Producer Boards: Maximising the Benefits of Change

  • Lockwood Smith
International Trade

AIC Conference
James Cook Centra

To any of you here today who are ideologically committed to producer board reform, I can understand that the way we farmers and the rest of the agriculture sector view the issue may be a little confusing.

After all, farmers have been staunch supporters of New Zealand's reform process over the last 14 years. They're not interested in subsidies or other handouts - for them or for anyone else. They support the abolition of tariffs, even if it costs some jobs in the short term. This week's $315 million in Government savings will be viewed by many farmers as only a first step. Farmers have the same progressive views of left-wing organisations like the teacher unions as any former Education Minister - namely that they should probably be made illegal and their leaders locked up. They are hardly a bunch of Bolsheviks and nor is their minister.

It is no surprise, then, that those who are ideologically committed to producer board reform might ask: "Why do farmers cling to these collectivised, agricultural soviets? And why does their minister have some sympathy for their views?"

The answer is all about controlling the value chain. No matter what benefits from reform are identified, farmers and their minister see farmer control of the value chain as an overwhelmingly important issue in the industry.

Let's say farmers believed reform would lead to tremendous new investment in their industries. Let's say it led to greater exports of branded consumer products. Let's say it led to free and open access to the markets of the world. Even with all these things, farmers argue that without farmer investment in the value chain they can never be more than peddlers of commodities to processors and exporters. Farmers are proud people and peddling commodities is not the business they want to be in.

Even were all our exports put into high value markets as high value products, farmers know that the real returns are not in hoping for possibly higher farmgate prices as a result of others' marketing efforts. They know that the real returns are in getting the dividends from extracting greater value from the market themselves. They can only do that with personal investment in the value chain.

And you can't blame farmers for believing there is a link between the statutory powers and their ability to control the value chain. Take the two agricultural industries that I was involved with prior to entering parliament: meat, as a farmer, and dairy, as the board's marketing manager for Central and South East Asia.

In the meat industry, competition among exporters has led to procurement wars. That's stopped them from being able to guarantee supply, which is essential for marketing high-value, branded consumer products. It has diverted resources from the consumer end of the industry to the procurement end.

The situation is even worse in the wool industry where the auction system means farmers - and often New Zealand - lose control of the product immediately.

In the dairy industry, that sort of nonsense is long gone. There is no day-to-day procurement battle. The dairy export industry has supply guaranteed. It, in turn, can guarantee supply to retailers internationally and make the long-term investment necessary to penetrate deep into markets, controlling the value chain as far as possible to the final consumer.

I'm fully aware of all the theory which suggests competition works best. Usually I believe it. But no farmer will believe it when they compare the relative performance of those two industries: the meat industry with light regulation and the dairy industry with far tighter control. In my childhood, sheep and cattle farmers used to look down on the local dairy farmers with their cooperative system. Now, as a beef farmer, I supply maize silage to my dairy farmer neighbours, and others graze their heifers.

Given that I think this way, anyone ideologically committed to reform may be even more confused. Why, then, have I given all producer boards until 15 November to provide me with initial plans for deregulation?

Those who are most familiar with the issue will know that my position on producer boards' special statutory powers has shifted, and I do not apologise for that. My views have never been ideological. They are based on information and careful consideration. And I now believe that we can progressively implement reform in a way which minimises the potential downside but which maximises the market access and marketing returns.

This is my thinking. The status quo for agriculture is not acceptable. If the current outlook is as good as it gets, we may as well all get out of the industry now. The question we must ask ourselves, if we set aside droughts, floods and the dollar being too high or too low, is what are the main problems facing agriculture today?

The primary one is our lack of market access. I expect you are all familiar with the examples from the US butter and cheese markets which I quote regularly - that because of trade restrictions, New Zealand has access to only half a percent of the market for those products, in the biggest consumer economy in the world.

But the more you examine the market access issue, the more horror stories keep emerging.

We are almost completely cut out of the Japanese butter market because of out-of-quota tariffs of 600%. Japan is the world's second biggest economy.

