3 April 2008 Speech
Large Herds Association conference
Yarrow Stadium, New Plymouth
You have asked me to talk about creating value from New Zealand's primary sectors.
I think this is a critical issue for New Zealand, and in talking about it I want to pick up on the conference themes of
new ideas and innovation.
I want to look at the major risks we have to confront too, because the way we need to manage our risks aligns closely
with opportunities available to our primary sectors.
This conference is taking place against a backdrop of a drought.
The effects of climate change are one of the greatest threats we face.
If we handle it the right way, it will also be our motorway to higher value production.
So let me start off by saying a bit about the drought.
A lot of New Zealand is drier than usual.
There is real concern about Waikato, Wairarapa, Southern Hawke's Bay, and Eastern Marlborough.
I've visited all of these regions and seen for myself, things are not in good shape.
Closer to here this is a serious problem in the South Taranaki and I'm very worried about Wanganui, North Manawatu, Bay
of Plenty and parts of Canterbury along with the Mackenzie Basin, parts of Otago, and Southland.
The widespread nature of the drought adds to the concern.
Milk production is well down in areas like here in Taranaki, as well as in the Waikato, which droughts usually by-pass.
Feed has been in heavy demand because the drought has been widespread, and supply is low.
We have a job to do in supporting rural communities to keep morale up in these difficult times, when finances and
families are under stress.
So much damage has already been done that there will only be a long, slow recovery even if rain returns now.
It's important to take the issue seriously - and I mention this because it hasn't sunk in for quite a few people yet.
Even within the rural community - one of the rural publications attacked me last week for going to see the drought for
myself.
I don't have any doubt about the contempt and derision I would receive - and I would earn - if I sat in my office
without speaking to farmers directly at all. That attitude from the rural newspaper - that I should just sit in my
office and ignore the drought, reflects a contempt for rural communities. It suggests that if you are a farmer you don't
deserve attention and support from politicians. I think that is a poor attitude from anyone, and it's even worse in the
rural news.
We can't end the drought, but we can do something.
The government can be flexible about tax issues and welfare support and MAF is doing a feed survey.
A national drought committee is coordinating initiatives. An agricultural recovery coordinator is working with industry
and community organisations.
In the drought-hit regions, communities and industry are doing their bit.
They are sharing resources and information and working with Rural Support Trusts, which this Government helped develop
and fund into a national network last year.
I'm glad we put a lot of resource into supporting the Trusts after the last serious drought.
The situation is specially harsh for sheep and beef farmers who have had a couple of lean years.
For dairy, we are lucky that the drought has come when we are enjoying unprecedented returns.
I've mentioned the drought at some length because I think that, on top of the obvious interest to you as colleagues in
the primary sector, the drought is very relevant to this conference.
It's relevant because it gives us a taste of what climate change means for our businesses and our economy.
It is relevant also because it sends us a message about diversifying our risk, and changing the way we connect to the
world.
The best advice that science can provide tells us: climate change is real, it is caused by human activity, and we can do
something about it.
No one can say that a particular drought, or any weather event, is caused by global warming.
But we know that as our climate changes we can expect more frequent adverse weather.
The drought is an ugly taste of what we face unless the world takes on the challenge.
So our primary sector faces a very serious risk from climate change.
Bear this carefully in mind, because our political opponents seem to be in denial about climate change. Only this week,
two senior opposition MPs were refusing to say they believe in global warming.
What happens if we pretend it isn't true:
The climate will get worse and we will have more droughts.
Even if they thought climate change wasn't occurring, we would be damaged - consumers around the world are demanding
sustainably produced goods.
Regulators around the world are looking at restricting trade in unsustainably produced products. We have heard about
spurious tools like food miles. There will be other measures.
But these issues are not only risks - they are also opportunities.
If New Zealand is seen as a genuinely sustainable country we can send a very powerful and attractive message to
shoppers.
We will have a significant edge over our low-cost competitors whose production is not sustainable.
We will be able to respond to concerns raised in global trade talks and when we are asking for market access for our
products.
It's not only climate change where we need to perform better.
Our full environmental performance needs to be superior.
That was the thinking behind, for example, the clean streams accord.
The latest report on the accord, released in late February, showed we met some targets early and two targets for last
year were not met.
