Speech – New Zealand Government

This arresting phrase Agriculture: New Zealands Silicon Valley is not mine. It is Sir Graeme Harrisons and I cant improve on it. Sir Graeme, you will recall, is the founder and Chairman of ANZCO Foods, one of New Zealands …
Hon Tim Groser
Minister of Trade
Minister for Climate Change Issues

Address to New Zealand National Fieldays

This arresting phrase – ‘Agriculture: New Zealand’s Silicon Valley’ – is not mine. It is Sir Graeme Harrison’s and I can’t improve on it. Sir Graeme, you will recall, is the founder and Chairman of ANZCO Foods, one of New Zealand’s largest exporters.

I like the phrase for three complementary reasons:

· First, it conveys a real sense of optimism – and we have every reason in this country to be optimistic about our future in the first quarter of the 21st Century.

· Second, it captures the reality that agriculture will be as important to New Zealand’s future as it has been to our past.

· Third, it also captures a more subtle idea about our agriculture future. Yes – agriculture will continue to be the economic backbone of our country’s export future. But it will be a vastly more sophisticated agriculture with innovation at its centre.

This is indeed the theme of Fieldays, the biggest annual display of agriculture technology in the Southern Hemisphere, and always hugely supported by the people of Hamilton. Every time I come here, I am reminded of just how high tech our agriculture sector is. These days, you are more likely to see a computer device in a young dairy farmer’s hands than a spade. Allow me to elaborate on these themes.

NZ: Positioned for Growth

If we stay on the broad trajectory we are now on, we have every reason to be optimistic about New Zealand’s medium and long-term future. Let me repeat the big numbers around our macro-economic performance. And make no mistake about it – sustained good economic performance rests always on the foundation of sensible, orthodox macro-economic and monetary policy, not the latest recycled ‘bright idea’ as to how to secure a free lunch.

We have growth around 3% and good prospects of sustaining this. Our inflation rate is around 1%. Our unemployment rate, though higher than we want it, is just above 6%. Our Government net core debt to GDP ratio is a little under 30% when the US and Eurozone are around 90%.

We are not resting on this – we particularly want to see more disadvantaged groups in our society in paid, full-time employment. But there are many countries in the developed world that would give their political back-teeth to have those numbers.

On this foundation, we are positioned to move ahead in the Asia Pacific and with other emerging economies. The shift in power to the emerging economies, led by China but by no means confined to China, is the big story of this age. Basically, the world’s wealth is being realigned with where most of the world’s people live, instead of being concentrated in what we have called ‘the developed world’.

This creates huge opportunities not just for the people who live in these emerging economies, but for other countries that can provide what these people want. This is not nice futuristic theory I am describing – some type of ‘Ted Talk’ for thinking farmers. We have already seen its impact. Our exports to China have tripled in the last five years. But literally, “you ain’t seen nothin’ yet”. The middle class of these countries is about to explode. It will grow from around 500 million today to around 3 billion in the next 15 years.

This is not like some ripe plumb, ready to fall into our hands. It is simply an opportunity. To grasp it, we need to continue to ensure, for example, we have the right tax policies, 21st Century infrastructure suitable for a small but successful outward-looking economy, the right regulatory frameworks in place governing water, food safety and myriad other issues.

This agenda is all set out in the Government’s long term plan for structural policies, known as the Business Growth Agenda. It covers six broad policy areas: Export Markets, Infrastructure, Natural Resources, Skilled and Safe workplaces, innovation, capital markets. None of it is straightforward and we are just working our way through the long-term policy adjustments required to deliver on the outstanding potential of this economy. We know where we want to be: to return NZ to the position we used to enjoy – a small, but highly successful cog in the larger global economy.

With respect to the Business Growth Agenda, my prime focus is on the first of these policy areas: export markets and the trade policy component of that agenda in particular. Here, we need to continue with our great success in recent decades creating the right trade platforms for our country. Rising middle class incomes will not do a thing for New Zealand if we are cut out of their markets by prohibitively high market access barriers. That was our problem in the last quarter of the 20th Century with the traditional developed country markets. They certainly had the income levels and demand for our exports, but we could not get access to their consumers because of massive protectionist barriers and subsidies.

As I look to our future, which lies largely with Australia and the emerging economies, we are doing really well here and I am confident it will get better. In particular, TPP, now that it is the centre of US Trade Policy and involves Japan, Canada and Mexico, is an enormous opportunity.

