Business environment issues and strategic directions relevant to future growth
- Broader business environment issues
- Reduction in regulatory barriers and compliance costs
-
Strategic directions relevant to the sectors
- Exploiting the scale of the agribusiness and forestry sectors
- Diversification into higher added value markets
- Migration of market structure
- Ongoing productivity gains in existing sectors
- Competing on the basis of how a product is produced
- Biotechnology
- Potential for lifting the returns from Maori-owned agribusiness and forestry assets
- Growing servicing and technology provider businesses
- Concluding comment
Business environment issues and strategic directions relevant to future growth
The future growth prospects of the specific agribusiness and forestry sectors are addressed in the sector overview papers. However, it is helpful to set out some broader business environment issues that need to be addressed, and to suggest some strategic directions that may be important to future growth prospects.
Broader business environment issues
Important issues relating to the broader business environment in which the sectors operate include:
Enhancing the international trading environment
New Zealand’s reliance on international markets for the vast proportion of its agricultural and forestry production makes maintaining and enhancing the international trading environment essential. At the very general level much of the international environment has to be treated as a “given” by New Zealand businesses. However, there is much scope for government-to-government negotiations, in association with business, to improve market access opportunities and to reduce trading distortions caused through subsidies and technical barriers to trade. MAF, MFAT and other agencies are actively addressing these issues, including through the Doha Development Round negotiations.
Enhancing the domestic business environment and policy settings
The future growth of the sectors depends primarily on private sector commercial decision making, and the most important role for government is likely to be fostering a stable and empowering broader business environment for the sectors.
Long-run economic growth depends on long-run investment in both physical and human capital. Since the mid-1980s many New Zealand businesses have concentrated on short-term cost cutting rather than the longer term process of creating new value, for example through product innovation, quality enhancement or new market development. Cost cutting is critical to the sectors, especially given that farmers are often subject to high input costs over which they have little control. However, cost cutting should be complemented by a greater emphasis on creating new value.
There is merit in fostering a business environment that is more supportive of long-term and more strategic business investment. New Zealand’s business environment should also focus on increased long-term investment in intangible assets such as R&D and skills. Capital investment is also needed to make intangible assets productive. There is value in encouraging new thinking on how New Zealand’s capital markets and business governance regimes and capital structures should evolve in ways that optimise the focus and timeframes for our business investment in new wealth creation.
Enhanced infrastructure
The agriculture and forestry sectors depend on efficient and effective transport, energy, telecommunications and other infrastructure. For most of the last fifteen years New Zealand has lacked a strategic approach to major physical infrastructure investments. This lack of strategy has contributed to recent problems in road transport infrastructure and in energy supply.
New Zealand has a small population spread over a large land area with difficult geography and is a great distance from the international markets on which it is dependent. To help overcome these impediments it is essential that we have superior infrastructure. This requires a more centralised, strategic approach to planning and an accelerated rate of well-targeted public investment in infrastructure that removes bottlenecks to economic growth and allows network economies to be exploited.
Key infrastructural objectives for the sectors include overcoming the “digital divide”, improving road transport, and enhancing the workings of the electricity market, including through improved interconnectivity for embedded generation and reducing price volatility. Officials are actively addressing all of these issues.
Reduction in regulatory barriers and compliance costs
Regulatory barriers and compliance costs, together with erosion of property rights, are big issues for the sectors. Legislation such as the Hazardous Substances and New Organisms (HSNO) Act and its processes need to facilitate wealth creation and innovation as well as manage risk. HSNO needs to be process efficient and be administered such that innovators and entrepreneurs are not faced with insurmountable up-front costs and uncertainty.
The Resource Management Act (RMA) is perceived as a major impediment, for example to new forestry processing plants. Increased complexity in employment related legislation falls most heavily on small businesses such as farm and orchard operations. The economic impact of the Government’s ratification of the Kyoto Protocol will depend on the practical effects of the policy response package.
Regulatory barriers such as the RMA may directly preclude investment, however in many cases the problems arise because they create uncertainty around the standards that have to be met, the time that resource consent and other processes take, and the costs that will be incurred. Businesses easily handle risk, however they struggle to handle uncertainty.
