stability – using a single policy instrument – the official cash rate. My move to MAF has demonstrated how much of a luxury that is. In the world of MAF, if there is a single primary objective, it has to be long run, real profitability from our land-based primary industries. But that objective is hugely, and increasingly, conditioned by numerous parallel objectives requiring simultaneous attention – issues such as sustainable land use, animal welfare, greenhouse gas emissions, water quality and water allocation, food safety standards and protection of our biological base from new pests and diseases.
I regularly tell my former colleagues at the RBNZ that MAF makes central banking look really easy.
So what of agriculture and forestry in New Zealand today? As much as at any time in my lifetime, New Zealand’s economy is highly dependent on its biological base and its ability to trade on this profitably.
“While other countries may find that they can’t be green if they are in the red, New Zealand can not be in the black if we aren’t green”
Agriculture, horticulture and forestry: The current state of the nation:
These industries contribute around 17 percent of GDP when included with their associated processes and services. They provide around two thirds of our total merchandise exports, and have long been the greatest contributors to our export earnings. There may be only 4 million of us, and we may be a long way from major markets, but that has not stopped New Zealand becoming the world’s largest dairy and sheep meat exporter and a major player in world trade in horticultural products.
The growth in agriculture has exceeded that of most other major sectors. Over the period from the late 1970s to 2005, the agriculture sector grew on average by 3.6 percent per annum compared with 2.5 percent for the New Zealand economy as a whole.
In addition to the direct contributions the primary sector makes to our economy there is a huge flow on into manufacturing, processing, education, technology, financial services, communications, and transport businesses. The food and beverage industry is the largest manufacturing industry in New Zealand contributing around 30 percent of overall output. While the wood manufacturing and furniture manufacturing industries contribute a further 15 percent of manufacturing output.
The sectors are major employers with an estimated 125,000 people employed in the agriculture and forestry sectors and a further 100,000 in the associated processing industries.
New Zealand’s agricultural industry is the only major New Zealand sector with world class economies of scale and scope, global market reach and world leading technological capabilities.
Fonterra alone is twice the size of any other New Zealand company, is the world’s largest dairy ingredients company, is responsible for around 40 percent of world cross-border trade, and is one of the largest exporters of dairy products out of the USA. It’s New Zealand’s only truly global business.
Our major meat exporters are leading international players in their fields.
A handful of our primary industry companies, all producer-owned co-operatives – Fonterra, Westland, Tatua, PPCS/Richmond and Alliance have total capitalisation comparable to the whole of the New Zealand share market.
New Zealand farms are substantial businesses in their own right – the average dairy farm has total assets of $4.2 million and a sheep and beef farm $3.8 million, with larger properties running assets worth tens of million dollars.
Our primary industries have strong synergies with the food, wine and tourism sectors, and these relationships are likely to grow. Wealthy tourists are not just interested in our untamed mountains and natural forests, they also come to see our farmscapes and to enjoy the fruits of those landscapes – our fine local food and wines. Just as importantly, that sort of tourist activity is taking place not in our major cities, but is an important source of the remarkable renaissance that has taken place in our rural and provincial communities over the past decade or so.
The agricultural and forestry sectors play a central role in defining New Zealand’s national identity and way of life. In conjunction with a strong Maori heritage, and growing ethnic diversity, the connection to our farming history strongly defines how we see ourselves and how others view us. And in a recent survey New Zealanders rated dairy farming as the fifth most respectable occupation, behind nurses, doctors, teachers and the police. Indecently, public servants came in sixth.
Our clean-green image also remains pivotal – not only to our national identity and tourism value, but also for our ability to position products in overseas markets. A reputation for having a clean and healthy environmental is a clear ‘natural advantage’ that New Zealand continues to enjoy but will need to nurture into the future if we are to remain competitive in food and other primary-based industries.
This will be another key theme in my comments today.
Emerging trends and challenges
The rise of the discerning global consumer…
We have seen a change in consumer expectations, both domestically and in our export markets. Consumers inevitably are becoming more sophisticated and discerning. As incomes rise in developing countries, they are consuming more western style foods. We are seeing a convergence of consumer tastes and demands leading to the emergence of global consumers.
