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• Private sector R&D and innovation
• Investment and related issues
• Labour and skills
• Resource constraints

Private sector R&D and innovation

New Zealand’s public R&D investment as a percentage of GDP is broadly comparable with expenditure in other OECD countries, however private R&D expenditure is lower. There is an extensive economic literature on why market processes fail to deliver economically optimal levels of R&D, and we are supportive of policy interventions and industry initiatives to address this under-investment.

The agribusiness and forestry sectors dominate New Zealand’s private sector R&D and investment – Fonterra is New Zealand’s largest single private sector R&D investor. Substantial increases in sector R&D investment will come largely from businesses within homogenous, commodity-based sectors moving into more differentiated markets which are often, though not always, higher value added. This trend is already happening e.g. in smaller dairy, food processing and agritech businesses, and to some extent in the solid wood products sector.

Schemes such as TBG and TIF make a valuable contribution to such differentiated strategies. There may be potential to modify these schemes to make it easier to support agribusiness sector co-operative initiatives that are outside the company framework required by scheme rules and procedures. This may be complemented by assessment of the potential to enhance levy-funding mechanisms and to better facilitate co-operative approaches to new and emerging sector development.

Investment and related issues

New Zealand agribusiness is based around the family-owned farm and orchard and a lot of its economics has been based on farmers balancing short-term cash flows with longer-term capital development and eventual gain.

An ongoing trend has been towards corporate farming, including substantial external equity investment. The benefits of corporate farming include economies of production scale and sometimes of scope, access to external capital, more bargaining power with input and logistics providers and customers and lower relative compliance costs. The disadvantages are that some corporate operations have high and inflexible fixed costs and are less able to weather the hard times, whereas family farms prove very able to reduce costs to a minimum and survive.

Entry to a family-owned farming business may be from inheritance or from sharemilking or other routes, with young farming couples able to build up equity over time before buying their own farms. The rising scale of the farm enterprise and increased investment thresholds are making it more difficult for new farmers to work their way to farm ownership and the consequence is that many can now only aspire to a career as a herd, farm or orchard manager.

In the high volume dairy and meat processing and exporting sectors, farmer shareholders typically provide the capital needs of co-operative companies such as Fonterra, Tatua, Alliance and PPCS. While the co-operative model has its limitations, co-operative companies take a longer-term view than many of New Zealand’s publicly-listed businesses. Together with niche enterprises in the manufacturing sector, many agritech companies are either private or public unlisted companies or family-owned businesses, and they tend to focus on long-term investment and business growth.

Many farmers and orchardists are also substantial off-farm investors with considerable investment stakes in new and emerging enterprises in a wide range of sectors. Some of this investment is in residential and commercial property and other investment is in more wealth-creating business investment. Agribusiness investors are a significant and entrepreneurial force within New Zealand’s venture and angel finance sector, and they have the potential to play a prominent role in future biotechnology and agritech developments.

There may be new ways to facilitate the mobilisation of capital from agribusiness sources to grow new high value business opportunities, and conversely to facilitate capital investment from the non-agribusiness financial sector into agribusiness. Opportunities may include evolution in tax, savings and investment policy, new investment vehicles, and changes to the co-operative company model that allows external equity to either augment existing capital investment or mobilise funds for new opportunities that are difficult to support through supply-linked co-operative structures.

Foreign direct investment (FDI) is important to the sectors. Some industries such as forestry need very large-scale capital investment that can only come from offshore unless current policy settings in New Zealand change. Much FDI in New Zealand over the last ten years has been buying existing assets rather than greenfields investment, however there have been some substantial investments in high added value forestry processing. FDI often brings with it new skills, technologies, management capabilities and market access opportunities. For example, FDI in the wine industry has facilitated access to global wine distribution networks.

Domestic investment and business ownership are also important to an economy. Internationally competing businesses may locate much of their manufacturing, marketing and distribution offshore, however the higher paid and more knowledge-intensive jobs are often in the R&D, design, finance, information technology and other jobs in head offices and in centralised design and research facilities. New Zealand will benefit substantially from more of such jobs and facilities being developed and retained domestically.

