Eric Watson: Trade future could be Made By NZ

Dairying in Georgia is usually more profitable than in New Zealand. Photo / File
Dairying in Georgia is usually more profitable than in New Zealand. Photo / File

There is a widely held view that growth in exports is the path to economic prosperity.

While exports are certainly important, exceptional growth is not going to come from sticking to the old recipe of making things in New Zealand and shipping them overseas.

I agree with Prime Minister John Key's observation that a crucial aspect of our economic future is bound up with everything related to food. It is crystal clear that as Asia's populations and per-capita wealth expand over the next few years, the region will grow rapidly as a buyer of food-related products.

Europe is also an important growth opportunity for New Zealand. In my view, the sovereign crises in Europe will ultimately transform the region into one that is more united, less dysfunctional and better co-ordinated in the areas of fiscal policy and banking.

This should lead to Europe's food markets becoming more accessible to Kiwi business.

How should New Zealand exploit these opportunities? One option is to grow or make more food here and ship it overseas. The problem with this approach is that New Zealand's physical constraints and dependence on imports are making our exports increasingly less competitive, and there's nothing we can do about it.

A case in point is the milk and dairy sector. My agri-scientist brother Richard and I run a dairying operation in the southern US state of Georgia. Comparative costs and margins are revealing.

New Zealand milk producers earn $2860 a cow, or $11,440 a hectare. The operating expenses, though, average $1690 a cow, leaving a profit of only $1170 for every cow. New Zealand earns only $4678 profit for every hectare of dairy farm.

In the US, by comparison, milk producers earn $2886 a cow. With operating costs of only $1523, they make a tidy profit of $1363 for every cow, or $6733 a hectare.

The US system operates at a lower cost and yields a 40 per cent higher profit. The reasons for the differences are several.

First, the stocking rate (cows per hectare) is higher on our [US] farms because the weather is wetter and warmer, so annual pasture growth rates exceed those in New Zealand. Also, supplementary feed stuffs are usually readily available in the US at relatively low cost. Higher stocking rates mean lower fixed costs per animal.

Secondly, many of the inputs for our farm operations, such as energy, labour, machinery, seed and fertiliser are competitively priced in the US.

Third and most importantly, the price of irrigated land in the southeast US is much lower than in New Zealand, with the price per hectare in Georgia sitting at just one-quarter of the price of high-producing dairy land in the Waikato (even allowing for the exchange rate).

Not all parts of the US are like this, but these economics apply to a land area that is two to three times the size of New Zealand, and there is plenty of under-used land to sustain growth.

These economics are not lost on Fonterra, which now sources much of its traded product overseas. It is also using Kiwi production technologies in South America, China and Eastern Europe to secure its future as the world's number one trader of dairy products.

This notion of applying our production systems overseas needs to be applied across our entire agricultural sector. Meat and wool, for instance, would do well to apply our "national I.P." to gain a competitive advantage in foreign markets rather than try to compete from afar.

Many countries that are rich in land and water need New Zealand to help them realise their potential. We could change our tagline to "Made by New Zealand".

- Herald on Sunday

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