PRODUCER BOARDS - BUILDING A PROFITABLE FUTURE FROM THE CURRENT BASE

  • John Luxton
Food, Fibre, Biosecurity and Border Control

Producer Board reform is about building a profitable future from the current base. It is about improving farmers incomes, improving the value of farmers total assets, improving farmers wealth. If we do this. we all know that this will also improve the rural economy and help continue to make our provinces satisfying enjoyable places to live and bring up our families.

Last year I raised three key risks with respect to the trading producer boards. The risk you run having a monopoly provider of marketing services and the problems of outlawing all other who have any good ideas or trade contacts. This hampers innovation and enables organizations to operate without competitive pressures on their cost structures

Secondly- insufficient investment to add the value that we need to get out of the commodity trap

Thirdly- the political risks, both external and internal, of having industry structures reliant on the vote of politicians. They say a week is a long time in politics - by next week perhaps you might have a majority of politicians who remove all legislation overnight. Currently we prefer to carefully evolve the industries to ensure the opportunities are maximized and any risks minimized.

So why evolve these political structures that we have had for around 70 years. In 1972 when I began farming I received $6 kgms, now it is around $3.50. Over the next twenty years in real terms it could halve again. Farmers continue to be commodity traders, and commodities continue to decline over time.

For those of you concerned about possible undercutting, the current single seller legislation does not prevent this happening now. As with any commodity price, it is set by whoever is prepared to sell at the lowest price. This is why over time commodity prices decline. With a number of sellers of agricultural commodity from a number of countries undercutting happen now

Politicians cant get higher prices out of a commodity market. It would be good if they could. The best protection from undercutting is to move the product above the commodity market.

(Graph) As we can see, all commodities reduce over time in real terms. Interestingly lamb has performed best, followed by meat. Milk and beef come next with wool the lowest on the index.

Cost are another reason for continuing the evolution. Currently there is no competitive pressure on the cost structures involved with the monopoly provision of marketing services by the trading boards. They just simply pay the grower less. Non trading boards, like the government, tax their growers.

The costs are significant. For example ?..

The Kiwi fruit industry has revenue of $573m, but $298m or 52% goes to people other than Kiwifruit growers.

Dairy has revenue of $6129m but $3486m or 57% goes to people other than dairy farmers.

Apple & Pear revenue is $520m, but $355m or 68% goes to people other than apple growers. Only 32% or $165m goes to NZ growers.

Canadian fruit growers, on the other hand receive between 47 - 68% of revenue.

In these three areas we can see there is an opportunity for the grower to get more of the existing revenue cake. A 10% improvement would mean millions more dollars in farmers and growers pockets

The other boards spend various amounts on a range of functions, averaging around $2000 for the Meat and Wool Boards. That?s $4000 per average meat & wool farm which for some farmers in difficult times will be more than their own profits

It is important that farmers feel that they have sufficient accountability for the money they work hard for to pay the Boards.

The amount of off farm net asset (i.e. gross assets less liabilities) is significant.

Board net assets/family farm
Meat - $137m/$7828 per average farmer
Wool - $140m/$8000 per family farm
Dairy - $2.6b/$180,000 per family farm
A&P - $110/ $1800 per family farm
Kiwi - $2.6/ $1800 per family farm

For the dairy industry for example the average farmer has at least $180,000 at current very conservative valuations. Some suggest that the assets are worth at least 5 times this balance sheet amount

Farmers should be able to have better control of these assets which they have worked hard to pay for.

Interestingly the A&P Boards with revenue of $520 million, requires it growers to invest almost $80,000 net each beyond the farmgate. Whereas Kiwifruit, with revenues of $573million, only requires $1800 net assets beyond farmgate.

The $50million the A&P Board received from recent sales of assets equates to about $36000 for orchard, which John Mcliskies tells me the Board cannot give back to growers because of the current legislation.

The key is to add more value than cost, to reduce costs, and capture as much value as possible through to the consumer to improve farmer returns.

Quite simply, continuing to sell commodities leads to peasantry.

So lets look at what some others are saying. Sir Dryden 1997 Dairy Board AGM "we achieved record sales volume of 1.3 million tonnes; an increase on the previous year of 258,000 tonnes. To put this in perspective, our total branded consumer sales are around 260,000 tonnes and it has taken us over 15 years of concerted effort to reach that volume."

That is just 20% of production. 80% is being exported, essentially as ?logs? for someone else to add and capture value.

While the board is doing some great work to make progress, if farmers and their rural communities are to improve their standard of living, we need much more investment and innovation.

The Dairy Board Operations Manager, David Pilkington said recently that any structure if it is to succeed commercially , must be market driven ?no matter what the industry evolves to it must become much more commercial, ?he said.

Anchor General Products Manager, Ross Townsend said in the NZ Herald recently that the standard cost model ?encouraged feral behavior?, that the ?wrong plant was being built for the wrong reasons?

He said that the present system did not deal well with dairy company innovation and was not representative of best commercial practice.

Just this last season some commodity products were paid for at 25% above market returns, whilst some valued added lines received less than 50% of market returns to Dairy companies

He points out that under the new payment system introduced this year, after 70 years, out of the 10 categories, a mere 6% of product in the innovative product category.

If we are serious about innovation, he says, this level is a message all on its own.

And Gilbert Petersen of Manfed gives a slightly different perspective. He said that while $2.3 billion was spent adding to fixed assets - value added - as measured by increased salaries and profits - in last 6 years in meat and dairy was $98 million. However in the general metals sector over the same period $3.4 billion

Farmers investment was going into mostly producing commodity products for which the terms of trade are in decline, he said.

?The Dairy Boards right to license other companies wanting to use milk derived products is inhibiting investment in value added products. As a result our processed foods have not grown for more than two years?

As the Manfed acting CEO points out this is a key issue if we are to get the growth and jobs we need in our rural communities and New Zealand as a whole. In my view this is a major handicap we as farmers have imposed on ourselves.

It is always important to remember that structures are a means to an end, not an end in themselves. The structure should be the servant of its owner - the farmer, not the other way round. When this is the case, i.e. the farmer comes first, any changes to structure are more straight forward.

So what are the opportunities for the future. Well I want an agricultural sector where:

your hard work counts, and is rewarded
your living standards increase, not decrease
you have control of, and get a return from your capital - that is can you can exit your capital if you want
that encourages innovation, attracts capital
is commercial rather than political - currently big political risks as previously mentioned.
is market driven, with the right incentives
where you don?t underwrite all the risks
you receive more than just residue payment after everyone else taken costs and profits
where the organisations you own and fund are accountable to levy payers
an agricultural sector that is not in a commodity trap
that grows more value added jobs in New Zealand
importantly boosts growth in provincial regions. I note that often it is farmer decisions that lead to closer of dairy factories, or shops as they drive past them into town.
and finally that is a viable and exciting career choice for our sons and daughters.
But government does have a role. We have a strategy to continue to make New Zealand internationally competitive. For example recently we have totally removed tariffs from motor vehicles, a cost of about $5000 per Hi-Lux. Removal of the prohibition of parallel importing means we can have access to inputs at worlds best prices.

We have enhanced competition in the oil and electricity sector, cut taxes by about $3 billion, while still paying off debt and putting more money into high priority areas such as rural health and education.

And of coarse we continue to push very hard to seek improved trade opportunities for all our export sectors, including the primary sector.

We need an environment to attract capital, technology and skills to grow jobs and the economy. Reforming producer boards is about doing this, about building a profitable future from the current base. It is about removing the current barriers hindering the improvement in farmers incomes and rural prosperity. You need to grasp the opportunity.