New Zealand Executive Government Speech Archive

Almost all my personal farming experience has been in sheep and cattle. Most of my contact with the dairy industry has been through the Dairy Board where I worked as Area Marketing Manager for Central and South East Asia. I have to confess that when I was a kid, we sheep and cattle farmers saw ourselves as the real farmers. We looked down our noses a bit at the "cow-cockies". How things have changed. Now, we cattle farmers look enviously at the success of the dairy industry. We graze your heifers and grow maize for your silage.

If I didn't have such interest in cattle breeding, I might even convert, just as many sheep and cattle farmers are. Over 50% of the increase in cow numbers - or over 70,000 cows - has come from recent conversions. From 1987 to 1993, dairy farming expanded from 1.35 million ha to 1.62 million ha. Even the Meat and Wool Board's Economic Service predicts that will increase again to up to 1.9 million ha by the year 2000. And this year, you'll receive the highest payouts since the mid-1980s.

It's easy for detractors to try to put that down to luck in the form of good weather, increased production and favourable world prices. Luck always plays a part in the agricultural industry. But you've been up against increased milk production in the US and Australia. And, like all exporters, the higher kiwi dollar has dampened the impact of your higher international prices.

What we have seen in the dairy industry, compared with our other less successful farming industries, has been a greater focus on international marketing. Twenty-one percent of dairy exports this season were products which did not exist five years ago. Since 1991, dairy exports have grown 33% by volume and - tellingly - 38% by value. Consumer pack sales have increased 80% over the last five years and will reach $1.35 billion in 1996. Twenty-five percent of product sold is now in branded consumer product form.

Partly because of the UK's entry into the EC, and partly through good management, the dairy industry has moved away from commodity trading and into branded consumer product marketing and specialised high tech products. I launched one in the early 1980s- Anchor milk powder in the Philippines. I was pleased to find out today it remains the market leader.

It has been marketing which has meant exports to Japan increased 25% in the last year, as Japan overtook the US as our second biggest export destination for dairy products. Exports to Thailand increased 32%. Exports to Indonesia increased 51%. Malaysia and Taiwan also increased their imports of New Zealand dairy products. We gained greater access to Europe with the entry of Austria, Finland and Sweden into the EU. On the downside, oil exporters, on the whole, took less New Zealand product due to economic and political problems. Saudi Arabia and Venezuela were the key exceptions.

So it's been a good year. The dairy industry has demonstrated that things like the value of the New Zealand dollar are not the key determinants of success in the world market. Today, I want to comment on those economic issues which are worrying some farmers. I want to discuss the medium-term outlook of the dairy industry. And I'll comment on the Government's programme for the year ahead.

We hear a great deal from some exporters about the high value of the New Zealand dollar. The argument goes that the Auckland property boom is fuelling inflation, which causes the Reserve Bank to be nervous about its 0-2% target, and so interest rates and the kiwi dollar are kept artificially high. The more sinister among us blame immigration for the property boom. That allows them to take the illogical, easy but popular leap of blaming Asians for reductions in farm incomes. The irony, of course, is that the Asian market is the very market our agricultural industry is increasingly dependent on.

Nevertheless, it's true that, according to the Real Estate Institute, house prices here in Auckland increased by 36% from December 1993 to December 1995. But it's also true that the Real Estate Institute reports your dairy farms increased in value by an average of 70% over the same period. And ironically, fattening farms went up 84%. So if some farmers want to blame property prices for any reductions in incomes, they can't lay the blame entirely on the townies.

But, in fact, rising property prices don't contribute directly to CPI inflation as it is measured by the Statistics Department. Only rent and new house prices are included. So the argument put forward by some farmers and political parties is not all that soundly-based.

The reason we have seen the New Zealand dollar increase in value is largely because New Zealand is now a favoured nation in which to invest. But it has also increased because New Zealand has high real interest rates by international standards. And our high real interest rates are caused because New Zealand, right now, is a nation of borrowers, not a nation of savers. New Zealanders seem to say "interest rates are too high, let me borrow some more". Private sector borrowing by New Zealand residents increased by 11.9% in the year to January 1996. That is a key reason for inflationary pressures.

To remove that pressure, we need to encourage New Zealanders to save, which is why the Government is urging people to save their forthcoming tax cuts.

