The New Zealand Land & Food Annual 2016: Volume 1

By Massey University Press

New Zealand depends on what our farmers, foresters and horticulturalists grow. When agriculture catches a cold, the entire economy sneezes. Right now things are looking a bit gloomy. What's the crisis telling us we should be doing better? That's where The New Zealand Land & Food Annual comes in. It features cutting-edge, provocative and expert views on the broad agrifood and agribusiness sector. It aims to serve the national interest, inform debate, and to be of value to experts, policy makers and the general public. Each edition has a defining theme. The first addresses dairying's current woes, and asks: Given the huge risks NZ Inc.' faces, is agriculture headed in the right direction, does it need to be reshaped, and how can we make it attack- and disaster-proof? Plus: What if we were to face trade boycotts because of our weak response to climate change? Are we really smart enough to take full advantage of export markets? And how will new technology change the way we farm?

• Language: English
• Publisher: Massey University Press
• Release date: Jun 1, 2016
• ISBN: 9780994132550

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challenge.

Looking Back:

Look forward

Robert Anderson

Former Deputy Vice Chancellor, Massey University

It is now three decades since the introduction of the current model for managing the national economy. Whether it is time to revisit the approach in favour of some alternative is a matter for the experts to debate in the remainder of this publication. My task is to reflect upon some of the issues that surrounded its adoption three decades ago.

Without doubt, the economic reform agenda unveiled by the newly elected Labour government after the 1984 snap election was as radical as it was controversial. Indeed, the ensuing policies and events were to constitute a defining chapter in the entire history of the nation. It would be fair to say that few could have imagined the enormous transformation that life in New Zealand was about to undergo.

What was some of the background that necessitated such radical change? The ongoing (over)dependence of the national economy on agriculture — more precisely, farming — was becoming unsustainable, especially if New Zealand citizens aspired to a first-world standard of living. Triggered by Britain’s 1973 entry into the European common market (as it was then known), successive governments in the 25-year period leading up to 1984 had sought to diversify the national economic base. As a result, various sectors had become heavily protected via tariffs and import licensing, financial systems were tightly regulated, anti-export influences unfolded, there was low economic growth, and balance of payments difficulties emerged. The New Zealand economy had essentially been insulated from the changing realities of the international marketplace. By 1984 the national budget deficit and the cost of farm support schemes, social welfare and so on had become unsustainable. In the words of the then Minister of Finance, the national economy had become ‘sluggish and overweight’. A more blunt assessment was ‘the nation was living in a fool’s paradise and on borrowed time’.

Prior to the reforms post 1984, the nation was still of a mind to ‘farm’ its way out of economic difficulty and, while many recognised that the prosperity of New Zealand would continue to be heavily dependent on its agricultural sector (they were right), the challenge was that it was following the wrong economic model. The excerpt below from the 1990 Porter Report, by Harvard professor Michael Porter, on New Zealand’s competitiveness as a nation, summarises the problem at the time:

The economic challenge for New Zealand had traditionally been seen as increasing [farm] production. New Zealand, as Britain’s farm, was the low-cost producer of wool, butter and lamb. Our cost advantages, Britain’s ability to consume all we could produce and a reliance on British companies to distribute goods means that New Zealand firms saw little need to develop new products, marketing skills or distribution systems. They have often seen their task as getting basic, simply processed products to the wharf … New Zealand management tends to be oriented to primary production. This mindset is reflected in the large, and in some cases increasing, proportion of forest product and meat exports that leave the country unprocessed.

Incidentally, and significantly, it wasn’t widely recognised or even acknowledged in 1984 that the various economic instruments that had been adopted to incentivise development of the off-farm sector were imposing additional costs on farming, thereby necessitating compensation, as distinct from subsidisation, for the farming sector. A study on behalf of Federated Farmers of New Zealand around 1984 estimated that the support for the off-farm sectors at the time of the introduction of the Supplementary Minimum Price scheme in 1978 was imposing an additional cost burden of between $5000 and $10,000 per farm. Either way, be it compensation or subsidisation, the (mistaken) impression that farmers needed to live off taxpayer ‘handouts’ did not sit well with farming leaders at the time.

By 1984 the need for reform across all sectors of the economy had become obvious. Recognising that need, farming leaders — the late Sir Peter Elworthy in particular — sought to work in partnership with the newly elected government to reduce the level of assistance to the agricultural sector, fully expecting that the assistance to other sectors would also be removed. Despite the recognition that severe repercussions would befall the export sectors, especially farming, if financial and exchange-rate controls and export subsidies were removed before first eliminating the internal national deficit and protection in the off-farm sectors, that was the reform sequence that was adopted. It is noteworthy that, whereas restructuring occurred quite rapidly in the agricultural sector, progress in the off-farm sector was rather slower.

