Annual General Meeting New Zealand Dairy Board

Sir Dryden Spring; Delegates to the New Zealand Dairy Board AGM.

It is not the best time for a minister to be giving a speech, given the current political situation. I can't outline to you my plans for the next three years. Nor can I even update you on coalition negotiations. Not being a member of the negotiating team, I know little more than you about the details of the talks. That allows me to speak rather more freely about several economic issues without the media being able to claim I'm `signalling' this or `hinting' that.

But I'm pleased to be here primarily because this is an historic AGM for the New Zealand Dairy Board. The Dairy Board Amendment Act, once your new constitution is approved, means that for the first time the ownership of the New Zealand Dairy Board will be made clear. The new act also addresses the issue of finding the necessary investment for processing and marketing the increased supply of milk. Producers and processors of additional milk will now be contributing to the cost. That will help separate the value of land from the value of your processing and marketing investment. I certainly encourage the AGM to approve the new constitution by the necessary margin so that I can present an Order In Council to the Governor-General to put the new system in place. I see it as a significant step forward.

To me, the new structure recognises the development of the board. World Trade Organisation definitions aside, I do not see the New Zealand Dairy Board as some State Trading Enterprise. I see you as a major international marketing corporation, owned by the industry. And, as we look to the future, there may well come a time when the industry itself decides that statutory powers are no longer needed and that the board has the strength to continue building on its success in its own right. I don't intend to lead that debate - others will - but my personal view is that your strength already comes from the expertise of your people, not from parliament. And I believe you have the foundations for continued success - as long as sane Government economic policies remain in place - whatever legal structure you operate under.

My first contact with the dairy industry was as a kid growing up on a Northland farm, where some of our neighbours were dairy farmers. We were sheep and cattle farmers. And we sheep and cattle farmers saw ourselves as far more sophisticated than our cousins in the dairy industry. While you operated under some silly co-operative system, we were businesspeople - traders - selling our stock at auction. I think that sort of arrogance goes some way towards explaining the relative performance of the meat and dairy industries.

By the time I had finished my agricultural science degree, Britain joined the EEC. It was obvious that there would need to be change in the way we marketed our primary products. To be fair, all our exporters made an effort to adjust. But the New Zealand Dairy Board stands out. You led the market and product diversification process. Your efforts to invest in the marketplace and control distribution lines, to develop branded consumer products, were superior to those of other exporters of primary produce, and we've seen the returns emerge over the years.

I was privileged to begin my non-academic working life as a marketing officer for the board in 1980, and managed later to reach the status of area marketing manager for Central and South East Asia. As a university academic and cabinet minister, I've worked with some of New Zealand's most innovative and impressive people, but, in my view, I've never come across more talented people than those I had the privilege to work with at the board. That investment in people - and investment in market and product diversification - has paid off.

The dairy industry now contributes nearly 5% of New Zealand's GDP, up from only 3% a decade ago, and is forecast to continue growing. In that time, the industry has grown at a rate of 16% a year. Importantly, it has been in the processing side of the industry that the faster growth has occurred. Processing represents a third of the industry's contribution to GDP. As Sir Dryden quotes regularly, over 20% of the products marketed this last season did not exist five years ago. You identify changes in consumer values and match them with new products.

For example, one of the problems in selling milk products in Asia is lactose intolerance, suffered by a surprisingly high percentage of adults in Asia. One of the board's newest products which won a major award at the recent Carter Holt Harvey Food Awards is JENTAL. Low in lactose, low in fat, JENTAL turned the problem of lactose intolerance into an opportunity. In so doing, you have opened up a new market - people who had previously avoided milk. Another example is the use of a problem, whey, to create a $120 million export business. ALACEN 895 is a high quality, highly flexible new generation protein which is ideal for the formulation of sports drinks, confectionery, meat substitutes, and many more applications. These are just two examples I've been briefed on recently.

