Speech to Australia and New Zealand Agriculture and Resource Economic Conference

Amongst my Christmas presents this year was P J O'Rourkes book "Eat the Rich" which I found a good read with his humorous analysis of what has made some countries rich and others poor His "Treatise on Economics".

Perhaps it would be a good textbook for those in society who think that should Governments increase taxes, societies pressures in education, health and welfare would disappear.

He refers to the success of Hong Kong and quotes the John Cowperthwaite the financial secretary of Hong Kong from 1961-71 as saying:

"in the long run the aggregate of decisions of individual businessmen, exercising individual judgement in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government; and certainly the harm is likely to be counteracted faster".

So we have seen in New Zealand and around the world a retreat and a re prioritising by the state over the last two decades as Governments try to emulate the success of countries where Governments take less of their GDP to carry out their role.

This has been aided by new technology in communication and computing giving rise to the Globalisation of society we read so much about.

I also noticed in my Xmas Economist an editorial article on Borders subtitled "Borders are arbitrary abstractions, economic impediments and surprisingly ineradicable!"

But borders are breaking down with international agreements; CER with our Australians friends, with the Eurodollar, with international treaties and the like. They have broken down when it comes to retaining capital, skilled people and technology in a country- the driving forces of commerce today. Despite the best efforts of some politicians to protect certain industries, trade flows internationally continue to increase at 3 times the rate of increase in production.

So with this background what is Government's role in Agribusiness today. It is quite clearly to make New Zealand's business environment such that it retains and attracts investment, people with skills and new technology whether that business be in agriculture, fishing, forestry, education, manufacturing, tourism or commerce. If the environment is not satisfactory, investment will depart, skilled people will depart and technology will also depart.

Fortunately most New Zealand Government policies over the last 15 years have generally been aimed at improving the business environment for New Zealand exporters of which the Primary Sector still comprises about three quarters. Policies have focused upon improving New Zealand's international competitiveness.

The corporatisation and privatisation of previously Government monopoly services, the restructuring of the public sector education, health and welfare have all been aimed at making these sectors use our taxes more efficiently rather than just increase taxes as an impost on society and a dampener on economy growth.

- Tariffs have come off inputs into our production systems
- Energy has become competitive
- Transport has become competitive
- Telecommunication has become competitive
- The meat industry has become competitive with killing costs now down to a third of those just 10 years ago
- The labour market has become competitive
- Our ports are internationally competitive
- The research market has become competitive and output focussed

We still are working on other costs such as roading, local government, health and education but all are markedly better at delivering their services than 10-15 years ago.

Agriculture has benefited from all of these reforms as costs have been reduced for farmers, growers and processors. What would farming be like today if change had not occurred?

1. What if killing that beef cow cost over $150 per head today?
2. What if we still paid twice as much to process our milk?
3. What if interest rates or exchange rates were where they were 10 years ago and the public debt was back at half the GDP?

Agriculture would be in much worse shape than it is today. So too would the rural sector. But we have not done enough and change needs to continue to keep ahead of our changing competitors. We need to continue to embark on microeconomic reform within our own economy. This is not a case, as some arguing for protection make, of exposing our economy to the open world ahead of others, but of actually lowering unnecessary and very selective costs still for a variety of reasons imposed upon our export sector. Something absolutely necessary if our agricultural or indeed our export sectors are to remain competitive.

Too much of our agricultural production is still sold into international commodity markets. Commodities tend to track down in value over time as others use new technology to produce them more cheaply.

Commodities in agriculture often meet trade barriers. Industries with greater investment can also move away from commodities to specialist and consumer products many of which meet fewer trade barriers.

Government has expended and will continue to expend enormous effort into improving trade access. The Prime Minister's successful visit to North America last week was basically trade related. Retaining quota access and pushing international trade policy through CER APEC and WTO are vital roles for Government and even more of a focus this year as we bring to New Zealand the leaders of APEC for the most significant international trade conference ever in New Zealand.

New Zealand/Australia and the Next WTO Round

As agricultural economists you will all be aware of the new round of agricultural trade negotiations to commence under the auspices of the World Trade Organisation later this year. The importance of these negotiations to both New Zealand and Australia cannot be over stated. While the Uruguay Round made significant advances, it also left much undone. New Zealand, along with its Cairns Group colleagues will be doing everything possible to try and use the new negotiations to complete the task of agricultural trade reform and align it with trade in other goods and services in the international market. Four areas need to be addressed; tariff levels, export subsidies, domestic subsidies and state trading enterprises.

Tariffs are the only acceptable form of trade protection for agricultural products, but in many cases those tariffs remain at levels that prevent trade from taking place - 300% and more are not uncommon. I'm told that Japan has a 1200% tariff on Australian rice. From the point of view of efficient exporters - and consumers in importing countries - a prohibitive tariff has the same effect as the import bans which we strove so hard to eliminate in the Uruguay Round. And even our attempts to make use of new access gained through tariff quotas - holes in the wall of protectionism - have sometimes been frustrated by others playing tricks with WTO rules. In the forthcoming negotiations a key priority will be to further open market access in all countries and ensure rules are in place to stop the quality of that access being undermined by importing governments.

