Food for Thought | Country Magazine

With the Ministry for Primary Industries seeking to lift the productivity and profitability of New Zealand’s primary sector and double export returns by 2025, Country looks at some of the value-add challenges we face.

While in international terms New Zealand has a strong pastoral agricultural advantage underpinned by good science and research, lifting the productivity and profitability of our primary sector lies in leveraging further off these strengths and capabilities – without any degradation of the country’s natural resources.

Discussions around the value chain and whether New Zealand can expand its economy by further processing the food products we already produce, has largely centred on the dairy industry, although other sectors – like meat and horticulture – are just as relevant and topical.

Lincoln University honorary professor of agri-food systems and agri-consultant, Keith Woodford says the issues and strategies are different for each of these sectors and the topic as a whole is a complex one.

Woodford talked to Country specifically about the dairy industry and says if New Zealand is to capture the add-value opportunities present in the global dairy sector, it needs to build non- seasonal capacity into the industry.

“Our seasonal system becomes an increasingly important constraint when looking to diversify to products other than whole milk powder,” he says.

“For many decades we have supplied long-life commodities into the international market and that has worked very well for us.

“But now the world is changing. As the world has become one big global market, commodity volatility has increased. In addition, and this is particularly the case in China, brand premiums can be very large over and above commodity prices. However, it costs a lot of money to develop brands.”

As Woodford sees it, New Zealand has a clear choice to make.

“Do we stick to seasonal production systems and volatile commodities, or do we focus on non-seasonal production and value-add?

“For most value-add dairy products, it is not possible to work within a seasonal production system. It greatly increases the manufacturing infrastructure and it only works for long-life products.”

The challenge with non-seasonal production systems is that they work much better with some form of winter housing.

“These systems give increased production eficiency as well as a at milk production curve, but of course have high capital cost,” says Woodford.

"As the world has become one big global market, commodity volatility has increased."

Lincoln University honorary professor of agri-food systems, Keith Woodford

“For the majority of New Zealand farmers, this is currently too much to get their minds or wallets around. We should have fronted some of these matters many years back, but all that people could see at that time were the existing markets for the ‘white gold’ (milk) commodities.”

Woodford goes further and says New Zealanders in general have yet to come to terms with the notion that seasonal production systems, commodities and price volatility go hand in hand.

“Similarly, non-seasonal production, higher prices, higher costs and less volatility also go hand in hand. But there are no easy paths to prosperity and the world does not owe us a living.


"Both in the commodity and the value-add worlds, some people are going to succeed and others are going to fail."

Lincoln University honorary professor of agri-food systems, Keith Woodford

“Both in the commodity and the value- add worlds, some people are going to succeed and others are going to fail.”

Woodford claims that there is a definite disconnect between those down-on-the- farm and the “real” consumer world.

“Again, this is particularly the case for China. Most New Zealand farmers have no direct experience as to Chinese consumer attitudes and the drivers behind Chinese buying behaviours,” explains Woodford.

“So farmers are very dependent on what their leaders tell them. Unfortunately, New Zealand’s industry leaders have got caught in a time warp rather than aiming at the world of the future.”

It is very hard for producers to capture value-add opportunities themselves, according to Woodford.

“The big opportunity that individual dairy producers should be working on is converting their herds to A2,” says Woodford. Cows from A2-certi ed herds carry two copies of the A2 allele of the beta-casein gene resulting in easier-to- digest milk.

“While most individual producers will not make any quick money from this, it is about positioning themselves for the future.”

Woodford says the only company currently paying premiums for A2 is Synlait, and there are about 35 farmers who are currently receiving premiums – albeit of only 15c per kg milk solids.

“All the additional A2 premiums – which are very large – are being earned along the value-chain,” he says.

“Fonterra had huge opportunities to be a world leader with A2, in which case almost all NZ farmers could have benefitted. But I feel they dropped the ball badly on this one.”

Whilst Woodford says China is not the “be all and end all for commodities”, without them, New Zealand struggles, both with its value-add and commodity products.

“Europe and North America do not need us, Africa cannot afford to pay the prices we need and the Middle East is currently struggling because of oil prices and other political issues,” points out Woodford.

“So that leaves Asia as our major market. And within Asia, China’s economy continues to grow faster than elsewhere.

“Last year, China’s consumer spending increased at over 11 percent as the economy shifts from investment to consumption. Food is definitely one of the industries to be in, but it has to be the right food, and positioned correctly for the market.”