Agriculture: Its Place in our Export Future

Move to my second point about the phrase – ‘Agriculture: NZ’s Silicon Valley’ – it absolutely nails the point that agriculture will be as important to our future as it has been to our past. And this is strongly related to the rise of the emerging economies. These emerging economies look to New Zealand primarily for safe, high quality food and agriculture technology. We have it, and they want it.

Of course there is more to us than just agriculture. All New Zealanders understand that. But we don’t need to get involved yet again in this internal and finally meaningless conversation about ‘agriculture versus non-agriculture’. The real choice facing New Zealanders is about shifting resources into exports, not a choice about what type of exports we have. Or, if you want to be more technically correct, the real choice is between the traded sector and the non-traded sector. There is no fight here between, say, horticulture exports and high end export-oriented software companies like Orion Health, which are starting to make real progress. We need both to perform in the global economy and as Trade Minister I switch inter-changeably between supporting both these export sectors.

Are we doing enough to achieve our goal of a ten per centile increase in the ratio of exports to GDP by 2025? No, but we are doing rather better than I suspect people think. In the last five years to March 2012 we have averaged 5% annual compound growth in total exports of goods and services, the last two years of which were considerably higher.

This is, of course, in the teeth of the continuing impact of the biggest global economic crisis in seventy years and what the Governor of the Reserve Bank has called an overvalued exchange rate. We have seen the top coming off the US cross rate a little bit recently. However, fundamentally this misalignment will be corrected, at least in my view, only when international markets start to price in an expectation of a structural shift away from quantitative easing and, associated with it, near zero interest rates in the major developed economies.

This extraordinary period of near zero interest rates in the developed world cannot last indefinitely. At some stage, a tightening cycle will happen internationally and that in turn will create all manner of problems with households and businesses around the world that have not rebalanced their books. As Warren Buffet said, it is only when the tide goes out that you can see who has been swimming naked. Having said that, I admit that economists are pretty good at predicting what will happen, but terrible about telling you when.

Putting this aside, let’s focus on longer-term drivers of change behind the outstanding prospects for New Zealand agriculture. Fundamentally, we are at the beginning of the same process of globalisation of trade in food as was the case for globalisation of trade in industrial products some fifty years ago. Revolution is quite the wrong word and concept. It is an evolutionary process and it is about readjusting to new realities in food security.

As a result of horrific experiences in war, including in particular, the Second World War, food security has been defined pretty much as one and the same thing as getting as close as you can to food self-sufficiency. New Zealand, here, has always been a complete outlier, since we export about 90% of our food. Broadly speaking, we are at the early stage of agriculture liberalisation and a consequential re-interpretation of food security to include security around imports as part of the equation.

I have no doubt that our FTA with China is, in effect, a small part of China’s food security for the future. Our investments in Chinese agriculture production, and we are just starting down this track, is another small part of this phenomenon.

Outward Chinese investment in efficient agriculture exporting companies is another part of this global trend. At the OECD Ministerial Meeting in Paris a couple of weeks ago, I noticed in the Financial Times that Shuanghui International Holdings has bid some $7 billion dollars for Smithfield, situated in Virginia, the United States. Smithfield is the world’s largest pork processor and pig producer. The investments by Bright Dairy, Yashili and Yili, three of China’s largest dairy companies, in our own country are part of the same pattern. Food security for China is now a global concept and they are systematically securing that future. Good on them. It is a far superior and more rational strategy of food security than a pure policy of self-sufficiency, regardless of environmental and resource constraints and economic reality.

This is all about the globalisation of agriculture, which has trade, investment and technology aspects to it. I welcome it. Globalisation is not a disease to be avoided, but an opportunity to be grasped. It has huge upside potential for New Zealand in particular. It will underwrite jobs, tax revenue and higher real wages for the next generation of New Zealanders.

Our agriculture prospects are nothing less than outstanding. Here’s an interesting ‘factoid’. We all know Australia is a hugely successful economy – in fact the most successful economy in the developed world in the first decade of this century, even if it is facing a few rough edges at the moment as the mining investment boom tails off.

We also know Australia, the Chair of the Cairns Group of agriculture exporting countries, is a major agriculture exporter by world standards. Well, it turns out that our agriculture exports, both unprocessed and processed are nipping at the heels of the Australians – and that is in absolute, not relative, terms.

