Issues for dairy farmers in 20 years time

What will be the issues for dairy farmers in 20 years time?

Speech by Conor English, Federated Farmers Chief Executive, to the New Zealand Institute of Agriculture and Horticultural Science.

Good morning Ladies and Gentlemen,

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.

I’ve been asked to talk about the issues that will affect dairy farmers in twenty years time. So I thought I would start by what we are concerned about right now and at a high level speculate and throw out some ideas about the future.

A simple question we need to answer is ‘Is this girl in the picture going to want to be a New Zealand citizen in twenty years time? Will new Zealand have what it takes? If that is to be the case then the New Zealand Dairy Industry and everyone in this room has a contribution to make.

As the Irish might say, whenever you arrive at a destination – like in 20 years time – you have always started from somewhere. Here today there are two clusters of issues that Federated Farmers focuses on.

The first is around “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, weather we are viable or not.
Will these issues still be relevant in 20 years time? Lets have a look.

Environmental sustainability is critical. As custodians of the land and water we need to leave it better than we found it. This takes objective science, economic practical solutions and good management. So, if you think it is going to get hotter then it’s not a bad idea to build some water storage. It’s not a bad idea to invest in research and to collaborate globally on how to do things differently, rather than charge farmers money for animals to breath.

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.

Whatever your views on climate change, this notion that you pay someone some money and then get the weather you want is a concept that I think farmers would be very keen on. The issue is, we are just not quite sure it will work in practice. With increasing population, scarcity and visibility environment issues will remain very important over the next 20 years. How we harvest from the environment matters. But the science and research focus needs to be on solutions that provide productivity gains as well as emissions management. If we do that in 20 years time we will remain world leaders through what we do, rather than by how we legislate.

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.

To give this a context, the Rugby World Cup is expected to have a benefit of around 1 billion dollars. So that means if we prevent the impact of just one drought, our economy is better off to the tune of three Rugby World Cups. So I guess you are all three time more excited about water storage than the Rugby World cup.

Potentially 1 million ha could benefit from water storage. That’s $7.5 billion more money in the economy each year, and an additional 30,000 jobs. So along with the economic gains, the reduction in the negative economic costs of a one year drought as in 2008 at say 2.8 billion – that’s about a $10 billion a year gain. So in the over 20 that could be as much as $200 billion. Those numbers are pretty loose, but its worth a look.

So as a nation, when you are doubling public debt over four years – out deficit this year will be about $13 billion – you need to earn some money to pay it back and we need to make sure we invest wisely. In my view water storage needs to be a top infrastructure priority for Government. And it’s good to see the Government getting there in this, so maybe in 20 years time the water storage stuff should be pretty much done, we will have more fish and less drought, and have a far more resilient economy and environment.

And water quality will not be an issue because we will have fixed it. Again, it’s not emotive, politically motivated language that will do this, but smart solutions, based on objective science, practical, economic solutions and balanced management and investment. The media coverage on the Manawatu River and the Cawthorne Institute simply does not cut it.

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.

I believe that our urban cousins do like farmers enormously because we are critical to New Zealand’s identity. This is built on our Maori culture and our authentic, rustic real, 'ruralness'. Right now, our number one issue though is water quality. City folk are just not quite sure they can trust us with water quality. So as I said, it needs to be fixed with objective science and not emotional politics. But there will be other issues that will need to be carefully worked through.

Attitudes matter and the dairy industry needs to ensure it takes an inclusive approach rather than a superior approach with the wider population. There is a thin line between confidence and perceived arrogance.

Attitudes in the city matter. We need to tell our story in a way they understand. We can’t assume. We need to celebrate our success. I am pleased to say that Janette Fitzsimons, the former Green Party Co-leader, launched her website www.goodfarmingstories.co.nz as a result of some prodding from us. Many farmers, who are very in touch with the environment every day, are doing absolutely fantastic things. It was great that Janette did this as her swansong before she left Parliament and I was very pleased to congratulate her as CEO of Federated Farmers at the launch, in the Green Party Caucus room.

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.

We have now lobbied and raised that investment to $300 million. Rural broadband is about social and global connectivity, our ability to attract and hold people in our rural communities. It’s about dramatically enhanced education, health and science outcomes. It will enable the aggregation of data and facilitate precision farming. This will greatly enhance farmers’ ability to make more informed decisions about their farming systems. It will greatly enhance our science and research capability as it brings labs and scientists, both locally and closer to the farm.

Broadband, the internet and the digital revolution has changed how we live, work, play and do business. In my view it is seen one of the most phenomenal changes in centuries that has happened over the last 20 years - consumers have gone from being readers to writers. That is rather than read about what someone says about their product or service they simply experience it and then they upload what they think of it for the world to see. This makes the supply chain far more responsive to consumer needs and wants, and creates significant opportunities in a compressed relationship. It allows for more questioning of scientific and research opinion.

But what is the next revolution. The Square Kilometre Array is a visionary project, globally funded, involving 20 countries. It will be the most powerful radio telescope in the world, with a collecting area of a square kilometre. I’m told that in one day it will collect the same amount of data as has existed on the planet to date The Large Hedron Collider - world's largest and highest-energy particle accelerator on the Franco Swiss boarder is another project that is fascinating What’s going to pop out of just these two multi billion dollar activities? Like the space race in the latter half of last century, you can be sure there will be spin offs into everyday life. These will affect farmers and the consumer’s we sell to.

This brings me onto our 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.

