3 September 2010

12 minute read

Oceania

"If we look over New Zealand’s history our story is pretty straightforward. We have some dirt, we’ve got some water, we grow some grass and from that we convert it into protein. It’s this protein that we sell to the four corners of the planet, earn some export dollars and pay our bills back here at home. The Dairy industry, of course contributes significantly to that and is on a growth rather than contraction path. Everyday we are trying to figure out how to do the process in this slide better. "

He says that there are two important issues that Federated Farmers considers.

"The first is "farming viability". Simply put this is about issues that effect income and expenses, and trying to ensure the former is greater than the latter. This basic equation will be the same in twenty years time as it was twenty years ago.

"Issues around input costs, compliance, rates, employment, farm gate returns, supply chain issues, trade access, market structures and the impact of Government - locally or globally - monetary and fiscal policies will always have an impact and will matter in 20 years time. It’s obvious that profit will still matter.

"The second area of focus for Federated Farmers is around a bunch of issues which I’d term our ability to “farm for generations”. These are strategic issues that we need to ensure we get right so we can continue to farm for another century, whether we are viable or not.

He asked the audience whether these issues would still be relevant in the future?

"Environmental sustainability is critical. As custodians of the land and water we need to leave it better than we found it.

"We have set up and support the Landcare Trust and the QE2 Trust to do practical stuff, along with farmers paying millions of dollars to DairyNZ to work on practical solutions in the field. We also focus on celebrating environmental success through our recently announced support of the Balance Farm Environment Awards Trust and our support of Janette Fitzsimmons and her www.goodfarmingstories.co.nz website.

"Water is critical. Its ownership, allocation, management, quality and storage are in play right now. Indeed the decisions that are made in the next one to two years will be felt for the next fifty years. Water is absolutely critical to the dairy industry as it is to the rest of New Zealand. If we get that wrong, our success as a nation will be constrained. If we get the balances right, then our ability to harvest and benefit from one of our critical comparative advantages will be enhanced. Water need not be an issue in 20 years time.

"Water storage, we have been running a campaign for the last couple of years on water storage and if we prove to be successful, in 20 years time we will have secured some economic and environmental resilience for New Zealand. Currently there are about 30 projects up the eastern sea board of New Zealand that could be developed. We know from the Opuha dam that for every 1000 Ha irrigated, it pumps about $7.5 million extra cash into the economy every year and creates 29 additional jobs. And there are more fish and less drought and increased recreational opportunities for the wider community.

"We need to build resilience over the next 20 years – both environmentally and economically, and water storage does that. Right now we are in the worst recession we’ve had in three quarters of a century. But this wasn’t started by the global financial crisis. This was started by a drought. Indeed MAF calculated that the 2008 drought cost $2.8 billion.

"Urban rural understanding and perceptions around agriculture in general and dairy in particular will become even more critical because the decision makers are increasingly becoming more removed from the practicalities of the farm and the farmers are reducing in number, in a proportional representation system. So with Farm Day we are trying to address that along with some other programs. In twenty years time we will be another two generations away from people actively being involved in the farm.

"Infrastructure, we need roads to cart inputs on and produce off our farms and link us to global markets.

"But critically and I am passionate about this, we need rural broadband to enable us to connect with people, markets and shift and aggregate data to enhance productivity and production. Of the Government original $1.548 billion investment in broadband, only $48million was allocated to the rural sector.

"Research: this is not only about investment levels, but the incentives on the players in the innovation supply chain. We need to be obsessive about innovation. The risk is that we get complacent. The world is a competitive place and it will get more, not less, competitive over the next 20 years. If you sit on your hands thinking you are the best in the world, the world passes you by, just like this phone box. While it’s probably the best phone box technology on the planet, with mobile phones, with cameras and access to the internet, this phone-box has become irrelevant to its target market and simply has little future.

"The New Zealand dairy industry thinks it's pretty good, and it is, but it needs to keep ahead of our competitors, some of whom we haven’t yet identified. It needs to be relentless in this pursuit.

"Genetic and other research around our farming systems needs to remain at the forefront, which bring me onto our agricultural intellectual capital.

"Intellectual capital, I believe a key part of our wealth as a nation will be determined by our ability to capture the future cash flows from our genetics, from our farming systems and our other agricultural intellectual property. It will be our ability to develop models to monetize our weightless exports. Concern around foreign investment in farms is to some extend a reflection of our current lack of a successful Intellectual Property (IP) strategy and business model. We need one for New Zealand.

"The depth of our capital markets, right now the demand channel for protein is very strong and the supply channel for credit is very weak. The convergence of these two factors is seeing our Government challenged by the amount of foreign investment looking to invest in land, farmland and particularly dairy land. But our lack of savings and depth in our capital markets is, I believe, one of this country’s greatest challenges over the next 20 years. It’s part of our problem retaining our IP. We need to fix it, or we will simply become a Pacific Island which is a nice place to visit.

"The current dairy model sees aggregation of smaller units into larger ones, more intensely managed, with changing ownership structures. The traditional owner operator family farm is under some pressure, but perhaps the constraints on capital and the removal of gift duty will see a resurgence of that model over the next 20 years.

"Succession is a massive issue. The farmer in 20 years time is the young man or woman today, who makes a decision and has the ability to move into farm ownership. Our share milking structure, which Federated Farmers oversees, has been a huge success but is coming under pressure. Since we lobbied to get death duties and stamp duties removed, we have been working on gift duty. This will be the biggest enhancement to inter-generational transfers in over half a century, so hopefully succession in twenty years time will be about common sense. not compliance. But I do think new models will evolve. More use will be made of leases and equity partnerships, as is starting to happen now.