As the economic reform process began to take effect, the hardship on the farming sector and the decline of provincial New Zealand through the failure of farm servicing business became the subject of widespread media commentary and debate. Some interesting side effects stemmed from the ‘turbulence’ at the time:

— Repeated focus on the impact of the reforms on farming and farmers reinforced the mistaken impression that the words ‘agriculture’ and ‘farming’ are synonymous. Indeed, they are not — the latter is but a subset of the former.

— Many New Zealanders, most notably young people, perceived the agricultural sector to be ‘finished’ and student enrolments in tertiary agricultural programmes plummeted, to the point of closures in some cases.

— The call for a subsidy-free global farming system became louder, especially in New Zealand. In short, the belief was that it could serve as a compelling role model for other nations. Indeed, special ambassadors were appointed to lobby for change in other nations! It is noteworthy that, at the time of writing, an article in the Dominion Post stated that farmers in the EU currently receive 42 per cent of their income from ‘direct payments’ (covering environmental protection, young farmers, farming in less productive regions, rural development, small farms, promotional support, and so forth).

That this economic reform (later to be known as the ‘Rogernomics’ model, after Minister of Finance Roger Douglas) across the agricultural sector was to be the forerunner of reform across the whole economy was not widely understood.

As for the issue of the sequence of the economic reform process, I am reminded of a conversation a few years ago in Karachi with a prospective postgraduate scholar from western Pakistan who was seeking to study in New Zealand. When my colleague, Professor Richard Archer, asked, ‘What do you know about New Zealand?’ the student replied, ‘Rogernomics. New Zealand is famous around the world because of its economic reforms.’ When I asked, ‘But did New Zealand get the sequence of reforms right?’ the student then entered into a lengthy response as to why things should have been done differently, especially for the agricultural sector. Professor Archer was rather stunned that someone from so far away knew so much about the events in New Zealand more than two decades ago!

How did institutions such as Massey University respond to these events? It was recognised that reform of the national economy was necessary, the major query being the preferred sequence within the reform process. Accordingly, numerous lectures and speeches addressed the topic ‘If the agricultural sector is to lead economic recovery in the new era of New Zealand, what is required?’

The response of academics was along these lines: First and foremost, a much more creative and imaginative understanding of agriculture and its wealth-creating potential must be actively cultivated and promoted. Wider New Zealand society needs to understand that agriculture comprises the full spectrum of activities, from grass roots right through to the (global) consumer. The sector should be promoted as the source of raw materials for generating high-quality and high-value biological consumer products. In short, the sector needs to develop systems for the production, processing, distribution and marketing of high-value and quality products that secure demand from consumers globally. The educational and research dimensions of such an objective are substantial. Indeed, meeting such an objective will demand inspired leadership, vision and commitment from not only the political and educational sectors, but also from within the agricultural sector itself. If talented people are to be attracted to agriculture, it is vital that an image of a forward-looking, positive and upmarket sector is projected by all concerned.

Have these ideals for the agricultural sector been realised in the three decades since 1984? I contend that this quest remains a work in progress.

Why Are We Wasting A Good Crisis? The value shift our primary sector needs

John Brakenridge

CEO, The New Zealand Merino Company Founder, Te Hono Movement

Commodity dairy prices are low. Our economy’s feeling it. We can sit back and reassure ourselves that it’s cyclical, but isn’t it time we used this as a catalyst for a more important consideration: Is it structural?

New Zealand must challenge the status quo, blow apart the traditional price-taker mentality and move to a market-shaping model, one where we forgo a volume mentality for a value mind-set. Forget the idea of feeding the world. We’re too small to be a big producer. We don’t have an environment that can sustain that strategy and also live up to the clean, green brand on which so much of our economy relies.

If we’re to double the value of our primary-sector exports by 2025 we need to transform not what we’re selling, but the way we’re selling it. We’re leaving value on the table. Sometimes, it takes a good crisis to catalyse action.

By way of illustration, in the 1950s wool was booming. The global population was on the rise, and societal and manufacturing shifts had seen sparsely furnished wardrobes expand with new choice and accessibility in fashion. The wool industry was on the up and its future was a sure thing. Or was it? The US Government’s requirement for wool uniforms during the Korean War dried up and the market began a slippery decline. This begs the question: Was the industry simply confirming a biased view of how they wanted the future to look? The commodity cycle won on the day. Perhaps if the crisis of that day hadn’t been squandered, like many which followed, the industry would look different today.