Another risk for the industry is that research and technology may provide substitution for natural dairy protein over the next 20 years, and this may totally change the game. I think the natural protein production system that we operate will always have an edge and demand will be such that synthetic protein could compliment the natural product. But that’s what the natural wool growers thought over their synthetic competition, who now have 90 percent of the carpet market.

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.

Crown Research Institutes (CRIs) and universities are sometimes selling off proven technology, sometimes to multinationals, so that they don’t have to invest in the next stage of development. So that they don’t have to sack people in the short term and meet their 9 percent rate of return. The current taskforce review of CRI and research capability, and the governments subsequent response, announced on March 29, 2010, is not really focused on how we optimize, in a commercial, way the excellent work these institutions produce. It needs to be.

And it’s the same in the private sector. Rather than sell a straw of semen for say $3 why are we not using the plant variety rights (PVR) model and getting paid for subsequent generations that are produced from that semen, for example for say $300 for each calf over the next 20 years. On rough numbers that’s a return of $6000 instead of $3 – a couple of thousand percent more.

When the Government used to sell state assets it had a unit in treasury that went through the process in order to get the best outcome for the nation. When it comes to selling intellectual property assets, it is left to cash constrained boards to make decisions that tend to be short term in focus. It’s not good enough and we need to get it sorted now and not wait 20 years when many opportunities have been given away.

If we do implement an IP strategy and crack the model, the New Zealand based scientists futures will definitely be assured.

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

When it comes to capital markets we are like a corner dairy. Nuffarm and Glaxo Smith Kline have listed in other market.

And a world of constrained capital will challenge the current farming model of low annual cash returns and a capital gain at the end of a farming career. Maori are an excellent example of a sector that has made the transition to business focused on cash flow, simply because they don’t wish to sell. And the impact of iwi in agriculture, indeed in the wider economy, will increase significantly over the next 20 years. They may well become a very significant source of capital.

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.

Globally energy is a key input into a competitor’s product. It is one of the reasons for recent commodity price rises – energy has got more expensive. Over the next 20 years it is likely continue to do so, which will underpin commodity prices It’s almost a natural hedge. Perhaps a risk is that global energy cost will get capitalized into the price of New Zealand dairy land.

I would also note, when we look out 20 years, New Zealand has a very bright future itself on the resource front. Last year, our biggest export to our biggest trading partner, Australia, was not an agricultural product, but oil – $2 billion. Our second biggest export was gold. We sold as much of that to Australia as we sold wool to the rest of the globe. In 20 years time, we hopefully won’t be a one trick pony, but will have diversified our economy through mineral harvesting. Our Economic Zone is two thirds the size of Australia. Solid Energy may become bigger than Fonterra. Of course, this might mean a substantially higher dollar, but will touch on that later.

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.

I now want to quickly touch on a couple of other issues that I think are very material to where we will be in 20 years time and what we will be thinking about then.

The unpredicted, Nostradamus was famous for predicting a number of things. Well I’m no Nostradamus, so I will simply predict that there will be plenty of unpredictable things happen that we can’t predict now.

If we look back over the last half century no-one predicted the discovery of penicillin. This has had a dramatic, positive impact on our population growth. No-one predicted the huge inflation of the 1970s, after the Vietnam War or the fall of communism in the 1980s.

September 11, was another unpredicted event which has certainly reshaped the last ten years of geo-politics. The global financial crisis wasn’t predicted, just as the receivership of Canterbury Finance wasn’t predicted 20 years ago.

So I predict that there will be an unpredicted war – perhaps Pakistan/India, or given that everyone else has had a go in Afghanistan over the last 3000 years – maybe China will invade there. It’s their turn; China will certainly be twitchy if Korea, Japan and Twain conduct military training together. What will this mean for our Asian markets? There will be a significant disease, either human or animal – just as we have had AIDS and bird flu. There will be some very significant weather events – just because there has been for a few million years now. There will be an invention, or a discovery that will have a profound impact on how we live, work and play. Or there could be an assassination or terrorist attack that will change the course of history, as September 11 did.

What we do know is that we don’t know and that’s why the English language invented the word “hindsight”.

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 U.S. government’s debt is 53 percent 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 percent, 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.

These two next slides show the significant shift in Fonterra strategy over the last 20 years.
They have gone from a single dimension supplier of New Zealand produced protein to a global logistic supplier of protein. It’s a dramatic shift. What other dramatic shifts will we see in Fonterra over the next 20 years? How will their strategy and structure evolve to capture what I believe could be a golden age for dairy. Will they perform to their potential? This performance will matter crucially to how we are placed in 20 years time.

But New Zealand now isn’t just about Fonterra. There are other players who may change things over the next twenty years, for better or worse. Natural Dairy who are looking to invest and Bright Dairy who have just bought 51 percent of Synlait milk are both talking of doing things differently. Rather than solely suck the water out of milk and export powder, they want to focus on the delivery of New Zealand sourced Ultra High Temperature (UHT) milk.

A key issue in China and other Asian Indian countries is supply / distribution security. Increasingly wealthy consumers will pay a premium price for a product processed and packaged in a developed country. Only then are they prepared to trust the product. Take Danone and Evian; a 0.5 litre bottle of Evian retails for Y20, yet you see them everywhere. It suggests a big opportunity is UHT, just as it has been water from Italy and France. Evian’s brand is “Live Young” to Fonterra “Dairy for life”

That demands sophisticated marketing, packaging, and processing. All from New Zealand. All of which we are not really doing right now
But maybe we will in 20 years time. We only have so much to sell so we need to sell it for as much as we can.

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.

Thank you.

ENDS

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