Hon Michael Cullen

27 January 2004

Speech Notes

Address to 2nd Bi-annual Wine Exporters Forum

Duxton Hotel, Wakefield Street, Wellington

In the last decade the New Zealand wine industry has progressed from being a precocious child, through a highly promising adolescence, and into a sturdy young adulthood. For many observers (perhaps the less well informed) it has come to represent a new vision for the future of rural New Zealand, combining as it does the rich flavours of the landscape, the aroma of tradition and craft, a dash of artistic New World flair and more than a hint of advanced technology.

Along with this rather misty image goes a new icon: the Kiwi viticulturist. A passionate individualist and innovator, self-taught, a tireless breaker-in of dry, stony soils, with a shelf full of gold medal awards and a long-forsaken past as a Queen Street merchant banker.

So much for the iconography. The reality, which is the focus of today's forum, is both more mundane and more exciting.

More mundane because making wine for export is a business like any other, requiring careful consideration of markets, product offerings, risks, logistics and finance.

And more exciting because of the prospect of securing a long term position of strength for New Zealand wines in both mature markets such as Europe, Australia and North America, and newer, emerging markets in Asia.

Last year MAF's "Situation and Outlook for New Zealand's Agriculture and Forestry" noted that the wine industry is well placed to capitalise on the trends towards premium and super-premium quality wine, in particular with the Pinot Noir and Sauvignon Blanc varieties.

The report forecast an increase in the land-area under grape vines from 15,400 hectares in 2003 to 20,000 hectares in 2006/07. It also forecast that export volumes would increase by over 160-percent to reach 60 million litres in 2006/07.

In export revenue terms, that means an increase from around $280 million to around $750 million over that period.

These figures demonstrate that the passion and expertise of our wine makers translate into a sound investment proposal, a fact that is borne out by the increasing level of foreign investment in the New Zealand wine industry, and the creation of marketing and distribution alliances which link New Zealand wine producers into the global wine industry.

Of course, while it is heartening to have experts and analysts confidently predict that an industry will scale high peaks in the years to come, those involved in production and marketing know that the intervening terrain has to be traversed on foot. There is a great momentum in the New Zealand wine industry, but no inevitability about whether it can meet the challenges it faces and fulfil its potential.

You are no doubt familiar with those challenges. They include:

- Relatively static consumption (particularly in the major markets in Europe) combined with worldwide oversupply;

- Competition from other New World wine producers in key markets such as the UK; and

- A need for investment in processing capacity, branding and marketing development, to maintain the ability of the New Zealand product to command the higher prices needed to offset the disadvantages of our distance from markets and higher average production costs.

Today's forum is an opportunity for the wine industry to develop the strategies to negotiate the next period of growth. It is important to recognise at this point that one of the strengths of the industry is the culture of coordinated effort that has developed amongst its disparate members. You have a well-functioning national body in New Zealand Winegrowers.

In this regard you are the envy of many other parts of the agricultural sector, and it is perhaps instructive that this was achieved without any intervention by government. There are those who would welcome more direct involvement by government, no doubt glancing enviously at the subsidy regime that Australian wine producers enjoy across the Tasman.

However, the history of government intervention demonstrates that it can - if poorly designed or continued beyond a very specific mandate - lead to producers taking their eyes off the ball, and becoming as attentive to the priorities of politicians and public servants as they are to their customers and shareholders. As many of New Zealand's primary industries can attest, too close a liaison with government can end in tears, and in a lengthy and painful process of retrenchment.

The preferred approach of my government has been to address broad sector-wide issues, and to leave ample room for the initiative of industry players. To seek partnerships, rather than attempt to lead where government has no superior wisdom.

This can be seen in the process of drafting and passing the Wine Act 2003, which came into force on 1 January this year. It replaces an outdated and poorly coordinated regime under the Wine Makers Levy Act 1976 and the Wine Makers Act 1981. The new Act is the product of a long process of consultation between government and the industry, and provides a single legislative framework for industry standards, government assurances, compliance and enforcement, and industry levies. As with all new pieces of legislation, there will be a period of adjustment; but I believe the new Wine Act 2003 will provide a firm platform for the next phase of growth in the industry.

At a more general level, we have made significant investments into research, in particular partnerships involving industry and Crown Research Institutes or tertiary institutions. Our goal is to make higher education and science in this country a more integral part of business, to apply our best brain-power and technology to the issues facing wine makers amongst others, rather than standing in splendid academic isolation.

And, specific to the primary sector, we have established the Sustainable Farming Fund, a multi-million dollar facility to support new low-impact approaches to land use, water utilisation and protection of the environment. The wine industry has so far been an enthusiastic supporter of this fund.

So our approach is generic and permissive, rather than tightly targeted and prescriptive. We have attempted to steer a course guided by pragmatism rather than by any doctrine, and focused on building the infrastructure which New Zealand businesses need to underpin their long term health.

That infrastructure has taken a variety of forms. To mention just two examples:

- We are making significant investments in our transport infrastructure over the next decade, and although much attention has been paid to the extra $1.6 billion to fix Auckland's transport woes, it should not be forgotten that the package also directs $1.35 billion for the regions; and

- We are investing tens of millions in the telecommunications infrastructure over the next two years with the aim of bringing broadband internet access to remote rural areas.

The first of these initiatives will speed the transmission of goods to ports and markets. The second will enable wine makers, among other businesses, to become more virtually present to their markets. This is particularly important for regions such as the Hawkes Bay and Gisborne, which are relatively isolated communities whose prosperity has traditionally been hampered by the distance to markets and lack of visibility.

A brief word finally on the current state of the New Zealand dollar and its continued appreciation. Clearly this has an impact in the short term on the revenue that New Zealand exporters earn. However it is important to understand the broader set of forces which impact upon our international competitiveness.

Media commentaries have tended to focus on the substantial appreciation of the Kiwi against the US dollar, some 25 per cent during 2003. What receives less attention is the fact that the New Zealand dollar has actually depreciated against the Australian dollar and appreciated more modestly against currencies such as the British pound and the euro. These currencies are, of course, more relevant to the New Zealand wine industry than the US dollar.

Nevertheless, the trade-weighted exchange rate has appreciated by 12.8 per cent since the start of 2003 and is currently around 43.5 per cent higher than its 2000 low. Overall the TWI is currently around 12.3 per cent higher than its post-float average.

The two key factors driving this appreciation are the generalised weakness in the US dollar and the out-performance of the New Zealand economy in world terms. Although exchange rates are notoriously difficult to forecast, there are few signs of these fundamental drivers reversing in the near term.

Much as I might wish otherwise, there is nothing I can do to alleviate the perception of current sluggishness in the US economy. And, on the other hand, the recent strength of the New Zealand economy is something to be celebrated, especially as it has been achieved without significant inflation and has been accompanied by rates of employment that have not been seen since the early 1980s and increases in household incomes and wealth.

I think the essential discipline for the medium to long term is to maintain a focus on what will create sustainable international competitiveness for New Zealand businesses. And for that it is hard to find a better example than the wine industry.

You are focused on producing a high value product with a strong and unassailable brand advantage, and on placing that product in markets where it can command premium prices. You are working towards higher levels of investment in key components of the value chain, and better coordination in marketing and distribution. And - as I mentioned earlier - you work well together as an industry and have energetic and imaginative leadership.

These factors do not guarantee success; although I think it is fair to say that their absence would probably guarantee failure.

You have a very full programme ahead of you for the next two days, and I trust this Forum will be a productive one for all of its participants.

Thank you.

ENDS

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