New Zealand could well benefit by moving to an environmental and resource management model that clearly specifies the (high) standards that have to be met in new developments, the time and cost it will take, and assurances that a development can proceed if specified standards are met. Such an approach would not reduce environmental standards and may not reduce costs but it would certainly reduce uncertainty and improve the business climate for new wealth creation.
Strategic directions relevant to the sectors
On the assumption that the international and domestic business environment will be conducive to growth, the following strategic directions relevant to agribusiness and forestry sector decision making could be considered:
Exploiting the scale of the agribusiness and forestry sectors
Together with seafood, the agribusiness and forestry sectors are the only ones in New Zealand that have achieved world-class economies of scale in production, processing, distribution and marketing capability. A small incremental gain in a large sector such as dairy obviously has a large aggregate effect on New Zealand’s economy.
Small firms and small industry sectors in New Zealand share problems of economic geography, high fixed costs of exporting, and the time and cost incurred to understand offshore customers and competitors, and to develop a sustainable position in international markets. Attempts to encourage clubbing together of such companies and sectors through clusters often founder on competitive rivalry and lack of core shared interests. Government attempts to catalyse clusters at a regional level can have the effect of impeding market dynamics and fragmenting competencies that are best accumulated around one or a few larger businesses through market processes.
Much industry and innovation policy thinking has focused on the problems of small firms and emerging sectors rather than on the opportunities for our large businesses and established industries that have already achieved world-class competitiveness and scale economies.
Our larger agribusiness enterprises are crucial to the growth of small firms because small firms are very often suppliers or service providers to larger businesses. These larger export businesses have to compete internationally and therefore the standards they have to meet are those of best practice international competitors. These larger businesses with global marketing reach indirectly force hundreds of other New Zealand firms to also lift their game to international standards.
The larger established businesses can seed spin-off enterprises over time. For example, Tait Communications created a skill base in electronics and also provided a training ground for entrepreneurs who spun off to create new business enterprises based around a core technological platform, and this played a key role in the development of the Christchurch electronics industry. It is possible that major agribusiness and possibly forestry companies could perform a similar nurturing, learning and enterprise-seeding role for future biotechnology and other clusters in New Zealand.
Diversification into higher added value markets
It is generally argued that high volume commodity products are much less profitable than differentiated products competing in higher value niche markets. Related to this, it is often assumed that processing products adds value to them. High value niche markets do tend to pay higher premiums but they are also smaller markets that can easily become commodified by competition. High volume commodity markets may earn low returns per unit volume but their aggregate economic contribution may be much higher. Likewise, processing may create value in, say, chilled lamb markets, however it may reduce value and/or add cost in e.g. some fruit and seafood markets. There are also trade barriers, such as escalating tariffs, that may make processing some products such as logs uneconomic in some markets.
However, New Zealand stands to benefit very substantially from increased diversification into markets where higher premiums can be earned and many New Zealand businesses are committed to this as a strategy. For example, Westland Dairy Co-operative has indicated an intention to move from commodity production into added value, R&D intensive markets. Some niche meat companies are moving into direct marketing to restaurants and other retail outlets, while wine and boutique cheese businesses are developing complementary tourist and café operations. The “slow food” movement, and the congruence between tourism and other leisure and lifestyle industries and the food and wine sectors, create great long-run opportunities for diversification by New Zealand agribusiness.
Migration of market structure
It is very difficult for countries to create whole new “greenfields” industries, and much easier to drive off and evolve from existing strengths. New Zealand agribusiness is well positioned to be a building block for new business and industry growth in related and in new areas.
Historical contingencies and path dependencies matter in economic change, and much new wealth creation has its genesis in migrations by businesses from one market structure to another. The classic New Zealand example of this was Glaxo that began in New Zealand as a dairy food business in Bunnythorpe and later migrated both into the pharmaceutical market and (regrettably) offshore. Likewise, Gallaghers has driven off its electric fence technology into security systems markets while Trutest is now augmenting its agritech business by moving into medical electronics.
It is not easy to identify what, if any, role government can play in facilitating migrations of market structure, though it is noted that Fisher and Paykel’s migration from whiteware into medical electronics was catalysed by the Auckland School of Clinical Medicine and DSIR. However, what is clear is that such migrations require knowledge of markets and technological opportunities and a business environment that lends itself to the long-term investments businesses need to make in learning, market development, R&D and innovation.