The “global consumer” places greater emphasis on buying foods that are safe, trusted, convenient, produced in a sustainable manner, but also at a competitive price. They are looking for food products that have consistent texture and flavour, an ability to deliver a range of health and nutritional benefits and the ability to trace from the plate to the farm gate. There is a demand for a year-round supply of products.
At the top end of the market, even those “rational” attributes are not enough. Increasingly, our consumers will be seeking a more subliminal, even emotional, sense that the product is “right” for them.
That sense of being “right” is partly fashion, but may also have a strong ethical dimension – encompassing such matters as animal welfare, the impact of the production, processing and distribution process on the environment, worker protection, “fair” prices to peasant farmers, and even religious dimensions. Already we see this emerging in the food miles debate. Expect to see much more of this in the future.
… and the emergence of new forms of trade protection
While New Zealand, and Australia, have traditionally battled high tariffs and quantitative restrictions on exports of our primary products, my fear is that as we roll those back through WTO and bi-lateral/pluri-lateral trade negotiations, we will increasingly encounter new forms of non-tariff protectionism. The prime candidates here come in the form of technical barriers based on sanitary and phyto-sanitary (SPS) regulations, with constraints being imposed on the flow of goods under the guise of protecting countries from pests and diseases.
This has the potential to be a particularly pernicious form of protectionism, not just blocking access of our products to other markets but, just as importantly, undermining the WTO’s SPS Agreement, and the essential protections that affords to countries such as New Zealand and Australia with genuinely unique and endangered species in need of protection from newly introduced pests and diseases.
Although tariffs and quotas have been reduced to some degree, they are still generally heavily stacked against agricultural products in our key markets. For example in the European Union, the average tariff for agricultural products is 18.6 percent compared with 4 percent for non-agricultural products, and this average of 18.6 percent hides tariff peaks of 146 percent for frozen beef and 168 percent for skim milk powder. In Japan, dairy spreads face a tariff of 568 percent and milk powder 483 percent. In the USA dairy products also face high tariffs; whey powder 108 percent, dairy spreads 122 percent and butter 92 percent. There is still plenty of work to do on this front.
Increasing supply from low cost producers
Traditionally, New Zealand has built its place in international primary product markets by being efficient – a low cost producer of products of acceptable quality. That has been achieved by a very sharp focus on minimising input costs rather than, for instance, maximizing output per cow or per sheep, or even per hectare of land. This is a perfectly rational strategy, and there are plenty of examples of companies that are sustainably successful by being the lowest cost producer in a commodity market.
But can New Zealand sustain that strategy in the face of emerging competition, especially from South America and parts of Asia? In the past fifteen years, growth in exports of many dairy, meat, horticulture and forestry products from China has been double that of New Zealand’s. A similar story emerges when comparing South American dairy, meat and forestry exports to that of New Zealand’s over the same period.
The UN Food and Agriculture Organisation (FAO) reported that over the past 20 years meat production in developing countries grew by 230 percent and dairy production by 200 percent. Much of the growth in these countries has been due to the adoption of technology and practices already developed and/or used in New Zealand.
While there sometimes remains a quality gap between agricultural exports from Australasia and those from emerging Asian and South American countries, the ability of producers to access resources, skills and technology to make necessary product improvements is already an obvious reality.
In many cases those countries also have large areas of low cost land with potential to be brought in to production and lower labour and other costs, which give them an additional comparative advantage.
In short, there seems to be a limited future in competing with the likes of China, India or Brazil for supermarket shelf space on price alone.
Demographic change and pressure on New Zealand’s natural resources
The composition of our population is changing; the urban population is growing and an increasing proportion of our population has been born outside of New Zealand. Only about 14 percent of New Zealanders live in a rural area. Over the last generation or two, New Zealanders first-hand experience of, and association with, agriculture and rural life has diminished sharply.