In the all-important area of export subsidies, I believe that progress will be made. There is no justification for the continuation of these highly distorting practices which are tolerated in the WTO system only for agricultural products. And it's clear that this view is widely held and more and more countries are joining the call for the prohibition of export subsidies. Export subsidies negatively affect not only the efficient exporters like Australia and New Zealand and many developing countries dependent of agricultural exports, but also the countries that are the recipients of subsidised goods. The short-term gains from lower import prices are more than offset by long-term damage to a country's productive capacity and a corresponding decline in its security of food supply. The only proper course of action for all WTO Members to take in the next negotiations is to set a date for the complete prohibition of export subsidies and strengthen the rules to ensure similar measures such as export credits can be used in their place.

The negotiations will also cover many other areas of great importance - domestic subsidies being high amongst them. In this area the disciplines that were agreed in the Uruguay Round were woefully lacking. In order to complement our ambitions in the market access and export subsidies areas, the provisions on domestic subsidies must have a real effect.

At the same time countries will continue the have the right to use non-trade distorting ("decoupled") measures in order to pursue domestic objectives such as those relating to environmental norms or rural income levels.

Trade is an all important part of the agricultural scene in New Zealand, Australia and many other countries around the world. Much of the work that many of you do every day is designed to further our competitiveness in terms of the high quality produce that is demanded by our consumers world wide. Likewise the negotiations to begin later this year will play a vital role in ensuring the long-term sustainability of our agricultural sector.

New Zealand/Australia Trade

This year (1999) marks the 16th anniversary of CER. Bilateral trade has increased over that period by 275 percent, which is largely a reflection of the success of CER. Australia is now New Zealand's largest export market, with exports to Australia rising from 8 percent of total exports to 20 percent over this period. New Zealand is Australia's fourth largest export market.

A significant development in 1998 was the Trans-Tasman Mutual Recognition Agreement, which means that anything sold legally in one country can be sold in the other without having to meet further standards and conformance requirements. Work will continue on focusing on areas where business is experiencing problems with this Agreement, including moves to harmonise standards and tighten regulations to ensure that difficulties in one area do not adversely affect the whole Agreement.

All this positive comment, does not mean that the relationship is without it's problems. As you will be aware, there are a number of sanitary and phytosanitary access issues that are still to be resolved, some of which have been around for a considerable length of time: access for New Zealand apples, salmon and poultry into Australia, and Australian tomatoes and trout into New Zealand - all issues I have been discussing with my Australian counterpart, Hon Mark Vaile, over the last two days. With the removal of quantitative restrictions on agricultural trade in the Uruguay Round, both Australia and New Zealand are well aware of the potential use of SPS measures for the purpose of providing an alternative form of protection for agricultural and horticultural producers. We must carefully guard against this and work at the international level to establish consistent principles and approaches to applying SPS measures. You are well aware of this, and I look forward to hearing about the conclusions reached at the pre-Conference Workshop on Border Security and Risk Analysis that was held yesterday.

Producer Boards

The Government is working hard to provide the trade access our productive sector so desperately needs. But we also need to make sure that Government intervention in the sector provides all of its participants with the commercial flexibility and incentives that the sector needs to maximise the benefits of exporting. So why trap the New Zealand agricultural sector in a legislative straightjacket?

I have encouraged debate on the merits of Producer Board legislation to New Zealand agriculture over the last 12 months, because it is my view that Government agricultural policy must benefit farming and the New Zealand economy, not add to its problems.

Do New Zealand meat and wool farmers receive a realistic return on the average $4000 levy they pay annually to fund activities of the Meat Board, the Wool Board and the Game Industry Board?

Should exporting fruit growers and dairy farmers be required by law to export only through the monopsony trading boards of Apple and Pear, Kiwifruit and Dairy, or with their permission and oversight?

A lot of grower and farmer capital has been invested in these organisations. These organisations have spent many dollars of their shareholders' funds defending their legislative monopolies on export marketing by lobbying politicians, farmers and the general public. Perhaps there is an agricultural economist here who might accept the challenge to show how the legislation adds to farmers' incomes. I would welcome such evidence.

If you look at many of the defenses of the status quo - they don't talk about legislation - they talk about industry structure. They make the case for the critical mass of a large entity selling from New Zealand. If this is the optimal structure, we could probably expect it to occur under an open market situation. As it is, dairy companies are merging voluntarily. Farmers should be asking whether legislation is necessary to achieve a Dairy Board type structure.

The big question which concerns me is the extent to which legislation imposes costs on farmers, lowers payouts and places restrictions on other New Zealand food companies without being necessary to achieve the dairy industry's desired structures. This is the issue we should be debating.

Government is not suggesting the existing commercial structures should be dismantled. Instead it is proposing that farmers and producers should be able to choose how their product is exported and marketed. If the existing structures are the right ones from the farmers' points of view, there is no need for legislation to achieve them. They are likely to grow faster and bigger without the current legislative constraints.

The dairy industry needs to continue to focus on the strategic issues of addressing its capital and corporate structure, its mission and its accountability and transparency to farmers as was clearly stated in last years BCG audit of the Board.