The success of your marketing operation is demonstrated by the value of the Anchor brand alone. That one brand alone is worth more than many of New Zealand's top companies. Anchor is to butter what Coca-Cola is to soft-drink. It's the top brand in the world. In milk-powder, we're not doing quite so well. We're only number two. Anchor is to milk-powder, "only" what Pepsi-Cola is to soft-drink. New Zealanders should take pride in that. The Anchor brand should be nearly as much of a New Zealand icon as the All Black jersey.

This year, the returns from this investment - despite the value of the New Zealand dollar - meant dairy farmers received a record payout. It will be difficult to emulate that achievement. We can't expect every year to be as good as the best. And new challenges will always arise in the global market. The need to continue the momentum - to continue to diversify - remains. The political environment may also make things difficult.

When New Zealanders voted for MMP, I believe it was more that they were grumpy with the last two Governments under First Past the Post, rather than a vote for the new system. Both the Lange/Douglas Labour Government and this National Government took tough decisions which they knew would be unpopular, sometimes in contravention of their manifestos.

It was argued that the weakness of First Past the Post was that Governments could be elected which did not have the support of the majority of New Zealanders. And minority political parties, like Values, the New Zealand Party and the Greens were totally excluded, despite receiving significant voter support. But what First Past the Post did deliver was the ability for the people to elect a Government, re-elect it, or kick it out. To me, the right for the people to elect their Government - and kick it out if they so choose - is what democracy is all about. With MMP, New Zealanders have lost that right.

Unless there is a minority National or Labour Government - which would have been voted for by a lower proportion of the people than any Government since universal franchise - no one voted for the Government which is going to emerge at the conclusion of coalition negotiations. I don't know whether New Zealanders find that objectionable or not, but I believe it needs to be debated, because that point never has been.

It is interesting, though, that in Israel, with a strong proportional representation tradition, a new Basic Law was enacted prior to the most recent election under which the Prime Minister is now elected directly. The people of Israel decided that they wanted to continue with proportional representation but wanted the right to elect their Government, not have it determined by coalition negotiations. And, at the next election, they'll have the right, if they so choose, to kick that Government out, not have it survive against their will.

It is also interesting that in Italy's referendum in 1993, the people voted for a system under which three-quarters of legislators would be elected under First Past the Post and only one quarter under proportional representation.

New Zealand's debate over MMP was demonstrably inadequate. Even three weeks out from the 1996 election, according to the Electoral Commission's own research, over 30% of New Zealanders did not know that the party vote would determine the number of seats each party held in parliament. An eighth of New Zealanders didn't even know that they had two votes. And, just last week, it was reported that a Hutt South man was let off being prosecuted for voting at two polling stations. His defence? All the publicity about having two votes meant he thought he could vote twice, or four times, or something.

If a country is to have debates about its voting system, the debate needs to be better informed, and must include the implications for the rest of its system of Government. As I said before, it is the power of the people to elect their Government that democracy is all about. Unfortunately, our debate over MMP was restricted solely to whether or not we should make one branch of Government - the parliament - more representative and therefore arguably more democratic. It did not touch on the wider implication that the vitally important executive branch of Government would become less democratic.

While we do need to have those kinds of debates in the future, our priority now must be to make MMP work.

Perhaps the most important issues for the dairy industry which I presume are being discussed in coalition talks - I stress I don't know, I'm therefore not trying to signal anything - are monetary policy, fiscal policy and the Employment Contracts Act.

When the rhetoric designed to please the unions is set aside, I do not believe that any party, other than perhaps the Alliance, would seriously consider returning power to those unions, given that over 200,000 additional jobs have been created since the passage of the ECA. But several parties have advocated changing the 0-2% inflation target range.

Their reasoning is that changing the target range would allow the Reserve Bank to have greater latitude, and so pressure on interest rates and the dollar would be reduced. It is easy to see why this may have some superficial appeal to exporters, but would it achieve what its supporters hope?

The previous Labour Government made a commitment to price stability, which has been continued by the National Government. Because the CPI suffers from an upward statistical bias - for example, as the quality of goods improves - an inflation target centred on 1% has been recognised as representing price stability. Because no country is ever going to hit 1% every quarter, we give the Reserve Bank some latitude and set a target range of 0 to 2%.

