Welcome To The 21st Century

Meat Board AGM , Te Rapa

Good morning ladies and gentleman, board members, industry leaders.

I expect today on St Patrick's day you will be hearing plenty of the blarney, especially when this meeting comes to the discussion on remits.

I trust however that the blarney will not get the better of substance, as the seriousness of the issues we are considering today cannot be over-emphasised.

Some of you are expecting me to talk today about the Government's plans for producer board reforms. For my part I prefer to think of it in terms of the meat industry's plans for its own reforms.

From the Government's point of view the desired outcome from the debate over producer board reform is clear. We want to hear from the industry on its views of the future. And, in the end, we want to implement reforms which take the industry forward with a common view of where it is going.

As stated in the open letter to meat producers, the Government's broad objectives are:

To give you (farmers) real ownership and with it more say in the governance of your organisation. To improve the accountability and responsiveness to you for the use of your levy money. Your Board levies are a cost equal in magnitude to your rates. The Government does not intend to take any action which would put New Zealand management of the meat country specific quotas at risk. It is your industry. The Government is only involved in the reform issue because it has responsibility for the overall regulatory framework. Where such a framework exists, does it impose unnecessary cost? Is it unnecessarily restrictive?

My intention is:

to encourage the debate about preparing the meat sector for future challenges, and then to ensure that Government doesn't get in the way. In other words let the sector get on with it. Since the prospect of board reform was raised last year, considerable progress has been made in bringing the entire industry to the table.

I note the work done by the Federated Farmers Meat and Wool Section and the Federation of Maori Authorities. I thank them and other groups for the considerable effort they have been to, and for their clearly expressed policy positions.

And of course, the Board's own direct consultation round just completed is set to make a vital contribution to the debate in coming months.

In the final analysis the critical components to this debate remain as they have always been . "Transparency", "accountability" and "vision" should be the bywords to all our discussions.

Farmers and other industry participants with questions are entitled to have their questions answered and concerns addressed.

I want to invite all those with views and questions to feel free to make their contribution.

As I say, these are your reforms, and I can assure you that the views of all participants, the Board, processors and individual farmers will be fully taken into account.

An often used business tool when faced with a critical decision point is the SWOT analysis.

Today I will attempt to apply this approach to address the question of reform through discussion of the strengths, weaknesses, opportunities and threats facing the New Zealand meat industry.

One of the New Zealand meat industry's key strengths is its efficiency.

New Zealand farmers are the best in the world. Without doubt they are among the lowest-cost producers of quality red meat in the world.

Another key strength is increasing market diversification. In 1988 New Zealand lamb was sold into 88 countries. Last year it was sold into 111. In the past decade the number of countries into which New Zealand beef is sold expanded from 66 to 101.

Ten years ago the United Kingdom purchased 31% of lamb exports, last year the figure was 27%. Similarly beef exports to the US made up 76% of all exports in 1989 whereas in 1998 the figure was 52%.

On the branding side New Zealand enjoys a perceived naturalness, a "clean-green image". As a market branding position this offers considerable potential in an increasingly environment and food-safety conscious world.

New Zealand's meat industry also benefits, at least at this stage of play, through being ahead of its competition.

Unlike European and US competitors, who are just now beginning to face up to declining farm subsidies and incomes, New Zealand meat producers have been operating without Government supports since the mid 1980s.

As a consequence the New Zealand meat industry is already well on the way to adapting to market forces dominated by consumer and retail imperatives.

In the past decade stronger relationships have been developed between New Zealand meat companies and their customers. For example, some major meat companies are now running their own Quality Assurance programmes tailored to tracking meat from farm to customers.

Statistics on carcass exports clearly show the changing profile of our markets.

In the past ten years lamb exported in frozen carcass form has decreased from 59% of the market to just 17%. This indicates a steady trend towards further processing and the development of new innovative product, a direction which is unquestionably where New Zealand meat needs to go.

On the weakness side of the equation there is the reliance of our meat industry to quota markets in Europe and the United States. And there is the often discussed long-term decline in commodity prices.

We also have a long way to go on establishing strong value creating international brands.

In the field of opportunities New Zealand's meat industry is well endowed. While it is true that food fashion and security conscious consumers provide a threat to the industry, they also offer huge opportunities.

As part of the Government's wide ranging Foresight Project the strategic intent statement for the New Zealand Meat industry was identified as, "the food industry world leader in creating value in the knowledge area."