For the last 20 years, China has made huge investments in building new cities, building huge highways, building high speed railways, building power plants, and increasing its manufacturing capacity. Woodford says now it is moving more to consumption.

“There are big winners and losers in this. For some it means pain and for others it means entrepreneurial profits.

“For dairy products, it is all about Chinese mums and dads wanting to do the very best for their children. And that means buying products manufactured either in Europe, America, Australia or New Zealand.

“Chinese parents work on the basis that whatever the foreign mums and dads are buying, that is what they want. Just being manufactured overseas is not enough. To get good premiums it has to be the same product as is sold in the overseas markets.

“Chinese consumers do their research very carefully – and they know what is selling in these overseas markets.”

Woodford says the importance of brands extends right across the Chinese economy but dairy products – with their importance in the diets of babies and growing children – attract at least as much research as would go into buying a house or car.

"The challenge with the online space is that it is a jungle. If New Zealand marketers work by themselves, then the consumers will never find them."

Lincoln University honorary professor of agri-food systems, Keith Woodford

 

In terms of marketing, Woodford has long advocated that New Zealand needs to market itself via a central online site – a ‘New Zealand Inc.’ philosophy.

“Chinese consumers increasingly buy their food online and get it delivered to their apartment as logistically, this
is much simpler than going to the supermarket where there is a lack of car parking,” he says.

“The challenge with the online space is that it is a jungle. If New Zealand marketers work by themselves, then the consumers will never find them.

“There has to be one online site where all marketers of genuine NZ food have their products. The Chinese consumers buy them all from the one ‘purchase cart’ and it arrives at their apartment within 24 hours.”

Woodford reckons this is totally feasible, but trying to make it happen all over China will take time and investment. Meanwhile, New Zealand misses out while the Europeans and Americans, lead.

Woodfords says in the long run, it’s a balance between cost efficiency and entrepreneurialism.

“The dairy goat and sheep milk industries are great examples of how markets and production must go hand in hand,” he says.

“However, both are high risk for new entrants, particularly if the investments are production-led.”

New Zealand’s credentials are often over-estimated. While our environmental standards are far ahead of countries such as China and can provide a marketing advantage, the notion that our pastoral farming is clean and green does not really stand up to close scrutiny.

“We are only now starting to face the issues that parts of Europe, such as the Netherlands, have been facing up to for twenty years,” says Woodford.

MEATY CHALLENGES

New Zealand meat industry commentator, Allan Barber, says the production value chain issue is intricate.

“Producers need to have a clear idea which outlet(s) their production ts from the perspective of quality, price profile, seasonality and regularity of supply,” says Barber.

“Some examples of these differing requirements are producing early season lambs to meet the chilled specification of the UK supermarket trade, prime beef with marbling for the top restaurants in Asia, and A2 milk for supply to China through Synlait or A2 Corporation.”

"Producers need to have a clear idea which outlet(s) their production fits from the perspective of quality, price profile, seasonality and regularity of supply."

New Zealand meat industry commentator, Allan Barber

Barber stresses that unless the farmer studies, or is informed by his processor of the real world consumer demands for his production, there’s a risk that the two ends of the value chain may not be connected, or if they are, very tenuously.

“One way of avoiding this trap is to supply against a contract which guarantees rewards for meeting specifications of quality, volume and timing. Another way for very large producers would be to contract directly with the overseas customer, as occurs with wool,” he says.

“Except for those farmers who are large enough to contract directly for their total production, added-value opportunities are restricted to niche products and outlets.”

Barber cautions that when China decides to slow down or stop buying, our producers can have a problem selling the excess elsewhere or at the same price.

“China is an increasingly important component of a processor’s market portfolio and has provided a good alternative destination when Europe or North America have not been buying or paying as much as usual,” says Barber.

“There are big winners and losers in this. For some it means pain and for others it means entrepreneurial profits.

“For dairy products, it is all about Chinese mums and dads wanting to do the very best for their children. And that means buying products manufactured either in Europe, America, Australia or New Zealand.

“Chinese parents work on the basis that whatever the foreign mums and dads are buying, that is what they want. Just being manufactured overseas is not enough. To get good premiums it has to be the same product as is sold in the overseas markets.

“Chinese consumers do their research very carefully – and they know what is selling in these overseas markets.”

Woodford says the importance of brands extends right across the Chinese economy but dairy products – with their importance in the diets of babies and growing children – attract at least as much research as would go into buying a house or car.

"The challenge with the online space is that it is a jungle. If New Zealand marketers work by themselves, then the consumers will never find them."

Lincoln University honorary professor of agri-food systems, Keith Woodford