Nothing needs to be said about the EU butter market. It's the EU which takes such a large chunk of the $500 million in tariffs that the New Zealand Dairy Board pays each year before it can start to sell anything in those tariff markets.

But for the EU high-quality beef market, we have quota access for 300 tonnes. That is not much more than I produce on my own farm. If we want to export any high quality beef above that 300 tonnes, we face tariffs which make it uneconomic.

We also get hit internationally by state trading enterprises with import monopolies.

The Uruguay Round led to us having access for up to 3% of the Canadian butter market by the turn of the century. But the only organisation we can sell it to is the local state trading enterprise - the Canadian Dairy Commission. That immediately stops us from being able to position ourselves at the top end of the market with innovative products. What's more, the Canadian Dairy Commission marks the butter up 60% before on-selling it. That means that the Canadian Dairy Commission gets more than 1/3rd of the value of our butter, for merely passing it along to the next person in the value chain.

In Japan, a state trading enterprise gets us again. The Diet has decided that the Japanese Agriculture & Livestock Industries Corporation should ensure the stability of supply and demand - and therefore the price - of milk products. While it could import a wider range of products, it has only ever imported a narrow range of products, specifically skim milk powder and whey powder. And it only ever imports products to complement rather than compete with domestic products.

I won ?t go on, but I could.

The effect of all this is that New Zealand cannot fully benefit from marketing many of our key export products in the high value markets of North America, Japan and the EU.

I'll give you a taste of what it means we are missing out on. According to rough figures supplied by the New Zealand Dairy Board, if we had free and open access to the US for just cheese, it could put up to $300 million into the New Zealand economy annually. That's an average of $20,000 per dairy farmer. If we had free and open access to the EU for just butter, it could put up to $560 million into New Zealand each year - an average of $38,000 per dairy farmer. That is just a taste of the potential returns from freeing up world markets.

What does this have to do with producer boards? At the end of next year, the World Trade Organisation will begin negotiations to liberalise agricultural trade. A unique convergence of developments means we will not have another opportunity to make the same degree of progress this generation.

New Zealand and our Cairns Group allies from Australia, Canada, Asia/Pacific, South America and South Africa have never been more united. In Sydney this April, we developed our vision for what we would like to achieve from the negotiations. We are seeking to put trade in agricultural products on the same basis as trade in other goods. Specifically, we are seeking:

open market access and deep cuts in tariffs
the elimination and prohibition of export subsidies, and
improved disciplines on domestic support, including its decoupling from production.
The world's most powerful country, the United States, has agreed to work with us on that strategy. And President Clinton, who is committed to tearing down barriers to trade, has offered to host the next WTO meeting in the United States for the launch of the negotiations. In fact, there are rumours that some in the American Government want the next round to be known as the Clinton Round, such is their confidence it will make progress.

Combine that with developments in the primary sector through APEC, and the current situation is indeed unique.

But the United States wants state trading enterprises on the agenda, and that means our Dairy, Apple & Pear, Kiwifruit, Hops and Raspberry boards.

The question for New Zealand is this. Are we best to spend our time resisting having our trading boards on the table, with the possibility of losing sight of the greater prizes, and having state trading enterprises abolished anyway? Or are we best in fact to side with the Americans, mindful of the damage state trading enterprises do us, and argue for their abolition internationally, along with the implementation of the Cairns Groups' vision? That's a legitimate debate, but I'm pretty sure we're best to take the second option.

That also begs another legitimate question: "Why don't we use our trading boards as a bargaining chip?" We could try to do that, of course. But, in the scheme of things, my view is that that would be a fairly weak bargaining chip. It would be naïve, for example, to think that that one bargaining chip could be traded off against the multitude of issues on the WTO agenda.

New Zealand's negotiating strategy has to be based on leadership. We are a small country. We have no inherent geopolitical strength. The only way we can be heard - let alone have influence - is through leadership. And we are heard, and we do have influence.