This has, in part, contributed to emerging labour and skill shortages experienced by the sectors. Fewer young people are interested in agricultural careers as illustrated by declining tertiary enrolments in agricultural and horticultural degrees.
Also, in the search for productivity growth and profitability, our agricultural systems are becoming more intensive, and in doing so, their supporting ecosystems are being pushed harder. Concurrently, the consumers of our products in the markets of importance to us are looking for something extra in their purchases. As already noted, the consumers we are interested in are seeking assurance that the products they purchase embody the values they regard as important – environmental, animal welfare and others.
Back at the farm, another influence is at work. Urban dwellers in search of some aspects of the rural lifestyle are pushing out beyond the fringes of our suburbs – the lifestylers and the farmers have become neighbours and in some very real ways, competitors.
The competition for one key resource, rural land, is well documented. Lifestylers with urban incomes will win that competition every time, since the price they pay for land will reflect its recreational value, rather than its production potential.
And when you are buying property for its recreational values, the quality of your local environment matters a great deal. An emerging prerequisite for successful farming is the ability to cohabit with neighbours who are not engaged in commercial farming. That, for the most part, will simply reinforce the sorts of expectations being placed on our farmers by their foreign customers.
The imperative of sustainability in our production, processing and distribution systems is here to stay, as is the parallel squeeze from competing land uses.
What does the future hold?
One could be tempted to look back at the evolution of agriculture in New Zealand and conclude that “she’ll be right mate!” After all there is much to be positive about. Agriculture remains at the core of the economy and any serious attempt to raise our national standard of living is likely to be driven from further productivity gains and export revenue from the agricultural sectors.
Furthermore, with the right sorts of responses to the risks posed by climate change, water management, flood risk management and sustainable land management, New Zealand should readily be able to achieve higher environmental standards. These environmental standards will in turn enhance our value proposition to the benefit of agricultural exporters. Under this scenario, through good environmental management and smart positioning of products based on top quality standards for environmental integrity, food safety and animal health and welfare, we should be able to maintain the quality gap and bank the profits.
Conversely, we could think of an alternative, and much less attractive scenario for agriculture in New Zealand, which, borrowing from the recent work of the Food and Beverage Task Force, we label the “Bugger!” scenario. Under this alternative scenario New Zealand’s “natural advantage” is eroded.
Domestically, competition for increasingly scarce resources leads to environment degradation and the loss of our ability to position products based on environmental integrity. Internationally, the quality gap between emerging low-cost producers and our own producers shrinks, helped in part by the sale of New Zealand technical and scientific expertise and experience. At the same time the price of entry to markets lifts as the global consumer demands higher intrinsic value from products.
The reality is that New Zealand’s agricultural sectors have been living for a very long time with a widely held perception that their future is not so bright. The rise of import licencing, quotas and astronomical tariffs from the 1950s was based on a premise that modern successful economies operate off an industrial, rather than an agricultural base. The protections were intended to provide a supportive environment in which local manufacturing businesses could thrive. My sense is that many of the most influential policy advisers active at the time of the major policy reforms in New Zealand in the mid - 1980s also believed that agriculture was essentially an important part of our history, rather than a potential driving force in our economic future. This, of course, makes the high performance of agriculture in New Zealand over the past 25 years or so all the more interesting.
In my view, that high performance is testimony to the influence of reduced protectionism and increased competition in industrial goods and service industries, which has lowered input costs for agriculture, and to the adaptability of our agriculture sectors – with shifting land use patterns, rapid adoption of new technology, and improved management capabilities on farm, in processing, and in distribution.
The Challenges Ahead
So if the past couple of decades have been relatively successful for our agricultural industries, can we expect that to continue for another 20 years?
I believe so, but not without overcoming some daunting challenges, and not without being able to command the trust and confidence of our consumers on a number of increasingly important dimensions.
We have seen a rise in public concern about the safety of food, particularly that produced in very intensive systems. Events such as “mad cow disease” and Avian Influenza have made the public nervous about some existing food production systems. The discovery of a single case of BSE in the US in December 2003 led to a total ban on exports to Japan, Korea and other countries. Consumers want trusted verification of the quality and production methods of the goods they are purchasing.