There are always arguable issues around definitions of what constitutes, for example, ‘agriculture’, since for both Australia and NZ a fair part of our respective manufactured exports will be highly processed agriculture. But as far as I can tell from officials ABS statistics, total Australian agriculture exports for CY 2011 totalled NZ$35 billion, using 80 cents as the cross rate for the currency conversion. Our total exports are just behind that at NZ$32 billion. Considering the vast difference in size of our economies, that is truly an objective measure of our standing and success in world agriculture markets.

Furthermore, we have great growth prospects. We are aiming to double those agriculture exports by 2025 and we think this is achievable.

The Growing Sophistication of Agriculture

The third point that I think that great phrase – ‘Agriculture: NZ’s Silicon Valley’ -captures relates to the growing sophistication of our agriculture future. So it is not just about grinding out higher volumes of food exports; it is a very different future and we need very sophisticated commercial and policy strategies around that future.

Water in particular is the absolute key. Seventy per cent of the entire world’s fresh water is used in producing food. We have water in abundance. It is just that we are capturing only around 5% of our annual rainfall. If we can invest in environmentally sound water storage and irrigation – and we have advanced plans to do just that – we can make an even bigger contribution to feeding an expanding global population and strengthen our own economic future. NZ agriculture exports can, in a very real sense, be considered a ‘virtual water exporter’, taking pressure off countries like Saudi Arabia, India and China which have massive water resource constraints.

So we need to continue to improve the environmental impact of our agriculture. This is a broad agenda around water management, wetlands, effluent management and a range of other important issues. One aspect of that is my direct responsibility is around the climate change impact of our agriculture. That is an entire subject matter in itself. Just remember a few facts.

No Government in the world has imposed a tax or a carbon charge on biological emissions and there is no point – other than an ideological one – in doing so until cost-effective and safe alternative technologies are available. The recent upset over DCD, which was in part a nitrification inhibitor, tells how careful we need to be.

Second, New Zealand is the most carbon-efficient major agriculture exporting country in the world. For our major pastoral industries, they have sustained around a 1.5% decrease per annum in carbon emissions per unit of output over the last 20 years or so. That is outstanding. The only reason our per capita emissions are high by international standards is not some ‘black mark’ about NZ being a ‘dirty country’ in terms of emissions. Quite the opposite. It is simply because around 90% of what we produce is exported to people who live outside our country. Most estimates suggest we feed about 50 million people. If we were a more ‘normal’ agriculture country and most of those 50 million people we feed lived within our borders, NZ’s per capita emissions would drop to near the bottom of international league tables. Do the math.

Any attempt to deliberately price carbon to reduce our agriculture output to make some ideological point would not only be an economic mistake of grave proportions, it would worsen the problem of global anthropogenic-induced greenhouse gas warming since the production gap would be filled by less carbon efficient producers than ours. Utter environmental and economic madness, in my view.

Finally, we are hardly sitting on our hands doing nothing about biological emissions. We are leading the world in having established the Global Research Alliance on Agriculture Emissions. This involves linking in climate change and agriculture scientists from over 30 countries in the search for alternative technologies and management systems that can achieve two global goals of great importance – increasing global food production by 70% by 2050 and reducing the emissions footprint of that extra production.

Above all our agriculture exporting future will be driven by innovation. Commercial realities are already forcing this on our agriculture sector and we are quite deliberately trying to accelerate this process through a number of innovation policy initiatives, the most important of which is the PGP, or Primary Growth Partnership, which is business-led, market driven primary sector innovation.

First, look at what is happening anyway in the market place. Our sheepmeat exports, for example, look nothing like our exports a few decades ago. When I started out as a young trade negotiator and analyst, 90% of our sheepmeat exports were frozen carcasses. Today the figure is less than 3%. The rest of it is all high end stuff.

Looked at more broadly, our processed food exports are making great strides. Even within processed food exports you can see this sharp shift towards higher value, more complex products. We have just had a very interesting analysis done for a range of agencies called ‘Driving Growth in the Processed Foods Sector’. I have done a bit of ‘data mining’ from this fascinating study. It is exciting and encouraging.