Compliance with resource consent conditions or regional plan rules for dairy effluent management averaged 93 percent
nationally.
But that achievement is below the Accord target of 100 percent compliance in 2003-04.
The Accord also set a target of a hundred percent of farms having nutrient management systems in place by 2007.
That target has been missed. 97 percent of farms have a nutrient budget - but a budget is not the same as a system.
Performance needs to be better.
Missing these two targets means agriculture is contributing towards high nutrient levels in lowland water.
Our fresh water is under increasing pressure - especially in rural areas.
Water is one of our most important natural assets. No one is going to stand by for long while the resource is
squandered.
It should be sobering to reflect on an aphorism quoted in the Dairy NZ pamphlet about nutrient budgeting - it's from
former General Electric ceo Jack Welch, and it says "control your destiny, or someone else will."
The thinking behind the clean streams accord was that farmers should take responsibility for cleaning up before someone
intervened.
So when targets in the Accord are missed - what do you think is going to happen? And what wider damage is going to be
done to the overall integrity of the industry?
A small number of farmers are letting down the majority.
Continued growth of the dairy sector depends on the support of the rest of the community. And therefore it is essential
that their needs and expectations are met as well.
The same applies across the sector.
I spoke at a national workshop on animal welfare issues this week.
No issue attracts more correspondence across my desk than animal welfare.
Considering our reliance on animal-derived proteins, New Zealand has been very fortunate so far to avoid much pressure.
Our record is exemplary too. But it is an example of the potential for great harm to be done, even through
misconceptions, unless we maintain very high standards.
You can not hope to develop a reputation for quality and reliability, and attract premium prices, if you are at risk of
being exposed for bad practice or irresponsibility.
When it comes to environmental performance, the government continues to work with the dairy industry.
The Dairy Environment Review Group has developed ambitious actions to reduce dairy farmers' environmental effects. Its
members come from Fonterra, DairyNZ, Synlait, Federated Farmers, Meat and Wool New Zealand, government departments like
MAF and Environment, government scientists and regional councils.
It has set targets for significant cuts in nutrient losses, better nutrient management and full adoption of the Clean
Streams Accord.
The vital relevance of this issue is that our markets expect us to have very high standards.
Countries that are perceived as 'dirty' are not going to be able to attract a premium from environmentally aware
consumers - if they enter the market at all. And that market segment is growing all the time.
If you think these problems are small - consider apple farmers, who are still struggling for access into Australia today
after being blocked over an issue more than eighty years ago!
I introduced the environmental issues by talking about the drought and the lessons of the drought for climate change.
But there are other lessons we can draw from the drought too.
One is that we should see our industry has some inevitable volatility and some constraints simply because it is exposed
to factors beyond our control.
One way to manage that risk is to widen the scope of our business. This means, widening the scope of things we do in our
businesses, and it means widening the number of countries where we do business.
Our focus needs to be wider than simply how much of our locally produced product we can send to overseas markets.
There also needs to be much more attention to how we can own more of other countries' production and distribution.
A drought will affect farmers in Taranaki or Waikato or Southland less if part of their income is derived from farming
by farmers overseas.
Think of it this way:
When I sit down at an Auckland cafe and order a Heineken beer, some of the price I pay goes to Europe. The beer is
poured in Auckland, bottled in New Zealand from hops grown in New Zealand and the brewery that makes it is in New
Zealand. But someone in Europe clips the ticket.
They partly collect because we borrow some of their capital. But they also collect because we use their brand, ideas and
recipes.
If they can profit when we drink our own beer, then we should be looking to profit more often when they drink their own
milk or eat their own milk products.
This is a difficult issue for many of our farmers to accept. Our instinct is to see ownership of overseas dairying as a
way of funding competition and putting ourselves out of a job.
But we need to be more sophisticated than that or we will never maximise our returns, we will never achieve the standard
of living other countries are able to earn, and we will always be in a defensive position.
Ask yourself if New Zealand could ever supply all the world's milk? Of course we couldn't.
But we can aspire to derive revenue even in markets where we can't directly supply.
We can hope to do it partly because we have a competitive advantage in growing milk. We know a lot about how to produce
milk efficiently.
We might find there are others who know a lot about marketing products that we need to learn from. For example, a
company like the giant Danone in Europe is much larger than Fonterra. It produces a far more diverse and high product
line.
