New Zealand Executive Government Speech Archive

Times are tough in our meat and wool industries Two years ago, I was selling my cattle for around $980 a head. In the last twelve months, I've averaged around $680 a head, and, right now, prices are lower still. It seems I'm destined to be minister in portfolios where there is discontent.

One of the scapegoats for lower farm returns is the high value of the kiwi dollar. It's said to be caused by the booming Auckland property market. The more sinister blame those increasing house prices on immigration. And that allows them to use the sick political trick of blaming Asians for falls in farmers' incomes, when figures I'll share with you today show that Asia may well be the salvation of our beef industry.

It is true that according to the Real Estate Institute, Auckland house prices increased 36% from December 1993 to December 1995. But the Real Estate institute also reports that dairy farm prices increased by 70% over the same period. And the value of fattening properties went up 84%. So as much as we might like to, it's just impossible to blame troubles in agriculture on the Aucklanders. What's more, these property price increases don't contribute directly to CPI inflation as it is measured. Only rent and new house prices are included.

The key reason why our dollar has increased in value is because New Zealand has been a favoured nation in which to invest. Over the years, we can expect the dollar to continue to trend upwards as long as the current successful economic framework emains in place. Fiddling round with the exchange rate, and damaging our long term
prospects, is just not an option.

In any case, the high value of the kiwi dollar is not the primary cause of the drop in farm incomes. Even according to the New Zealand Meat and Wool Economic Service, the increasing value of the dollar has been responsible for only 18% of the problem. It's been the major fall in US beef prices which has caused 82% of the drop in our beef prices. So even if some other party did fiddle round with the dollar, and risk the return of inflation, farmers wouldn't see much of a return. The real issue is the value we extract back to the farm-gate from the world market.

For far too much of our product, we are mere price-takers on that world market. It means that whatever efficiencies or genetic improvements we make, or any devaluation of the dollar, can be wiped out overnight by a drop in international commodity prices. We have to get out of the turbulence of that commodity market, as far as possible. We have to turn to the relative safety of marketing branded consumer products. That is the only way that we can divorce the incomes of New Zealand farmers from commodity price swings overseas.

I want you to look at two markets. The first is beef.

The top line shows the US retail ground beef price over the years. The bottom line shows the farm-gate return to New Zealand farmers. Notice how they match one another almost identically. Whenever the price of hamburger patties in the US has increased, beef farmers in New Zealand have earned a little more. But when hamburger patties in the US have dropped in price, we New Zealand beef farmers have seen our incomes plummet.

That's hopeless. It's a picture of a typical commodity market. We haven't extracted any more value relative to that indicator price for our beef products. And it doesn't bode well for our beef industry that US cattle prices have now sunk to a 9 year low.

Now take a look at the lamb market. You'll see that retail prices for imported lamb on the British market have been trending upwards, with a slight drop over the last few years. But look at the farm-gate return. When subsidies were abolished in 1985, the farm-gate return dropped massively. But by 1990, schedule prices were back at their pre-reform levels. And since then, the trend has been upwards. Between 1986 and 1994, the schedule price increased by over 200%. Farmers are receiving a higher return relative to the UK retail price than they did in the mid-1980s.

That is evidence of more successful marketing and more efficient processing. Extra value has been extracted back to the farm-gate from the world market relative to the UK indicator retail price.

Just one of the reasons for that is this. Look how we've nearly doubled our exports of chilled lamb since 1991, as our access improved. And in the first quarter of this year, we've already shipped nearly 9,000 tonnes of chilled lamb to the EU.

Chilled lamb extracts a premium over frozen lamb. You could almost call it a luxury product. In the early 1990s, the shift into chilled lamb contributed to the change in relativity between the UK indicator price and farm-gate return we saw earlier. You'll notice exports of chilled beef have remained almost constant.

I was down in Timaru earlier in the week for a Deer Expo. They weren't talking about world commodity markets, and the dollar was hardly mentioned. They're not interested in selling "venison" and competing in some commodity market with producers overseas.

They're selling "Cervena" and "Zeal". And they guarantee a consistent product by demanding quality right through the production process, from pasture to plate. It involves on-farm quality assurance, accreditation of road transport companies, and standards setting for exporters and wholesalers. Wool is starting to make progress along the same lines. We need to take a similar approach with lamb and beef.

The North American hamburger market just doesn't offer us the stability of return we need. We need to look to the growth markets of Asia. Asia's middle-class is growing enormously. New Zealand's goal must be to supply that middle-class with the branded consumer product it wants. There are premiums if we do.

The good news is that we have been increasing our beef export volumes to the growing Asian market. Back in 1988/89, less than 12% of our beef went to Asia. In the last full year, that's increased to over a quarter. We've got to keep that going.