Essentially the idea is that New Zealand farmers will become, by 2010, the market leaders in the integration of science and technology with an increasingly discerning consumer market.

The Ministry of Research Science and Technology's scenario envisages the New Zealand food business making 20% of its profits in 2010 from knowledge based products through things such as licensing systems which help producers meet the ever increasing standards required by consumers in the areas of environmental sustainability and food safety.

And thus the cult of foodism, and lets face it, people care more about what they or even their pets eat now than ever before, is potentially a huge opportunity for agriculture.

The potential of genetic modification and biotechnology also provides both huge opportunities and, arguably, the greatest threats to New Zealand agriculture.

New Zealand is a world leader in biotechnology research and should hope to remain so, but the challengers are rising thick and fast.

The New Zealand agricultural industry now needs to learn how to utilise the opportunities presented by new biotechnologies, without endangering the trust and faith of its consumers in the process.

The debate over genetically modified food is gaining momentum. Food producers have now acknowledged their consumers desire to know what they are eating. But there is another aspect to the debate that should not be overlooked.

All food industries with the exception of fish from the ocean have over time been selectively bred for preferred characteristics. Biotechnology may speed up and more directly achieve such results. The opportunity for genetic manipulation of pasture species to produce twice the level of quality dry matter production could dramatically improve our pastoral farming viability in New Zealand. The ownership of that skill by our competitors could lead to our demise. The stakes are high.

I hope for a more balanced public debate as more people are brought into it. We need to ensure that any labelling system is sensible, workable and meets our international obligations. The current debate is largely a non-issue in the US but a real political hot potato in the UK, potentially seriously damaging the UK's agricultural competitiveness.

It is clear that consumers want choice, and to be treated with respect. There is no evidence yet that anything other than a small minority are fundamentally opposed to genetic science. It should also be noted that so far the debate over pesticide residues, one of the key potential benefits of genetic science, hasn't even yet begun.

Like biotechnology, trade reform also provides both opportunities and threats to the meat industry.

New Zealand farmers are understandably skeptical about the pace of change being achieved towards free trade, especially in agricultural products. The Uruguay Round, while delivering reasonable results for New Zealand agriculture, was only a first step in liberalising agriculture trade. Much of the dairy industry's recent ability to increase volume sales around the world has come from the Uruguay Round.

New agriculture negotiations are due to get under way in the WTO at the end of this year. These negotiations provide a real opportunity to achieve real gains for New Zealand farmers through better access to markets and reductions in the negative effects of others' subsidisation in those markets. New Zealand's (and the Cairns Group's) determination on this front is well known by our trading partners.

Recent ructions in Europe and the United States hail more from the fact that their agricultural industries are finally being forced to face up to long-needed reform, than to any growing political tendency towards stepping backwards into protectionism.

Significantly all the work being done on trade reform, by the WTO, by the Australasian Prime Ministers' working group on CER, by APEC, by the Cairns Group, by South America's free trade grouping Mercosur, by NAFTA, and even by the seemingly immovable Europeans, is predicated by a general commitment, globally, to growing free-trade and internationally trade is growing at three times the rate of production.

It would be churlish however to suggest that aspects of trade reform do not also pose a threat to the industry.

Specifically, liberalisation would lead to improvements in efficiency in a number of countries. As a result, lower-cost producers in eg South America and Eastern Europe might be able to produce at even lower costs and displace New Zealand from its lowest-cost quality producer status. But if anything this threat provides an even greater incentive to ensure that New Zealand produce is positioned at the top of the value chain through a commitment to excellence and consumer responsiveness.

Other threats to the meat industry are posed by the climate, and the political environment both locally and internationally.

This is an election year and there are political threats to farmers. To those who think there is an alternative I would like to remind you that Government's action and policy towards the productive sector over the last 15 years have almost entirely been aimed at reducing the cost structure of all of our exporters, of whom our farmers still represent an important majority.

The costs imposed by high tariffs on farm inputs have been eliminated. Parallel importing is lowering farm input costs. Reprioritising of Government spending and Government restructuring have resulted in quite major tax reductions to businesses such as farming, again leaving more in farmers' pockets than would have occurred if Government expenditure had remained at previous levels. Port reforms have halved the costs of our ports over the last decade.

The advent of the Employment Contracts Act has lowered many farm servicing costs. For example, a cattle beast being killed for export today costs between a quarter and a third of what it did a decade ago. The introduction of competition into the rural transport sector, the meat industry, shipping, the energy sector, telecommunications, and many other sectors have brought considerable reductions in costs and service improvements over what would otherwise have been the case in remote rural New Zealand.