In the ten years to 2011, the compound average growth annual growth rate (CAGR) of processed foods has been 15%. At a CAGR of 15% you double any number roughly every 5 years. Within that stellar growth rate, highly sophisticated nutraceuticals and other innovative foods have been growing even faster. This reflects the increasingly porous nature of the distinction between food as nutrition and food as health. This is huge in Chinese and many Asian cultures. We have an extraordinary natural resource base and an extraordinary brand from which we can leverage. Much as I admire the outstanding future of NZ wines, I suspect ten years from now our natural food exports will be much bigger.

The Primary Growth Partnership is, as I said, an attempt to turbo-charge these commercial developments, working closely with business. To date, we have kicked in around $300 million in 13 projects and our business partners have added some $350 million extra. So more than half a billion dollars of R&D funding is working on projects large and small. Let me give you two practical examples.

There is a tiny, but very strategic project to find cost-effective alternatives to methyl bromide, which is a fumigant for our forestry exports. It is also an ozone depleting substance. But it underwrites some $3 billion dollars of exports. We need to find alternatives.

At the other end of the scale is a $43 million investment in generating more value from the red meat carcase to transform our export future into a consumer-centric food and healthcare business. This programme is called ‘Food Plus’.

It is about innovation and this is a large part of our future.

We also have to admit that we have a lot to learn. The new supply chains, or global value chains, that we are just starting to create with the great emerging economies, primarily but not solely in Asia, create new demands. How well do we know our customers? Well, we have had two sharp reminders on that score – the problems over DCD in certain dairy products and some issues we had to resolve over meat certification in China.

I am not going to re-litigate those issues here: after some uncomfortable moments, we have found a way through and the trade is flowing. But I don’t think anyone can say that we have a clear run to the line here. We need to develop improved infrastructure – in the broader sense of that word ‘infrastructure’ – to support these rapidly growing and unfamiliar markets. We need a new generation of NZ experts who are not just highly technically skilled – and we have some of the best in the world. But in my view, they need to be steeped in the languages and cultures of our new markets. I am not being critical here. The situation has exploded on us. But a number of NZ institutions in the public and private sector need to start thinking through long-term strategic responses, particularly in the area of HR strategy, and these two events should be regarded as a wake up call.

This was not an issue from 1880 to 1975 when our export economy was essentially geared to selling agriculture commodities to the Anglo-Saxon world of the UK, Canada, US and Australia – but it is an issue today. Recall the deep accumulated wisdom of the phrase – ‘the customer is always right’. Let me repeat the point: do we really understand our new customers? This is not just a matter for Government agencies; it is a matter for every NZ agribusiness that wants to base its future on these markets.

The Ministry of Foreign Affairs and Trade went through this shift in mind-set in the late 1970s when we realised that we were not an offshore island in the English Channel. The entry of the UK (then taking 50% of our exports) into the then unreformed protectionist morass of the EEC’s Common Agriculture Policy (it is much improved now) sent shockwaves throughout NZ. I remember political leaders of the day like Jack Marshall and Trade Minister Brian Talboys, sending out the panic signals – ‘diversify, diversify’. That realignment away from Europe in particular has dominated my entire professional life.

So the Ministry of Foreign Affairs, as a first step, sent off at least some of our smart young men and women to Tokyo, Beijing and other capitals to learn the languages and cultures and spend a fair bit of their careers there. We have benefited enormously from that investment. Other agencies, including Treasury and the Reserve Bank, take note. You all know where the financial power is shifting to – it is not just about NZ exports. And do not overlook the smart young New Zealanders who are of Asian heritage.

Our vastly more sophisticated agriculture future will also be about the export of our world-class agriculture technology. Don’t get me wrong: I still see the base of this great future ahead for NZ agriculture our production base in NZ. But I remain convinced that we can supplement that by selling our Intellectual Property in agriculture.

There is nothing new in this. We have been doing this for decades. But the scale of the opportunity is on a different scale. There is simply no way New Zealand can meet the opportunity of the growth in emerging markets from a NZ production base. So either we profit from growth in agriculture production elsewhere or someone else will.

By ‘intellectual property’ I mean something far broader than products and processes formally protected by patents and copyright. The big star in this year’s OECD Ministerial Meeting was a concept called ‘Knowledge Based Capital’ (KBC). It turns out that for Apple, for example, the bulk of its value is knowledge based capital, not formal IP. Design and management know-how are huge.

