Situation and outlook for New Zealand agriculture and forestry (August 2007)
4 Productivity isn’t everything … or is it?
Productivity gains generated from the reallocation and better use of resources can take New Zealand only so far. Once efficiency gains are realised, the primary sector needs innovation and new technology to continue driving productivity gains. Our growth in productivity has been dominated by the economic reforms of the mid-1980s. We are now facing many new challenges to improving our productivity. Our future depends on increased productivity.
Innovation is often a matter of necessityA common response to weak international prices, high exchange rates, barriers to trade, and other countries’ subsidies is to seek efficiency gains by increasing scale and substituting capital for labour. New Zealand’s flexibility to combine properties and shift land use from one activity to another in response to shifting market returns, highlights a real competitive advantage New Zealand has had over some other countries. |
Ultimately, the primary sector needs innovation to generate new knowledge to allow it to expand the production frontier. We need new technology that will allow us to produce more, produce highly valued products, and allow intensification without downsides such as environmental degradation.
There are long time lags before the results of investment in research and development are realised, because of the nature of the biological system in which we are operating. It is clear that the competitive advantages the sector has acquired to date strongly reflect the accumulation of intellectual property developed over decades of investment in research. The consequences of any underinvesting in research and development in primary industry now will become apparent only after a decade or two.
Capital is important. New technology is often more capital intensive than old technology is. It is important to ensure there are no inadvertent barriers to access to capital. New Zealand’s small domestic market could limit its capital growth. Therefore, it is also important to have policies about tax and capital accumulation and financial markets that facilitate, not hinder, capital growth.
Biotechnology and nanotechnologyTechnology, such as new hybridisation techniques, has the potential not only to generate on-farm productivity gains, including reduced greenhouse gas emissions from our livestock industries, but to provide a platform for generating new seed, plant-breeding, and related biotechnology service industries. Nanotechnology may also revolutionise productivity. |
Growth and productivity
Research shows that since the late 1980s, the primary sector has experienced strong growth in output and productivity. On-farm and on-plantation productivity growth was higher than the economy average in that period.
From the year ended 31 March 1988 to the year ended 31 March 2006, agricultural output grew 1.5 percent a year, but productivity grew 2.2 percent a year. In effect, fewer inputs were used to produce more outputs, freeing up resources for use elsewhere in the economy.
A similar story exists for forestry and logging. From 1988 to 2006, productivity growth was 2.2 percent a year. Growth in forestry and logging was 4 percent a year because of increased productivity and increased contributions of capital and labour of 0.5 percent and 1.2 percent respectively.
The off-farm and off-plantation stories are not so positive. The associated processing and manufacturing sectors experienced lower productivity growth than did the on-farm sectors. Average productivity growth in food, beverage, and tobacco manufacturing was 1 percent a year from 1988 to 2006, while in wood and paper products manufacturing it was almost flat during the same period. (See Figures 4.1 and 4.2.)
Research also shows that productivity growth after 1984 was significantly higher than growth before 1984 for both the agriculture and forestry sectors (3.4 percent compared with –0.5 percent for agriculture and 3.5 percent compared with 1.3 percent for forestry). However, it was not until about 1992 that productivity growth in the primary industries really began to recover from the 1984 economic reforms.
Figure 4.1: Agriculture, and food, beverage and tobacco manufacturing productivity growth,
years ended 31 March 1987–2006
Source Statistics New Zealand and MAF.
Figure 4.2: Forestry and logging, and wood and paper product manufacturing productivity growth,
years ended 31 March 1987–2006
Source Statistics New Zealand and MAF.
The challenges ahead
The rise of the discerning global consumer
Consumers in key markets are becoming more sophisticated and discerning. They now place greater emphasis on buying foods that are safe, fresh, convenient, and produced in a sustainable manner, but that are also competitively priced. At the top end of the market, even those “rational” attributes are not enough. Increasingly, consumers will be seeking a more subliminal, even emotional, sense that the product is “right” for them. If the sector is to build its markets and command premium prices, it needs to demonstrate that it offers products of integrity in many dimensions, for example, safety, nutrition, the environment, carbon content, and animal welfare.
Tariffs
Although tariffs and quotas overseas have been reduced, they are still 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. 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 United States (US) dairy products also face high tariffs, for example whey powder faces a tariff of 108 percent, dairy spreads 122 percent, and butter 92 percent.
Demographic changes
The composition of New Zealand’s population is changing, with only about 14 percent of the population living in rural areas. Over the last couple of generations, New Zealanders’ first-hand experiences of, and association with, agriculture and rural life have diminished sharply. This has contributed to labour and skill shortages in the rural sector.
Urban dwellers in search of aspects of a rural lifestyle are pushing out beyond the fringes of suburbs. Lifestylers and farmers are becoming neighbours and, in some very real ways, competitors. An emerging prerequisite for successful farming is for farmers to successfully coexist with non-farming neighbours. The imperative is to have sustainable production, processing, and distribution systems existing alongside other land uses.
Increasing supply and technological catch-upThe Food and Agriculture Organization of the United Nations reported that since the late 1980s meat production in developing countries has grown 230 percent and dairy production 200 percent. Much of this growth has been because technology and practices already developed and/or used in New Zealand have been adopted. In the future, the technology gap between developed and developing countries will close even faster. Productivity growth in developed countries is predicted to slow down, while developing countries such as China, India, and those of Latin America will achieve high productivity growth in all primary subsectors. |
Productivity and the future
Huge potential exists to improve primary sector productivity. That farmers and foresters continue working smarter not just harder is a positive sign for productivity growth.
Since the late 1980s, more farmers have adopted best practice approaches to farming. The challenge is to innovate and shift out the production frontier. This can be done by using new technology to cut costs or by adding value through product differentiation, such as convenience foods or foods produced in a sustainable way.
We think it is critical to have an efficient research and development system that can also disseminate information about innovation. Our policies and regulatory system need to facilitate capital mobility and enhance production efficiency and flexibility, not create inefficiencies and impose rigidities.
Primary industries 2020The Primary Industries Summit to be held in Christchurch on 28 and 29 November 2007 will focus on the theme of succeeding in a changing global economy. Participants will be challenged and inspired to think about what it will take to thrive in business in 2020. Industry has driven the summit’s programme. The summit will address seven key questions.
Summit participants will have a chance to hear how influential overseas speakers see the global marketplace changing over the next decade, and how innovative New Zealand business leaders are planning for their business into the future. It will also be a chance to network with key business leaders from across New Zealand’s primary industry sector. For futher information contact Stephanie McPherson, MAF Policy (stephanie.mcpherson@maf.govt.nz). |
Contact for Enquiries
Manager
Monitoring and Evaluation
MAF Policy
PO Box 2526
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NEW ZEALAND
Phone: +64 4 894 0623
Fax: +64 4 894 0741
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