So far this financial year, New Zealand has earned $2,609 for every tonne of beef we've sent to North America. I expect we'll find that is now lower still. But we've earned nearly $4,500 a tonne from Japan. We've earned over $5,000 a tonne from Taiwan and Malaysia. In other words, for every tonne of beef we sent to North America for hamburgers rather than as premium product to these Asian markets, we missed out on around $2,000.

Interestingly, you'll see our returns from Korea were below that of North America. and that's despite Koreans tending to prefer our grass-fed beef over American grain-fed beef. It's one of the few Asian countries where we already have that advantage. Here's why our return from Korea was lower than our return from Japan.

In Japan, we have greater control over the distribution of our product. We sell it direct to retailers. Around a quarter of our beef exports to Japan are chilled product. We can sell a higher quality product, because we have greater control over maintaining quality all the way through to the supermarket.

In Korea, over 80% of our 1995 exports went through Government traders, and then on to the retailer. We can't sell high quality product that way because we have no control over the quality of product through to the end user. As a result, we're stuck with largely selling frozen product on a commodity market. And that frozen product earns New Zealand $4,100 a tonne less than chilled product. Chilled beef earns a premium of $4,100 over frozen meat. It's worth more than twice as much.

In fairness to the industry, we have had access problems to the Korean market, which have restricted our ability to control distribution. But the market is now being liberalised. That will mean we will be able to sell more premium product, like chilled beef, direct to retailers. We'll increase our returns.

The message is clear. The future of the industry cannot be in supplying frozen meat to commodity traders. The future lies in controlling distribution as far down the chain as possible; as close as possible to the end user. That's the only way we can guarantee quality and sell premium products. And, more and more, it is those premium product that are wanted.

The percentage of the food dollar being spent on food for consumption outside the home has increased and will continue to increase. People cooking themselves are demanding more versatile products which are easier, and quicker, to cook. They are looking for foods they perceive to be healthier.

The Poultry industry has responded to these changes more rapidly than anyone else. World production nearly doubled between 1984 and 1994, while beef remained static. The poultry industry is now seeking to take on pork for control of the breakfast plate. What chicken has done is produce the range of products that different consumers want, from whole chickens for roasting to over 200 specialty products. Like chicken has done, the beef and lamb industries need to more closely match their products to what the market wants.

Three things are needed.

First, we need greater investment in the marketplace. We need more market research, and we need to transfer that information back down the meat production process. I mentioned the success of the poultry industry. New Zealand research shows that one of the reasons for its success is that chicken is perceived to be less fatty than red meat. Why is it then that we continue to ask farmers to produce cattle far fatter than they would kill for their own consumption? Far less fatty beef can be produced, but the farmer isn't being asked to produce it, let alone offered a premium. We need market signals, such as the demand for less fatty meat, to make their way right to the farm-gate.

Second, we need greater control over distribution channels. That is essential to guaranteeing quality of final product. It's all very well for us to develop quality assurance systems which involve farmers, New Zealand transport companies and processing and exporting companies. We need to guarantee that the quality is maintained all the way through to the supermarket shelf or the restaurant plate.

Overseas retailers need to have confidence about the exact specifications and quality of New Zealand product they will receive.

When a consumer orders a New Zealand product from a restaurant, that consumer needs a high degree of certainty about the quality of product that will turn up on the plate. If you like venison and you order Cervena, you know what you will be served. Order beef in a restaurant and all too often you're taking a chance. Guaranteeing quality is the only way we can build loyalty from overseas retailers and consumers. It is simply no good for them to be involved in a lottery when buying our product.

The third requirement is for farmers to build longer-term relationships with meat companies. I've played the game of ringing the different meat companies on Sunday night asking which was paying the highest premiums. It boosts income for the next week, but it does nothing for the long-term health of the industry.

For meat companies to be able to invest in the marketplace, they need to be able to free resources from stock procurement. And for them to have confidence to be able to guarantee supply to overseas buyers, they need to have guarantee of supply themselves. That involves long-term contracts which are honoured. And it also involves getting those price signals from overseas markets to the farm gate.

If a company is contracted to supply a particular specification of beef to a foreign buyer, there needs to be an incentive for the farmer to produce it, and earn a premium. We need more sophisticated methods of sending market signals to the farm-gate than the current grading system. And we need closer coordination between breeders and fattening farmers so that we develop more of the stock which will deliver what the market is demanding.

Many will say this is all a pipe-dream. But it must be the ultimate goal. It is the only way to extract more value from the marketplace. No approach which relies on short-term, old-fashioned, and discredited ideas like devaluing the dollar will protect us from the swings and roundabouts of the world commodity market. Marketing will.

There are more than 5 billion potential consumers out there in the world. Hundreds of millions of them are entering the middle class. Those consumers represent a massive emerging market. By marketing our products to extract ever-greater value from that market, we can ensure that agriculture becomes an even stronger backbone of the economy in the 21st Century.