The Labour Party wants to maintain the 1% mid-point but prefers a -1 to 3% target range. New Zealand First wants inflation to be below that of the trade-weighted average of our major trading partners, which was around 3.5% in the last year.

There may be technical difficulties with the New Zealand First policy in that I don't believe it would be at all easy to predict in advance exactly the level of inflation to be suffered by our main trading partners in any given year. That aside, the perceived benefits of expanding the target range could be short-term and might be out-weighed by the medium-term downside.

The most important issue is the credibility of the price stability goal. If the Reserve Bank were to be given greater latitude, it is likely that that latitude would be used. The frequency of breaches of the target range - and the frequency of the need for a response - would not change. But the responses would need to be more severe. The distance from the 1% target would be greater, and the damage to the credibility of the price stability goal would create greater inflationary expectations, requiring a stronger response.

It is also likely that a wider target range would lead to higher average inflation over time, and higher interest rates. There would be more uncertainty about the value of money. Decision-making by firms and individuals would become more difficult. Saving money in a bank would become that little bit less attractive compared with speculation in, say, real estate.

We know from bitter experience that inflation damages the long-term performance of the economy. Of course, some in the Labour Party may say that by maintaining the 1% mid-point, the bank would respond in exactly the same way as it does now to inflation above that. In which case their policy would have no practical effect. Why damage the credibility of the target and risk it?

I believe we are better to look at changes, not to the inflation target range, but to how the CPI is measured. Statistics New Zealand will be reviewing the make up of the CPI next year. The CPI is, after all, a consumer price index. It makes no sense to me whatsoever that the capital cost of the land on which new houses are built, and even the cost of those new houses themselves, are included. Some argue that house rentals reflect these prices closely. With the Reserve Bank saying that house prices contributed so greatly to inflation as it is measured, I suggest we should examine whether that is the case.

But my main concern about the impact of coalition negotiations on the dairy industry is fiscal policy. Even this National Government - seen all too often by the public as being related to Scrooge - came in for some criticism from the National Bank prior to the election. The bank claimed that our fiscal policy was fuelling inflation, meaning that the Reserve Bank needed to run a tighter monetary policy than otherwise. That was forcing up interest rates and the dollar, said the National Bank. The same thing was happening to the economy, it said, as would happen to a car with the driver having one foot on the accelerator and the other on the brake.

It is inevitable that Government spending will increase as a result of MMP. The question is by how much.

While I believe expanding the inflation target range could be detrimental, both Labour and NZ First wish to control inflation to some degree. The risk is that their spending proposals would make the task that much more difficult. All parties need to keep in mind that extra spending will put pressure on inflation, and will mean that the Reserve Bank will need to run a tighter monetary policy than otherwise, with higher real interest rates and a higher dollar, whether or not the target range is expanded. Remember, the Reserve Bank's fairly tight monetary policy right now is based on current levels of Government spending.

While I applaud your efforts at forward cover this year, I'm not sure they can be maintained indefinitely. It would be disastrous for New Zealand and New Zealand exporters if the price of a new Government under MMP is a pledge to attempt to control inflation in the face of unrealistic increases in Government spending. One does not need to study political science to know that the best way to win elections is to spend money. The problem is that $50 million more each Monday at Cabinet may not sound much to some politicians. But if a Government fails to resist the temptation, New Zealand no longer has a surplus. It has deficit, inflationary pressure, higher interest rates and a higher dollar. I see that as the greatest risk faced by the dairy industry and all exporters right now.

The good news is that, according to The Independent, in coalition talks last week, New Zealand First lectured Labour about Labour's unsustainable fiscal commitments. That is a positive sign whether there is a National/NZ First Government or a Labour/NZ First Government.

I wish you all the best for your AGM and for the year ahead. The new structure of the industry is an historic step. A tremendous effort will be needed this season to try to emulate this season's performance. I'm not sure whether I will be Minister of Agriculture this time next year. But either way, as I struggle along on my beef property, I will remain a vitally interested admirer of the dairy industry.