It wasn’t until 1996 that The New Zealand Merino Company instigated the change that was to be the vanguard for the wool industry value-creation model. Our strategic anchor from the start has been transforming the way we sell our products, working harder to create and capture value apart from the prevailing commodity model. Now, we have suppliers who are connected with their end markets, 70 per cent of the merino wool we transact is via contracts as opposed to the commodity auction, and merino growers have a value creation, capture and transfer mechanism to ensure they see a return on their investment in marketing and innovation.

Sadly, the model that characterised the merino industry 20 years ago and the wool industry for hundreds of years before that remains prolific in our primary industry: quality product is produced by passionate people who have no connection with the end-users of their product, no insight into its channel to market, no feedback as to how to optimise its value … It’s a commodity-disposal model based on a historic auction system where primary producers are in the back seat hoping a broker’s as good as his word.

It’s easy to say ‘Let’s do things differently’, but, with so many incumbent industries in our primary sector, shifting to a value play is not easy. What’s needed is a coalition of the willing. What’s needed is joined-up thinking. After operating in silos for years, joined-up thinking in the primary industry doesn’t come naturally. It wasn’t until New Zealand Merino needed a partner to realise our vision of a branded merino meat offering that this approach was spurred to action.

A few years ago I took Keith Cooper, then CEO of Silver Fern Farms, up to Palo Alto to hear Stanford University Graduate School of Business Professor of Marketing Baba Shiv on the power of emotion in shaping decisions and experiences. Later, in conversation, we said to each other, ‘Could we get all of New Zealand’s primary sector, or at least the people who are aligned in their thinking, to come together?’

Professor Shiv talks about two types of people: those who fear making a mistake (Type 1) and those who fear missing out on an opportunity (Type 2). The key is to start a conversation; not a talkfest, but a conversation, with real ideas, listening, observation. That approach becomes self-selecting — if people don’t want to talk to you, quite possibly they’re not the right people to talk to.

Following further conversations with the Hon. David Carter, Peter Chrisp (Chief Executive of New Zealand Trade and Enterprise) and Wayne McNee (then Director General of the Ministry for Primary Industries), I decided that uniting our primary sector through a common vision was worth a try. I got on the phone that night to fellow primary-sector CEOs. The Te Hono primary-sector boot camp, a business-led, government-enabled initiative held at Stanford University, was the result.

Since 2012 the Te Hono movement has aligned over 80 per cent of the largest and most innovative companies in the New Zealand primary sector around a common goal: to unlock the power of New Zealand’s primary sector by moving from price takers to market shapers. This involves transforming our primary sector to be recognised for our natural environment and products, and for the quality of our relations with the rest of the world.

It has been enriched by the Māori cohort brought together through Jamie Tuuta and Graham Stuart, who championed the Māori Primary Sector Leaders boot camp and provided a platform for a fuller sector representation in subsequent events.

The Te Hono movement offers an example of how joined-up thinking can get results. Instead of banging our heads together in a school hall in Gore, as one media commentator so eloquently put it, we have created a network of leading agribusinesses serious about transforming New Zealand’s place in global markets.

So, how can we accelerate our primary sector’s metamorphosis from price takers to market shapers through joined-up thinking?

Move from commodity norms to sophisticated market models.

Move from talking to listening.

Move from clean, green to reputation leadership.

Move from generic marketing to new categories.

Move from existing to emerging leaders.

Move from skepticism to trust.

Moving from commodity norms to sophisticated market models — making things happen that don’t happen naturally.

Here’s the background detail. Professor Robert Burgelman, Stanford Graduate School of Business, quotes leadership as the process of making things happen that don’t happen naturally. The commodity model has been the key sales mechanism for primary products globally for hundreds of years. Our systems are now geared for the circumstances of the past, not the future, and the primary sector lacks the sophistication to deal with current market realities. This makes us vulnerable as a nation, with the primary sector contributing over 50 per cent of New Zealand’s total export earnings. What does this vulnerability mean? That consumer and business confidence dives with every dip in the dairy payout.

Michael Pollan’s The Omnivore’s Dilemma provides an extreme version of what happens when we force a redundant system to evolve, with the example of a glut in the corn market. The result? The great corn conquest. Corn has worked its way into almost everything we eat, including our meat, milk, cheese and salmon, by virtue of the need to find markets for corn. Corn syrup, corn starch, marbled beef. Is this progress? Ironically, it’s created the counter-opportunity for ‘grass-fed everything’ — an opportunity that mustn’t be squandered by failing to change the system.