One practical example is Fonterra’s operation in the United States. The US dairy industry is part way through a process of transition – from a deeply defensive, inward looking past to an outward-looking, export-oriented future. The real winners from comprehensive liberalisation in TPP in dairy will be the US industry, not NZ, simply because our dairy production base is far too small to seize the opportunities. This is happening already. Some 60% of the increase in demand for milk protein in recent years has gone to the US dairy industry, compared with 12% for NZ. Today, some 14% of all US milk is exported.

But who is the largest exporter of US milk products? Fonterra. Why? KBC – knowledge based capital. In this case it is the marketing and distribution channels of Fonterra, the world’s largest milk exporting company that is the real jewel in the crown.

I am not sure we have yet developed the business models to fully leverage our agriculture technology. We are certainly making efforts. This was a major theme of the Prime Minister’s recent visit to Mexico, Colombia and Chile and there is no question that the agri-business delegation with the Prime Minister saw the scale of the opportunities. And only a few weeks ago, NZTE led a group of agri-business to Russia to explore the opportunities for NZ agriculture technology. There is a huge hunger in Russia for NZ expertise, equipment and genetics. There is also a very interesting investment proposition taking shape in the Russian Far East.

The international market for agriculture technology is huge and will grow. Agriculture machinery and equipment – and we have our own world class machinery and equipment on show right outside this room at Fieldays – was worth US$111 billion in 2012. We know we have real niche strengths here in areas such as electric fencing, milk meters, and livestock weighing equipment.

But the market for our agriculture technology is more than just ‘kit’. It includes includes soil testing, pasture species development, DNA testing, sustainable resource software that enables planning around water quality, effluent disposal, and resource management compliance. These premium exports are a product of the practices and technology designed and employed by NZ’s agriculture industries.

The bigger game of course, but fraught with risk, is for our agriculture companies to take equity positions, rather than just sell licensed technology. It is happening – particularly in China with Fonterra’s ambitious plans to produce 1 billion litres of high quality milk in China in over 30 large farms. It is happening in Chile and Brazil and will happen in Russia and India.

But this is not straightforward and my general sense is that we are out of our comfort zone and this is going to be a complicated journey. Generally, the commercial history of New Zealand companies’ efforts to invest outside NZ is poor, though we have had a few welcome exceptions. It will take time for NZ agribusiness to find the right business model to do this profitably and without too high risk exposure.

The Government will of course continue to do whatever it can to support this, but finally it rests on commercial decisions. We just need to recognise that this country needs to lift its game on outward investment. Some economists have argued we don’t have a trade problem, we have an investment problem – and if you compare the average rates of return on our FDI in other countries compared with the average rate of return on FDI in NZ made by Australia in particular, these economists have a point except I would say the two ways of earning a living – exporting from our domestic base or investment – are not alternatives. We need them both to participate more fully in the complex global value chains developing. I am just stating the obvious when I say that while I would support any commercial enterprise in any sector with a good business plan that involves strategic investments and thus gives us an equity stake in far bigger economies, the one thing we know how to do well is agriculture. Agriculture has to be the most obvious thing to focus on. Investment has to be part of the more sophisticated future ahead of us in the first quarter of this century

In summary, ladies and gentlemen, let me repeat the key theme. I think Sir Graeme Harrison is right on message. Agriculture is indeed NZ’s Silicon Valley. This is not going to be at the expense of non-agriculture, internationally efficient export activities such as high end services exports – which incidentally are powering ahead with an average annual growth of nearly 10% – but it will be our export backbone for many years to come.

This is the one area of global politics and the economy where we are not small – we are a middle sized player with standing internationally and influence. Our total agriculture exports, processed and unprocessed, are pretty much the same as Australia’s – and Australia is rightly recognised as a major player in this league.

We have the world-class technology; we have access to the emerging markets through these new trade agreements, some of which are fully negotiated and others yet to be finessed such as TPP. We also have the human capital – but I think there are some systemic HR issues for NZ Inc. that need to be addressed here.

So, to sum it up, we are in the right space at the right time and agriculture will play a huge role in this. There is every reason for us to have some measured optimism that the next 25 years are going to be far better for our country than the period of transition in the last quarter of the 20th Century. Now we just have to put in the hard yards to make it happen.

ends

Content Sourced from scoop.co.nz
Original url