Business 2000: A time to milk it down on the farm

By PHILIPPA STEVENSON agricultural editor

The record books were well thumbed in 2000 by a New Zealand agriculture sector searching for a year which had been as brilliant.

The catchcry was that it was the best year in the past 20.

But most would happily have left out the qualification. To them it was simply the best year ever.

It was topped off in the dying days of December by the heaviest of the economy's heavyweight agricultural businesses - the dairy industry - announcing the agreed mega-merger of the $2.5 billion New Zealand Dairy Group with the $2.4 billion Kiwi Dairies, and the integration of the $4.3 billion Dairy Board as the combined company's marketing arm.

Suddenly, after years of vacillation, the industry that singlehandedly produces nearly 25 per cent of the country's exports put itself on the verge of ditching its divisive and inefficient structure for that of a lean, mean marketing machine.

There are serious hurdles to overcome before the deal is done, but as 2001 begins there is hope that the leading exporter - 40 per cent bigger than the meat industry, five times that of wool and 30 times greater than wine - will be milking profits from the world like never before by June 1.

Throughout the year, agricultural product processors and service companies reported record profits or, in some instances, a welcome return to profitability. In some years, company returns have been at the expense of farmers and growers, but 2000 was a winning one on both sides of the fence.

Apple growers competing in an international market awash with fruit and struggling with the wholesale change of their industry after major marketer Enza became dominated by two corporates were probably the single exception.

The Ministry of Agriculture and Forestry, forecasting export returns until 2004, predicted that only apple exports would fall during the period. All other sectors - dairy, meat, wool, kiwifruit, other horticulture, lumber, logs and wood panels - would show substantial increases in value.

The Meat and Wool Economic Service said sheep and beef farms were about to have their best season since the restructuring of the New Zealand economy began in 1985.

Farm profit before tax was forecast to be up 11 per cent on the good level of the previous season as favourable growing conditions continued, and the export-favourable exchange rate delivered a major bonus.

This "provided a window of opportunity for farmers to position their business for long-term prosperity," said service executive director Rob Davison.

While enjoying his own company's profitability, Wrightson managing director Dr Allan Freeth warned that the top of the commodity cycle was a dangerous place for an agricultural sector that typically grew complacent at such times. He said there was a danger of systemic problems being overlooked.

"We all know that in two years' time the cycle will be back down and the businesses that have not adapted, not changed and not put strategies into place will be in exactly the same position."

Some might be able to afford the rollercoaster ride but the New Zealand economy could not, and Dr Freeth said the agricultural industries had a unique opportunity to do things while times were good and away from pressures of dealing with debt or disasters such as drought. That was certainly the case for the $1 billion wool sector.

During 2000, a report by McKinsey and Co recommended wholesale change for one of New Zealand's oldest export industries, which is teetering on the verge of extinction.

The idea of integrated farm-to-market companies for the bulk of the wool clip that is used in carpetmaking, and for the niche-marketed fine Merino wool used in fabric, has created a storm among the hundreds of companies and individuals used to "clipping the ticket" on wool's way through.

Dr Freeth said it was not surprising to see the move by vested interests in New Zealand and worldwide against "reform which will release value within the industry to growers and the people prepared to create value.

"Many organisations who fill the wool industry and have had control of the flow of wool and its trademarks are now responding, as does any institution that is potentially losing its control. It echoes of protection of profits, but it is in the context of an overall industry that has been a disaster for New Zealand in the last five years."

McKinsey had pointed out that if production was going to be treated as a commodity "that will be the only value you can ever hope to get," said Dr Freeth.

Wrightson had introduced integrated fibre management and begun relationships with overseas carpet makers, many of whom did not use New Zealand wool because of supply problems. The price of wool was not important to such businesses.

"What's important to them is the hundreds of millions of dollars or pounds of capital tied up in their wool processing machines. If they can get 10 per cent efficiency through a supply chain that is delivering what they need at one end, then that's huge value creation that can be transferred."

Dr Freeth said woolgrowers should not be spooked by dire warnings from the middlemen.

"They need to take heart and not blink. We've got a one-time opportunity to create real value."

John Loughlin, chief executive of the country's biggest meat company, Richmond, spoke of similar issues for his company, and the food industry in general, at the company's December annual meeting.

He said many of the megatrends that had run through the meat business for some time would continue in 2001.

They provided "pitfalls for the unwary and the opportunities for the strong to consolidate."

Food safety was a major issue.

"Higher and higher standards are being required as regulatory minimums and as customer prerequisites. It puts pressure on our ability to maintain efficiency and to create wealth," he said. "However, the flipside of this is that a failure in food safety can be the end of any food business."

BSE, or mad cow disease, had again become a major issue, which was having an enormous impact on beef consumption worldwide, even in markets not affected by outbreaks of the disease.

Mr Loughlin said consumers were becoming more demanding, especially in relation to convenience, presentation and meal inspiration.

"This is more of an opportunity for us than a threat. As we become more of a food business we are better and better placed to respond to this."

However, the growth in power through consolidation of retailers and food manufacturers was more of a threat. The next big change would be multinational customers moving to global sourcing of their product.

"Instead of buying market by market, they are buying across their organisation in total," he said.

Mr Loughlin said there was little mileage in "trying to flog ourselves harder to sell the same thing at different prices.

"We must recognise that our products have lifecycles and that our job increasingly will be about matching consumers' wants and needs with innovative products that command price premiums."

Presenting a better end-product would be critical, he said.

"One of the key messages of our brand, and our food company positioning, is that we are not simply stuffing denuded animal flesh in plastic bags and boxes but presenting somebody with their meal.

"We need to take the value chain concept further and get everybody focused on the production of the end food item.

"A lot of the behaviour right through the supply chain is too much focused on animals and not on attractive food.

"It is important that we build the psychology that we are wanting to produce food that we are proud of and that someone will enjoy. This is the key to unlocking value."

Dr Freeth said that in 2001 agricultural leaders would do well to continue to push the message that New Zealand's economic prospects were absolutely dependent on an agriculture-based knowledge economy.

"Government can say the right things but it's behaviours that count," he said.

Last year's Government-sponsored Auckland business forum, from which agricultural representatives were conspicuous by their absence, sent a clear signal of where the Government considered agriculture, Dr Freeth said.

"It was just not on the scoreboard."

A perception of agriculture as a sunset industry had wrongly become ingrained, "and when agricultural leaders try to make points it's seen as a continuation of on-farm whinging."

Yet economic analysis showed that GDP gain from agriculture with the application of knowledge technologies was substantial, he said.

"Even without the use of GMOs [genetically modified organisms] the gains suggested are between a $3 billion and $18 billion increase on GDP over five years."

Critical issues to be considered were the future of agricultural research and the intellectual property based in research organisations.

Herald Online features:

2000 - Year in review

2000 - Month by month

2000 - The obituaries