Some of our future will be in entering these high values markets, including by producing and selling products that are
not grown here.
Fonterra's review of its capital structure has something to do with these challenges.
Fonterra Chairman, Henry van der Heyden, says all capital structure options will be considered and not just the Board's
preferred option.
The Government accepts that there are exciting international prospects in global dairying that Fonterra could benefit
from.
It's important for farmers to think through the wider opportunities for the sector to develop as it works through this
capital restructuring issue.
The prospects for our primary sector are very good.
There is a growing world demand for high-quality sustainably-produced protein.
It will only continue to grow as populations rise and become more affluent.
Given current annual production of approximately 15 billion litres, a growth rate of only 2% per annum implies total
production increasing to over 18 billion litres within 10 years.
Globally, the competition for agricultural land to produce biofuels is going to work in favour of agricultural-producing
countries like ours, too.
Our pastoral farming techniques have built in advantages.
We are more energy efficient than intensive animal farming, we typically have better animal welfare and we are free from
the negative consumer associations with 'factory farming'.
To remain competitive and sustainable - and to better align the food and pastoral sectors with trends and opportunities
in global markets - we need to invest substantially more in innovation.
I am excited about our momentum on this front.
Last month the Government announced New Zealand Fast Forward.
It is the largest ever investment in science and innovation.
This is genuinely a partnership between the government and the private sector.
The government is putting in $700 million, which over the life of the fund could grow to be as much as a billion. With
matching industry contributions, that amounts to two billion dollars over ten to 15 years.
The aim of this fund is to achieve a step change in the performance of our primary industries.
It's an opportunity, the likes of which don't come along very often, to change the economic destiny of New Zealand.
Fonterra has already signed up to be part of Fast Forward.
And I have high hopes for the future of science related to the industry.
Milk is an amazing product and scientists are just scraping the surface of its potential.
For example, a little over 100 years ago some very smart scientists worked out that oil was merely a bundle of
hydrocarbons that could be 'cracked' in a myriad of ways.
Their discoveries laid the foundations of the petrochemical industry.
I have no doubt that some very smart scientists will also find ways to crack milk in a myriad of elements and lay the
foundations of entirely new biotech industries.
There are already exciting business opportunities in fields that use milk as an ingredient, able to be sold for as much
as US$4000 a tonne.
Nutriceuticals can sell for even more.
The challenge for our industry will be to harness these opportunities, instead of just supplying the raw ingredient,
while someone else takes off with the IP and all the associated returns from new products.
I sat down around tables at the Primary Summit last November, while one company and sector after another confirmed to me
that we share a common vision of pushing New Zealand up the value chain. I sat down with scientists. I sat down with
company and primary sector leaders. Everywhere the message was the same:
We have amazing creativity in New Zealand.
Our science has enormous potential to make a difference to our production.
And it takes us working together to overcome the barriers and take our success to new levels.
Innovation is crucial to every stage of our food and farm industries.
Innovation is relevant to soil and to seeds, to varieties and breeds.
It's relevant to transport and energy inputs to the products served on plates and packages in the world's consumer
market places.
Innovation is vital to equipping our primary sector for an age when our climate is changing.
Innovation in our pastoral industries offers the single greatest chance to achieve a breakthrough that can restore the
place we lost in the seventies, eighties and nineties at the table of the world's winning economies.
It always takes more than one magic bullet. But science and innovation is a necessary part of the solution.
The alternative is a low skill, low wage economy that competes on price.
And while an economy like that might offer some returns to a few, it cannot deliver enough for the majority of New
Zealanders.
Everywhere you look around the world where economies have been successfully transformed to the benefit of their people
and their communities, the pattern has been the same.
It has been without exception, where the Government has worked alongside industry.
That is why development and innovation has been a passion and a priority for me for nine years in government.
It's why I am committed to the expansion of our primary sectors through smart, active policies and a constructive
partnership.
You asked me here to talk about creating value from New Zealand's primary industries.
I hope I have persuaded you that we can do a lot to position ourselves better in order to create value.
And also that we are taking some very positive steps along the way.
If we can keep going, the primary sector will continue to provide very attractive returns for New Zealand for a long
time to come.
ENDS