Ongoing productivity gains in existing sectors
Long-run per capita income growth depends substantially on productivity growth, and small increases in an economy’s productivity growth cumulate over time into substantial impacts on per capita income. Major sources of productivity growth in the agribusiness sectors are likely to include dairy industry on-farm productivity and processing efficiency gains, and use of modern biotechnology to increase sheep industry productivity. Major gains in the sectors will be complemented by a great deal of incremental productivity improvement that is “below the radar screen” but has substantial cumulative effects.
Competing on the basis of how a product is produced
Markets are concerned not only with the nature of the product but how it is produced. Examples of this include environmental sustainability of production processes (e.g. planted forestry), animal welfare and organic production. How a product is produced can not only underpin competitive advantage in international markets but also lead to the development of technologies that can be commercialised and marketed in their own right, for example product trace-back technologies.
Competing on the basis of production processes etc., means a greater emphasis on standards and on certification and verification regimes, and systems to track products from farm to customer. The Government has a key role in verification and auditing regimes and in some cases in active facilitation. For example, in relation to the organics sector, the Government has assisted through a number of initiatives such as the small-scale organic producers’ certification scheme and the development of the New Zealand organic standard.
Specific examples of marketing on the basis of how products are produced are discussed in the sector overview papers, and relevant market access issues are discussed in the earlier sections relating to trade policy issues.
Biotechnology
New Zealand has the scale and skill base in agribusiness and forestry to rapidly adopt the most fluid and generative field of modern science and technology – biotechnology. Biotechnology is crucial for productivity gains, quality enhancement, and new product development in the agriculture and forestry industries. It also has the potential to deliver considerable environmental benefits, for example in reducing pesticide use. Biotechnology also creates opportunities for agribusiness to diversify into new and non-traditional markets, for example medical and health-related markets.
Many of New Zealand’s biotechnology businesses, including recent start-ups, have an agribusiness focus. Examples include Bortry-Zen and PharmaZen, while Genesis Research and Development and New Zealand Pharmaceuticals are examples of more established biotechnology businesses with an agribusiness focus. There are major opportunities for large agribusiness and forestry companies to effectively exploit biotechnology as a core part of competitive strategy.
Potential for lifting the returns from Maori-owned agribusiness and forestry assets
Maori are major stakeholders in the agribusiness and forestry sectors. Maori and the New Zealand economy will benefit substantially if the returns from Maori-owned agribusiness and forestry assets can be lifted. In the past there was a view that the economic development of Maori land was impeded primarily by governance difficulties and by multiple ownership of land restricting access to capital. While capital constraints do limit Maori investment, for example in forestry, Maori do have access to substantial capital resources, including through Treaty settlements, and some Maori agribusiness operations are performing very well commercially.
For under-performing Maori land there is merit in encouraging wider application of best practice technology and management practices. A Farm Improvement Co-ordinator (FIC) initiative has been successfully piloted on Maori collectively-owned farmland and indications are that such interventions generate substantial net financial benefits.
There is also work underway on the potential for further forestry developments on Maori land to capitalise on carbon credits arising from New Zealand’s ratification of the Kyoto Protocol.
Growing servicing and technology provider businesses
The agricultural and forestry industries are the centres of wider cluster industries, including service and technology provider and other businesses. Examples include agritech, animal remedies, software, machinery, and biochemical businesses. A major part of New Zealand’s high value manufacturing and processing is directly dependent on agribusiness, including processing, packaging, agritech equipment, machinery and software.
Servicing and technology provider businesses can grow around domestic demand to a point where they can then expand into international markets, and later often migrate into other markets. There is potential to grow more of such businesses around the agricultural, forestry and seafood sectors. The new Trade and Enterprise entity could have a lead role in fostering the development of such businesses.
Concluding comment
The agribusiness and forestry industries make a very large and growing contribution to New Zealand’s economy. If the issues and opportunities identified in this paper are addressed effectively, these sectors have great potential to lift New Zealand’s per capita income in a sustainable way.
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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