"Energy its cost and supply really matters.

"For Kiwi dairy farmers on the farm, energy is becoming more of an issue. If we were to shift to the northern hemisphere farming model, that many green groups wish us to, for example cart the grass to the cows rather than the cows to the grass, we will cripple any cost advantage we might currently enjoy. And of course it isn’t too good when the power goes off so it’s great that Federated Farmers has got written into law that Lines companies have to supply everyone they supply now beyond 2013.

"Animal welfare is increasingly becoming an issue. People are connected with animals but removed from the practicalities of farming. We need to retain our very high standards. As people become more digitized they will seek meaning in their lives so issues such as animal welfare will have more potency.

"Property rights, we push back on plenty of people who want to impinge on the property rights of farmers and their ability to do things on their own properties.

"Bio-Security. We are an island. It’s critical to our success.

"Safe food, we’ve seen from the experience in China that what consumers want is food that they can eat and they are not physically harmed by. Increasingly they want to eat for better health, rather than just sustenance. New Zealand has an excellent track record and reputation. It costs a lot of money to get it, so we can’t loose it. This will become even more important over the next 20 years. We must retain this advantage. If we don’t our food exporting economy will be very sick.

"Skills and Education, we need skilled people on our farms. Farming as we know is a complex business and we need very good people to run those businesses and their management systems. As has often been said it is people that make the difference. And we need skilled and motivated people on our science community and rural professional community. Getting the balance between education and immigration will be important.

"So they are the issues we focus on now and while the context may be different, I believe they will all be relevant in 20 years time.

"The unpredicted. One thing that wasn’t predicted that long ago, is the global financial crisis. And what I saw on the Bloomberg website on 25 August, was one of the most stunning statements that I’ve ever heard in my lifetime and it will likely impact every one of the next 20 years through inflation, deflation, reduced demand, civil unrest, impact of capital markets and other effects, because there is no free lunch."

Investors face defaults on government bonds given the burden of aging populations and the difficulty of increasing tax revenue, according to a Morgan Stanley executive director Arnaud Mares in the firm’s London office wrote.

“The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”

While the US government’s debt is 53 per cent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Italy has one of the highest debt-to-GDP ratios, at 116 per cent, yet has a debt-to-revenue ratio of 188, Mares said.

"This is an extraordinary statement. If it happens, the greenback will likely tank and will our NZD appreciate significantly? If our strategy in the dairy sector, indeed the wider agriculture sector is to wait to be saved by a falling dollar, then that is a very big risk.

"The global financial crisis has seen unprecedented volatility. So not only do farmers have to deal with the weather and off farm regulatory risk, but commodity, interest and exchange rate values are bouncing around significantly. And Fonterra new payment system and capital structure will see more volatility, which farmers and their banks will need to get used to. Costs of capital will rise and risk management will become more critical.

"Also, as a result of the global response, it simply means that those economies who have over indulged in debt have to take a drop in standards of living and those that haven’t, are growing. We are seeing a massive shift from West to East as one empire declines and another rises. China is taking back its preeminent global position that it gave up a century or two ago.

"And it’s followed by India, who today is where China was about 10 years ago. This is good news for New Zealand. With a large emerging middle class, we have an increasing number of increasingly affluent consumers who are not as price sensitive who will pay premiums for safe high quality foods and protein. There is a big shift from starch to protein, so the protein demand channel is very strong, so in that the trend is our friend.

"And there are massive demographic changes. These are driven by two key issues – lots more people and more people living much longer. The metrics are phenomenal. And then we have ethnic and family structure changes. This impacts both the demand and supply side of agriculture. There is a whole speech on just this issue alone. But not today!

"Along with a geopolitical and demographic change, perhaps we are seeing an emerging ideological change. We are moving from a global division on the basis of democracy vs. communism to one more based around religion. What does that mean for our markets? What does that mean for the products that we produce? What does that mean for how we produce them if that’s where the biggest growth is? So the location of our markets may very well change as it has over the last 20 years.

"And what our strategy is and our performance executing it will determine what happens in 20 years.

"A key message I want to get across today is that over the next 20 years, as an agricultural sector, we need to focus on solutions, not just the problems. This guy knows he’s got a problem and the longer he focuses on it and not the solution the worse it gets. For some that can be a challenge, but for the people in this room, I am sure it isn’t.

"So in conclusion, many of the issues we are concerned about now, we will still be concerned about in 20 years time. Our ability to have what it takes to farm profitability in New Zealand will still be critical. But we live in an increasingly volatile, unpredictable world where change happens quickly.

"The demographic and geopolitical changes that are happening are phenomenal. Technology advances and research endeavour’s provide an exciting catalysis for change on an ever shrinking globe. We need to look over the horizon, look to manage increasing risk and volatility. We need to build resilience now. We need to aggressively seize the opportunity, or otherwise someone else will. We need to do all this and take the rest of New Zealand with us if we are to have successful agricultural businesses and happy lives.

"People and their attitudes matter. People are critical to our future, for getting New Zealand to a point and getting this young girl to choose, when she grows up, to stay and prosper in our great country, and to get involved in agriculture. This is a challenge we must meet. Thank you. "

TheCattleSite News Desk