Because the previous Labour Government had abolished subsidies and some protectionism, we had greater influence during the Uruguay Round, which delivered $1.6 billion to New Zealand despite being the first time that agriculture had even been on the agenda. Imagine, had Labour not made that reform, how our negotiators would have got on arguing that we promise to get rid of our subsidies as long as you make some concessions too. We would have had no influence. Nothing would have been achieved. If we want to achieve anything this time round, we must continue to show leadership.

Of course, the inevitable response to that is to ask for an absolute guarantee of progress. I can't give one. The only guarantee I can give is that if we do nothing we will achieve nothing. The approach we are taking is based on my best assessment of our best chances of success. I will be held accountable for that.

I will also be held accountable for the management of the change process, as will all in the agriculture sector. It is our job to manage change in a way that maximises the returns.

If market access is the biggest challenge facing our agricultural industries, our need to more dramatically shift out of commodity trade and into the modern food and fibre business is close behind. And, as I said at the outset, we can't be satisfied with the status quo. Even in the dairy industry, 70% of our exports are commodities.

But, despite that, I argue that the trading boards have done reasonably well. The question is whether they are the best organisations for the modern food business?

Many people would say that the advantages of having all our eggs in one basket outweighs the losses from stopping other New Zealanders from trying out their ideas in the international marketplace. Even if they are right, there are other issues to consider.

The New Zealand Dairy Board is New Zealand's biggest exporting company. It has net assets of $1.4 billion, and employs many of our top, innovative marketing executives. But should it wish to export products which contain less than 30% by weight of dairy produce, it must obtain an Order In Council on the advice of the New Zealand Cabinet - farmers and non-farmers alike. As far as I am aware, it has never done so. And it cannot export other products even if it sees a market opportunity to do so.

The Apple & Pear and Kiwifruit boards are also restricted in terms of the products they can export.

This is actually fair enough. For as long as all producers are forced to effectively invest in the boards, we could hardly give the boards free rein to export products other than those supplied by their producers. And it would hardly be fair on the rest of the New Zealand's export industry to allow the Dairy Board to compete with it while stopping it from competing in the dairy market.

But for as long as such a restriction remains, the New Zealand company with the most experience in the international marketplace is operating with one hand tied behind its back.

International supermarket chains and other customers are increasingly wanting to purchase a basket of goods from the one organisation. The board's main competition, Nestle, markets a range of other products like Perrier mineral water, Maggi soup, coffee and chocolate. It is at an advantage. The Dairy Board cannot utilise its capital, its people, its networks and its experience to compete.

The board's shareholders - indirectly the farmers - could gain were the board allowed to compete on a more equal footing. If you divide the board's net assets with the number of dairy farmers in New Zealand, you discover that the average dairy farmer in New Zealand has around $100,000 indirectly invested in the board. That is not an insubstantial sum. While it doesn't compare with a farm, it is mortgage free. What's more, the board's books do not take into account assets which would appear in a normal corporate's accounts, so the $100,000 average shareholding is certainly understated.

Because of the restrictions on the board's activities, that minimum of $100,000 cannot always be put into the areas where the board's marketing people may otherwise see the greatest market opportunities.

Many farmers don't even see that $100,000 as their money, because they can't access it and they are never paid a direct dividend on it. When the board does well through its marketing effort, the market signal farmers get is to produce more milk. While the removal of the statutory powers is not necessary to unbundle payments, it will make it essential. Unbundling will solve one of the key problems facing the industry.

Because of its export monopoly, the board has to buy all the milk produced in New Zealand. And that means its primary focus has to be to sell all the milk it gets. Its marketing people simply can't keep up with the extra production their success - and the bundling of payments - cause. That's a major reason why 70% of our dairy exports are still commodities.

All these issues also exist to a greater or lesser degree with respect to the Apple & Pear and Kiwifruit industries. Reform will solve them. It will allow our most experienced marketing organisations and their people to focus more widely and more fully on the modern food business.

For the non-trading boards, the arguments for reform are different, and the process does not have the same implications.