Likewise, interest rates are less than half what they were a decade ago and realistic exchange rates are the result of Government actions also aimed at assisting both exporters and ordinary New Zealanders.

Internationally the New Zealand meat industry is in a rapidly changing, complex and vulnerable environment.

How then does all this impact on the producer board reform debate?

Ultimately it is clear that the global trends, threats and opportunities I have been discussing are not matters entirely within the power of an institution such as the New Zealand Meat Board to deal with directly.

Ultimately, evidence suggests that the development of new "knowledge-based" licensing systems for food production safety and supply line efficiency will be owned by someone.

Such systems will be the source of competitive advantage, and, like brands, they will become highly valuable to their owners.

In the Meat Industry Foresight Project it was envisaged that New Zealand based operators would not only "own" these systems, used for meeting the complex food standards of the world, but that they will also export these systems to assist other agricultural producing nations to meet the increasing demands of Western consumers.

The important question in all this for the producer board debate is "is the current Meat Board legislation the best entity to develop proprietary systems and can it even perform such a role?"

If they were they would not provide anyone with a competitive advantage, all they could hope to do was raise the level of the general playing field.

The way these forces operate can be easily seen through the operation of the Meat Board's joint venture promotional fund.

As the carcass trade declines, meat companies are increasingly involved in direct purchasing relationships with off-shore retailers. Through these relationships, jealously guarded, the companies are in the process of developing valuable branding relationships with their consumers.

So what is the role for the Board into the future?

At present the Meat Board contributes to this process by providing joint-venture funding for promotional campaigns.

But is it beneficial for the industry to have this source of promotional funding assistance? How much promotional value is received from the levy paid by Waikato dairy culls sold into the US manufacturing beef market?

As a meat company executive recently observed to a colleague, the Meat Board joint-venture promotional fund is, "like a bank, only better, because you don't have to pay it back."

The joint-venture promotional fund's impact on the industry is as a result of this disproportionate to its size

Any meat company which does not bid for funding is effectively placed at a competitive disadvantage to those that are receiving the funds assistance. The result is to misdirect the effort of processor's marketing departments, which ought to be directed externally at customers, at securing Meat Board funding.

Farmers need to ask who is best placed to know markets needs, commercial sellers or the administrators of compulsory levies?

Some commentators such as Federated Farmers Meat and Wool Section have expressed a clear preference on this issue. Generic promotion ought to be funded by the industry rather than by farmers.

Clearly others have a different view.

There are similarly widely ranged views on other aspects of the Meat Board's role in the industry.

For example, is farmer levied money better spent on on-farm research or on production technology? Or would it be better still in market development and brand development?

Again Federated Farmers consultation on this issue produced a clear preference for farmers money to be confined exclusively to on-farm research.

From my perspective, for the same reasons that contestable promotional funding is potentially distortionary in the industry, Research and Development priorities are possibly best determined, and funded by, the users of the technology.

There are other fundamental questions farmers need to ask in relation to levies.

Should farmers be able to have a say as to whether a levy should be raised, its size and how it is spent? - What are the policy characteristics of "industry good activities"? Would some of the Board's current activities be more appropriately funded on a commercial basis?

- What should the Government's role in the levying process be?

In my letter to producers sent last month I observed that any levy system should not crowd out commercial enterprise. Nor should farmers be forced to pay a levy for things that are inherently commercial.

On this and all the other issues I discussed in my letter to farmers I am keen to keep the momentum of debate going.

So far as the referendum planned for Meat Producers later this year is concerned, a referendum is a useful way of polling farmers on the questions to be asked. And I'm sure John (Acland) will ask the right kind of questions.

From the outset of this process the Board has recognised the need to consult with farmers on the changes it had in mind. The Government welcomes that.

Following the consultation round just completed both the board and Government will be digesting the feedback received..

I expect both parties to do some long hard thinking about what farmers have said.

Like any successful business, the future of farming lies in providing goods and services, as efficiently as possible, to meet the needs of overseas meat consumers. As many of you know, consumer are becoming increasingly demanding.

This creates challenges and opportunities. Farmers and exporters who are quick to adapt and innovate will do very well. The key to success is an ability to adapt, strong disciplines on the use of capital and vigorous competition and innovation. It is time to move our horizons beyond the Board's statutes and look to a strong, self-sustaining commercial future for all in this important New Zealand industry As the title of a recent book says, "Sacred cows make the best burgers".