Supermarkets are developing into superpowers. There are about ten supermarket chains that control between 80 percent and 90 percent of world food and beverage trade, and that number is expected to consolidate further over the next decade.
In our export markets, those supermarkets are already setting product standards, often at levels far more demanding than those required by our government counterparts in multilateral and bilateral trade agreements ... and well beyond their traditional consensus for the safety and suitability of the food they offer their customers.
Responding to where they perceive customer preferences to be at, or to be headed, Tesco recently announced its involvement in the development of a carbon index that will measure the carbon required to produce, transport and consume every product it sells.
How should New Zealand producers respond?
The trick will be to meet market demands more efficiently than our competitors – and often that will require shifting from a mindset of grudging and expensive compliance to one of creating lasting competitive advantage in the market place by understanding and exceeding our customers’ expectations.
We need market structures and business models that are quick to identify shifts in consumer interests and quick to identify how those emergent market opportunities may be exploited profitably. And as businesses like Fonterra and Zespri become more global, sourcing produce from around the globe, their business structures will evolve to capture the full range of benefits and remain internationally competitive.
Environmental challenges are already becoming apparent, although - happily - not anything like the same degree as in countries with highly intensive livestock production systems. However, water quality in some areas of more intensive farming is not up to scratch with rivers and streams contaminated from increased nutrients and animal waste. Many shallow aquifers particularly in dairy farming areas, have elevated nitrate concentrations. Soil erosion has been accelerated by land clearance and unsuitable land management. Water allocation issues are an increasing concern. The area of irrigated land has been growing, some river systems and aquifers are overcommitted, and often the move to irrigation is accompanied by higher inputs of fertilisers and energy.
Farmland prices have escalated in recent years, in parallel with developments in our urban real estate. In many areas, it is likely that farm prices now exceed what is justified by productive returns. This adds to the pressure to lift productivity and, if not managed carefully, can exacerbate environmental problems as farmers force the biophysical limits of their productive systems.
The combination of changing expectations on the part of both international consumers and local urban populations, and increasing awareness of the environmental factors has lead to an increased focus on sustainability of production.
If our focus post-1984 was on economic efficiency and financial returns, it seems pretty clear to me that the 21st century paradigm will be a broader concern centred on sustainability – economic/financial, environmental and social.
MAF’s Role
MAF is tasked with leading and contributing to developments that manage risks and create opportunities with respect to our land-based primary industries. Given that mandate, we view ourselves as a sustainable development agency, operating under the tagline “MAF, enhancing New Zealand’s natural advantage”.
As such, we are heavily engaged as joint lead agency with the Ministry for the Environment in issues such as the water programme of action – shaping policies around both water allocation and water quality where those issues intersect with our land-based primary industries.
Likewise, we are leading those aspects of the climate change policy development process which relate to agriculture and forestry. Tying both of those strands of work together will enable us also to develop an integrated policy framework for sustainable land use – dealing with managing risks to soils and water from erosion and flooding.
By far our biggest line of business, at least in terms of numbers of personnel, is biosecurity. There, MAF is responsible for leading an integrated risk management system that encompasses biosecurity risks to our primary industries along with risks to the environment, including marine and aquatic, and risks to human health. While the biosecurity mandate has broadened, the imperative of effectively protecting against risks to our key primary industries remains front of mind and our capability on that front continues to grow.
For a nation dependent on production and export of food products, a trusted and credible food safety regulatory capability is vital. The New Zealand Food Safety Authority, created almost four years ago as a semi-autonomous body attached to MAF, meets that test. What is required in such functions is a constant eye on the best scientific evidence available to incorporate into risk assessments and policy development. That empirical foundation is core, because by their nature, arguments around risk, in both food safety and biosecurity, tend to be heavily clouded with emotion. Keeping regulatory interventions effective, efficient and proportional to the best and most objective assessments of risk we can find is essential. Without that, we can add huge inefficiencies into our regulatory processes very quickly, to the benefit of no-one.