As long as we continue to focus on what we produce (which we’re very good at), rather than the markets that have an appetite to buy, we will be stuck in the same commodity trap. Sometimes it takes a good crisis to bring about the transformational change needed. This does not simply take the employment of a ‘person in marketing’. Rather, it requires a philosophical change across the business; a total rewiring of the way we empathise with and design solutions for customers. These solutions will be less about the physical product and more about the intangibles that are delivered with it. This won’t happen naturally, but it needs to happen.

Moving from talking to listening — we’re targeting the same consumers.

If primary-sector businesses are serious about moving to a value-add strategy — and they should be — we’ll more than likely target the same consumers. High-end consumer preferences are changing. Yes, it’s about the experience a product delivers functionally; those are the rational reasons for buying a product. More so than ever, however, it’s what’s behind the product that influences emotional purchase drivers.

As consumers become increasingly engaged and knowledgeable about what goes into products, they become less and less trusting. Since 2009 the top 25 US food and beverage companies have lost $18 billion in market share. Who’s picked up the slack? Emerging brands that have built trust with consumers at a phenomenal rate. Through transparency they’ve created brands and products that are perceived as high-quality and, importantly, safe. When it comes to what’s behind the product, there’s nowhere to hide.

The latest output of the Te Hono Movement is a joint $1 million investment in market insight work in the United States, the world’s largest, most established and most valuable economy. It will provide insights into consumer spending habits, how they think, what they think they want, and how they actually behave. Importantly, it will help us to ensure the right consumers encounter our products in a way that aligns with their rational and emotional drivers, and that when they do purchase we don’t disappoint. Because they will share their opinions and experiences. Fast.

Moving from clean, green to reputation leadership — ensuring a social licence to operate.

With NGOs breathing down the necks of global corporates that are viewed as exploiting the land, people or animals, there has been no more critical time than now to lift our collective game. Shared knowledge and experiences will help us to ensure our primary sector maintains a social licence to operate.

In our digital age, the way consumers receive and share information is ever more sophisticated. Every second, 1 million minutes of YouTube footage are shared. With agriculture being increasingly scrutinised for its animal welfare, environmental and social practices, one false move can have catastrophic consequences in a matter of hours.

Here’s a stirling example. Premium fashion brand Stella McCartney and leading active-outdoors brand Patagonia decided to drop their South American wool supplier following a video exposé by PETA (People for the Ethical Treatment of Animals). Here’s how it played out in time (brief) and numbers (huge).

24 hours: Notice PETA gave Patagonia and the wool supplier before the video launch.

6 hours: How long it took for Stella McCartney to end all supply relationships with the supplier.

72 hours: How long it took for Patagonia to end all supply relationships with the supplier.

35,000: The number of views on the PETA Facebook page within the first four hours.

300,000: The number of views on the PETA Facebook page within five days (once the number of times that page was shared is included, viewership will be in the millions).

In contrast, when the 1080 scandal hit the media in 2015, our dairy leaders put aside deeply embedded competitive tensions and recognised the value of working together. They sought alignment, and dealt with the situation in a united manner.

While the private sector needs to front-foot reputation leadership, government is providing a support role, acting as an enabler through the likes of the Ministry for Primary Industries’ Primary Growth Partnership programme. Alignment across government agencies and strong private–public partnership is required to make the necessary transformation.

If we fail to manage our reputation, we will fail our brand partners in market, we’ll fail New Zealand’s primary sector, and we’ll fail growers and producers and future generations. There’s wisdom in the Māori philosophy of kaitiakitanga, or guardianship of our land and people. It’s simply the right thing to do.

Moving from generic marketing to new categories — what mind-space will New Zealand own?

The US organic grocery chain Whole Foods Market has just predicted the biggest food trends of 2016. Among them is a new category for ‘grass-fed everything’. The grass-fed craze, bolstered by heightened awareness of the nutritional and safety benefits of a free-range diet and the perceived welfare inadequacies of the feed-lot alternatives, is moving beyond meat to include milk, eggs, yoghurt, butter, cheese and even protein powders. Grass-fed beef sales have grown at least 25 per cent each year over the past 10 years. Opportunity abounds for category creation and leadership.

A value play needs a refocusing of resources on creating uncontested market space. There’s no sense in operating in highly competitive war zones if you can command new territory. Take Red Bull as an example: by creating a category for energy drinks and positioning Red Bull as the leader in that space, they were able to blaze a trail that’s not based on price.

When New Zealand Merino was in its infancy there were two major markets for wool: men’s suits and carpets. The casualisation of dress has, over time, eroded the giddy highs that were occasionally achieved for wool destined for fine suits. A new category was needed. New