Were monetary policy to be relaxed right now, real interest rates and the dollar would fall. You'd immediately see even higher returns. But given the propensity of New Zealanders to borrow, we would undoubtedly see the return of high levels of inflation. That's the last thing farmers, or any exporters, want to see.

Over the years, we can expect the New Zealand dollar to rise gradually, as long as New Zealand maintains inflation below that of our trading partners. And it will tend to trend upwards as our economy becomes stronger relative to other economies. A weaker economy would mean a weaker dollar over time.

Those who see economic advantage through a lower dollar are contradicting themselves. When they say they want a weaker dollar, they are, by implication, saying they want us to be perceived as a weaker economy. That can hardly be the path to economic success. Our economic success can only come from competing successfully, as the dairy industry has done.

It depends on us continuing to improve our production techniques at the farm level. It depends on us continuing to focus on the marketplace and creating the products that market wants. And in the dairy industry, we will need to continue to seek improvements because the medium term outlook presents us with challenges as well as opportunities.

Prices are expected to ease in the short term. While GATT will gradually reduce the volumes of subsidised exports, those volumes will remain large.

The announcement by the United States this month of a further round of dairy export subsidies is a major disappointment. The so-called FAIR Act, leaves the US dairy industry largely unchanged. Worse, when that FAIR Act expires in 2002, the 1949 Farm Act will go into effect. That means there is no end-point for US dairy subsidies and the debate will have to be had all over again.

Australia and New Zealand are both expected to increase exports over the short to medium term. At the same time, economic and political difficulties in oil producing countries may also cause demand to decline short-term. Countering that, is an expected increase in demand from Asia.

The overall short term outlook is for increased supply, and more uncertain demand. While prices will be lower, they should remain above the levels of early 1995. In the medium term, prices are expected to increase, as GATT reduces export subsidies and as demand continues to increase in Asia. Overall, things look positive. We'll benefit from greater demand and reductions in subsidies. But we will face greater competition.

We're well placed to meet that competition through the increased investment we're seeing right around the country - Lichfield being only the most well known recent example.

The Dairy Board Amendment Bill will provide security of ownership of capital and assets in the event the board were ever dissolved. The long-term ownership of brands will become more secure and we will have assurance that if the board were ever dissolved, marketing activities would continue.

The new share structure will mean ownership will become more transparent. New entrants into the dairy industry will have to purchase ownership of the existing investment. People like me won't just be able to convert to dairying and gain the benefits of your long-term investment. We'll have to buy into your investment.

Right now, the value of dairy farms reflects both the value of the land and the value of the industry investment. The reform should change that. The value of the farm will reflect the value of the land. Access to the industry's infrastructure will be owned separately. That means the increase in farm prices should slow. Young farmers won't be faced with such massive land prices. But the $1 share value will send them an economic signal of the approximate cost of marketing the product made from an additional kilogram of milksolids.

I expect the bill to pass this year.

The Government also intends to have our Pest Management Strategy for Tb in place as soon as possible. Implementation depends on the introduction and passage of the Biosecurity Amendment Bills and I've told MAF I see that as a major priority.

The Government is giving consideration to continuing to support the research programme aimed at developing new cost-effective biological control methods for possums. We spend about $35 million annually trapping and poisoning possums. The cost is increasing. We will always need to use a range of approaches to control possums, but biological control offers the greatest hope of cost-effective long-term control. In 1992, the Control of Possums and Bovine Tb National Science Strategy Committee identified the need for a programme to address biological control. In 1993, the Government agreed to fund the programme to the tune of $2 million a year for three years. We're looking at possible further funding.

The programme has already made progress over the last two and a half years. We've been searching for parasites and pathogens in possums both here and in Australia. The best known progress has been the discovery of "Wobbly Possum Syndrome" which was found in possums at Invermay. It's thought to be due to a virus, and work is continuing to clarify its role and the potential of the disease as a biocontrol for possums. Welcome progress has also been made on developing understanding of reproduction, lactation and embryo development. An immuno-contraceptive is now seen as a distinct possibility within five years. Details of any further funding will be announced in the Budget.

Government initiatives such as this help the industry. But they aren't the most important factors in your long-term success. Long-term success depends on ever-improving marketing.

The dairy industry has set the standard for the rest of the agricultural industry in New Zealand. You have done tremendously well over the last two decades. You need to continue building on that progress. You need to focus on the value you can extract from a growing market place, and bring more and more of that value back to the New Zealand farm gate. I look forward to working with you and playing my part as Minister of Agriculture.