I mentioned earlier the risks faced by agricultural traders the world over from rising technical barriers to trade. The WTO’s SPS Agreement is core infrastructure for Australasia’s traders of biological products. The SPS Agreement provides the framework by which we can provide essentially technical, risk-based, evidence-based protocols around trade in biological risk products. Those protocols should aim to facilitate international trade unless there is sound evidence to demonstrate that such trade would be unreasonably risky to the importing country.
In my view, the work MAF does in this field, from within each of our major business groups (Policy, Biosecurity NZ, NZ Food Safety Authority), along with our colleagues at the Ministry of Foreign Affairs and Trade, is amongst the most valuable contribution we make to the well being of New Zealanders. This is vital national infrastructure.
Professional response… Agricultural and resource economics needs to make a greater contribution to the debate
As mentioned, the issues that we are grappling with are vital, interesting and challenging. Many of these issues are multigenerational and cross state and national boundaries – such as water and climate change. The process by which solutions are arrived at is critical, especially if they are to be robust and enduring.
As economists we have always had a lot to say about efficiency, and society is better as a result. We are less comfortable (or some of us are) making judgments about welfare and allocation. However, as highlighted by Sir Nicholas Stern’s report on climate change, how future generations are treated and relativities between the rich and the poor do matter in formulating robust policy.
As social scientists, I believe we do have a duty to pay attention to these issues. Failing to do so risks marginalizing our advice and allowing others to dominate the agenda. At the very least we need to be able to add to understanding about likely impacts and assess who will bear the costs. Generally, it is easier to identify who loses. It is more difficult to identify who gains and how to articulate this in ways that are meaningful to ordinary people.
While the benefits of productivity and economic growth may be self evident to us, they are not always well understood by the general public. It is a constant challenge for our profession to not only find ways of better understanding what drives economic growth, but how to communicate it.
While we all accept it is important to internalise externalities, it is not simple. Leaving aside technical issues about the size of a Pigouvian tax, or the size of a cap needed for a cap and trade model, the issues about initial allocation do have real wealth implications and these have to be addressed for governments and society to accept any proposed solution.
Unlike some countries, New Zealand does not have other sectors that can, or are prepared to bear the costs of adjustments in our primary industries. We are generally being asked to find solutions where our sectors are expected to bear their own adjustment costs. For example, New Zealand society is expecting our waterways to remain of high quality and that our industries, in particular our livestock industries, to bear the costs of protecting and maintaining their quality.
What is clear, is that for our sectors to continue to improve the sustainability of their production systems and to meet society’s and consumers’ increasing demands for environmental services, innovation, productivity gains and access to international markets are essential. Without this our standard of living will decline.
After reading the abstracts for the range of topics being presented at the conference, I am pleased to see that many of these issues are being addressed over the next couple of days. However, I believe the profession has to be bolder, acknowledging that policy makers do have to make decisions, often with imperfect information and without the time to undertake a complete analysis of the issues. This means, at times, having to make well grounded judgment calls.
Earlier I mentioned that I believed that New Zealand can’t be in the black unless we are green.
We could wring our hands and worry about this being just another cost undermining our business. But while I acknowledge there are challenges, I am optimistic.
I am constantly reminded how innovative our sectors are. New Zealand is currently celebrating 125 years of our first export of frozen lamb. That innovation produced industries that, to this day, are the bedrock of our economy and society. The science and technology that goes into producing our current and future output is outstanding. There are opportunities in the solutions we eventually develop in response to challenges such as climate change. Done well, we can contribute to better environmental outcomes, improve the productivity of our animal production systems, capitalise on the intellectual property created, and lay the foundation for the development of further intellectual property and future productivity gains.
As a profession we have a lot to offer. I look forward to being able to participate in the debate over the next few days and I wish you every success for the conference.
Contact for Enquiries
Director-General
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
Tel: +64 4 894 0100
Fax: +64 4 894 0720
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