For some time now many farmers have been questioning some of the costs associated with the current structure such as the requirement to take all milk and the insufficient capital contributions required of new entrants to process and market it.

The legislative requirement to take all milk and the existing share structure of companies and the Board means that existing farmers' ownership in the Board and Dairy Companies is still virtually gifted to new entrants. That surplus milk is turned into commodity products and sold on less than lucrative markets. Some of the farmer payout on this marginal new production would have been cross-subsidised by existing farmers receiving a lower payout. Interestingly I note a change in farmer correspondence to the New Zealand Dairy Exporter of recent beginning to raise such concerns and I'm pleased the industry is endeavouring to remedy this.

The assets of existing farmers who have built up the dairy cooperatives and the Dairy Board have been valued conservatively at $10 per kilogram of milk solids if they were freely marketable. Farmers should ask whether the Dairy Board could be structured to give farmers choice about continuing to invest off-farm and hold those shares - yet still retain overall farmer control? The Australian Wheat Board is currently undergoing a similar change. It may provide some ideas.

We need to ensure that our productive sector has the greatest opportunity to innovate, respond to market opportunity and adjust quickly to market conditions. So I am at a loss as to why some continue to try to retain a legislative embargo on alternatives. Some of the questions farmers should be asking are:

- What if we added more value to milk, apples and kiwifruit in New Zealand by encouraging new investment into new products, people skills, processing and marketing approaches?
- What if the very good infrastructure of Dairy, Apple and Pear and Kiwifruit Marketing Boards were able to grow and diversify in adding value for their farmer shareholders?
- What if "new milk" paid the full $10 entry cost to New Zealand's dairy processing and marketing facilities (or could be processed independent of equity shareholding.)?
- What if farmers were given the choice of more than one buyer for their export produce? Would efficiencies be found? Would price be bid up?
- What if New Zealand's finest gourmet cheeses, wines, fruit and meats could be sold together into niche markets without a licence?

There is still huge potential to add value to milk in New Zealand. With new capital investment, more than the existing 20 percent of our product could be sold out of New Zealand in end consumer products. We could add more value closer to source creating new jobs and the like with beneficial impacts on provincial New Zealand. It is not the government that has closed over 100 dairy factories in Taranaki.

It is true that the Boards are starting to make some changes in moving towards more clearly defined ownership and more market-oriented payments systems. Unfortunately the longer it takes the trading boards to recognise the need for change, innovation and competition in exporting then the more concerned I become for the future of the agricultural sector.

Warren Hughes an economist from Waikato University had a very good paper, recently published in the Independent, highlighting some of the dynamic potential for a real return on farmers' investment when he compared the Dairy Board to IBM and Nestle. The board had done well when compared to IBM but the potential to achieve more is obvious.

We should also remember some of the costs that these structures have placed on growers in the past.

Without wanting to criticise with the benefit of hindsight, the degree to which we are vulnerable to these costs is a direct consequences of having all our eggs in one basket - a problem that could be solved by allowing contestable marketing.

New Zealand agriculture needs better returns. For so much of our most important agricultural sector to be constrained by legislation is not appropriate in today's global food industry.

Interestingly, many other countries have got ahead of New Zealand in operating in world markets. Producer Boards have been deregulated with considerable success.

All countries that have deregulated have experienced better export growth post-deregulation. We can't really say that this is solely because of deregulation, but:

- Growers benefit because the Board successors have stronger incentives to perform greater commercial flexibility and are more accountable. Growers may also have access to their considerable capital investments in the Boards, which enables them to diversify their investments; and
- Industries benefit from inflows of investment and technology. The degree of new, innovative marketing approaches in deregulated industries overseas has been impressive.

As a result those countries' economies are better off. Resources are used more efficiently and flow to where they are generally needed. But more importantly, growth prospects are good because of high levels of innovation. Of course, there was some short-term disruption as the industries adjusted to a free market. Most (if not all) of this disruption, however, can be mitigated if we learn from other countries' experiences and if the Boards cooperate constructively.

What more evidence of the benefits of deregulation do you need than to look at the example of Capespan in South Africa? Since deregulation, they have:

- increased grower returns
- improved efficiency
- maintained a large proportion of supply
- increased profits; and
- increased market capitalisation

Capespan now has the commercial flexibility to sell part of their business to Fyffes PLC, a European fruit trader who has a strong market position in bananas. This move complements their existing business and values Capespan at approximately 1.5 billion rand.

In the face of this sort of evidence I think the debate becomes even more important and more urgent..

While New Zealand's farming incomes continue to decline, our competitors are catching us up. They are producing their commodities more efficiently. We need to reform if we are going to keep ahead in world markets.

My challenge to this conference is to get involved in debate - debate about how best to utilise our land productively and to retain competitive advantage in international markets. Debate about the reform of the productive sector, legislative reform and the role of the producer boards in the future of the agricultural sector.

I am convinced that the single most positive impact currently available for New Zealand agriculture would be to remove the legislative restrictions to innovation, investment and value being added to farm-gate produce. If properly managed, we could again see more jobs return to provincial New Zealand. Most agree that the status quo is not an option.

Thank you.