What reform of the non-trading boards will do is put them back under the control of farmers. Right now, it is the New Zealand Parliament - Pam Corkery and the rest of us - that decides there shall be a Meat Board and there shall be a Wool Board. Pam Corkery helps decide that farmers shall pay boards compulsory levies, whether they like it or not.

And, increasingly, we are seeing that many farmers don't want to. There is considerable disquiet amongst some farmers about the Wool Board's performance. At Meat New Zealand's AGM, a remit was passed calling on the levy to be halved. A remit calling on the compulsory levy to be abolished was narrowly lost.

In the future, it will be farmers who will make decisions about their industry organisations' levying powers under the Commodity Levies Act. If such industry organisations have sufficient support from farmers when voting is held, they will be able to operate in the way that farmers want.

I expect that farmers will want them. And I have not yet heard it argued that such organisations should continue to exist if they don't have sufficient support from farmers. The big difference will be that they will no longer be at risk of a parliament being elected which could chose to abolish the whole lot overnight. That will no longer be possible. Instead, farmers will have that decision-making power.

Issues that will need to be addressed over the transition period include New Zealand management of our quota markets. The Prime Minister said this week that from New Zealand's perspective that is non-negotiable.

Despite all this, I still haven't satisfied every farmer and every grower. They argue that even were the Dairy, Apple & Pear and Kiwifruit boards to become the most sophisticated food exporting companies in the world, it wouldn't do them much good if they lose control and become mere suppliers of raw materials. How do they - we - control the value chain in a deregulated environment? How do we stop from becoming mere peddlers of commodities at the farmgate?

It's the important question if farmers are to maximise the benefits of change. It's why we are right to start planning early for change, before it is imposed on us by the World Trade Organisation or by parliament.

In the case of red meat, wool, game and pork farmers, making industry organisations more directly accountable to farmers will make it neither more difficult nor any easier to control part of the value chain. While some may find it difficult to stomach, those farmers have to work long-term with their processing and exporting companies, of which many are shareholders. The debate over the technical changes to their producer boards should serve as a catalyst for them to think fully about how best to build better relationships with exporters. Industry organisations can play an important coordination role. Some may see the Game Industry Board's Cervena programme as a possible model.

In the case of the trading boards, I expect such organisations to continue to operate as the main players in their industries, but with a difference. Owned directly or indirectly by farmers and growers, they'll be free forever of the risk of parliament imposing sudden, hasty, confused and anti-farmer change. They will no longer have an export monopoly for butter, apples or kiwifruit, but intellectual property will ensure they will have a monopoly for Anchor, Enza and Zespri. Brands like these are an important part of the way forward in the modern food business.

The stability that reform will provide will be better for business to thrive, than being beholden to parliament. And the boards will no longer have one hand tied behind their back as they seek to maximise the opportunities of a more liberal global trading environment.

Some farmers and companies, at the margins, may decide to go it alone to try different marketing approaches. They'll have to weigh losing the benefits of voluntary cooperation against the benefits they hope to acquire through competition with much larger and more established organisations. Good luck to them, but I do not expect more than a very small percentage will believe it is in their best interests to try.

The Government has given our agricultural industries the gift of time to work out the best way forward for farmers to maintain the control of the value chain they have already, and to improve upon it. We have given the gift of time to ensure we deal with other issues like quota management satisfactorily prior to deregulation. It is for the industries, farmers and growers to drive the change management process to maximise the gains. It is for farmers and their industries to advise the Government on exactly how and when it is best for each of them to move to a deregulated environment.

The Government did not come up with this change management process lightly or overnight. We accept there are pros and cons. But we have weighed them and on balance we believe this is the best way forward. The future the Government's process offers is this. Farmer control of our agricultural industries, with continued farmer investment in the value chain. The removal of restraints over the product mix of our agricultural marketing organisations. And the potential to break down the appalling barriers to trade which continue to hold back New Zealand agriculture today.

I have no doubt that agriculture has the potential to become an even stronger backbone of the New Zealand economy.