There is significant investment in rural land for lifestyle and other purposes and overseas ownership of New Zealand farmland continues to expand. One effect of these trends is to boost land prices, to the great benefit of current landowners with properties on the market. However, longer term it will make it more difficult for young New Zealanders to enter into farming as a career and may also lead to some social tensions, for example over access to land and waterways for recreational purposes.

Labour and skills

In recent years, the agribusiness and forestry sectors have experienced significant labour and skill shortages, sometimes co-existing with substantial levels of local unemployment. Some of the best investment New Zealand could make may well be in base-level skills and improving labour market participation. Any serious focus on long-term skill development has implications for social policy as well as education and training policy, and implies a move from passive social spending to active investment in people development.

There will always be difficulties in co-ordinating the labour needs of large numbers of small-scale employers, especially for seasonal work, and poor remuneration and some poor employment practices make some less skilled jobs unattractive to many. The welfare dependency culture of some unskilled people and drug abuse lead to poor motivation and inability to perform effectively in the work force. Isolation, lack of services, lack of affordable accommodation for seasonal workers, and inadequate information about career opportunities in agribusiness are also difficulties. More technically sophisticated agribusinesses are demanding higher skill levels, for example corporate farm and orchard operations demand more skilled herd, farm and orchard managers, etc.

MAF has facilitated the establishment of a government/industry working group process to address some of these issues and in August 2002 an agriculture and horticulture industry Governance Group and Working Group were established to oversee industry responses to them. In February 2003 the Governance Group signed off on a pan-industry Human Capability Strategy that addresses “on-farm” and “near-farm” human capability. However, it does not address labour and skill issues in the processing industry or the forestry sector.

Key elements of the strategy include:

• industry associations working collaboratively to address labour and skill needs in the agriculture and horticulture sectors;
• industry actively managing the way it promotes career prospects, identifying and reducing barriers and improving employment practices;
• industry associations engaging more effectively with the research and education communities to ensure responsiveness to industry needs;
• industry associations assisting producers to access appropriate tools and advice to make decisions about the best mix of technology, labour supply and skills for their businesses.

Industry will lead the implementation of the strategy in liaison with MAF, the Tertiary Education Commission and the Department of Labour. MAF’s Sustainable Farming Fund is providing seeding funds for the strategy and there will be a substantial investment of industry association personnel and resources, including use of industry levy money.

Resource constraints

A major constraint to the growth of the sectors is freshwater allocation. Especially on the East Coast of the South Island there are competing demands for water from agricultural, horticultural, hydro electricity, recreational and environmental users of our water resources. Irrigation can increase gross output from pastoral farming by about $1 billion for every additional 500,000 hectaresirrigated. Irrigation also helps improve the reliability of production volumes and product quality and this allows farmers and exporters to enter into longer-term market development arrangements based on surety of supply.

Currently, the framework for water allocation reflects ad hoc policy and regulatory decisions made over time and is no longer appropriate for today’s circumstances. For example, allocation of irrigation rights has been on a “first come, first served” basis. There is no way of trading those rights, and no ability to use economic instruments to allow water to be efficiently allocated among competing economic uses. The provisions governing balancing of economic and other uses of water are inadequate, and environmental protection provisions lack flexibility and do not lend themselves to catchment-wide approaches to water management.

It is possible to meet all competing economic, environmental and recreational uses for water in a balanced way if an effective allocation framework is in place, water storage is used, and water is managed in a technically efficient way. Failure to develop an effective allocation framework means that there will be increasing conflict over water, the tradeoffs between economic and non-economic uses will not be transparent, and decision making will therefore be poorly informed. This will be detrimental to economic, environmental and other users of water.

The Government’s Sustainable Development programme of action has made the quality and allocation of freshwater a top priority and MfE and MAF have been given joint responsibility for developing a regulatory and management framework for freshwater that provides a more effective basis for allocation.

Contact for Enquiries

Monitoring and Evaluation
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0623
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