KEY POINTS:
Next time you pop a pill, take a second to think about our dairy industry.
The connection might not be immediately apparent, but according to dairy giant Fonterra, its joint venture with European dairy company Campina is a perfect example of how New Zealand is taking a giant
leap back to the future.
The joint venture is targeting the pharmaceutical industry, by extracting high-quality lactose from cows' milk and turning it into the magic ingredient that helps us swallow medicine more easily.
It's a high-risk gamble: you can lose millions in the drug industry if the science doesn't work in your favour. But for New Zealand, the gamble is probably worth taking, given that the returns from pharmaceutical and nutriceutical products are likely to be far more lucrative and stable than earnings from commodities such as milk and cheese.
"You will take your medication regardless of what the economy does; regardless of what price cycles do," the joint venture's chief executive, Herman Ermens, told The Business in February.
According to Ermens, the Taranaki factory which processes the lactose is the most modern of its type anywhere in the world. And there are plenty more examples where that came from, like the food research centre in Palmerston North which has found a way to extract Omega-3 from fish oils, without the fishy taste. Or the foresters who are trying to extract ethanol from wood.
"Functional food" is the latest buzzword in the industry, and it is helping to drive a plethora of projects aimed at wringing the maximum value possible from our primary industries.
Yet anyone who has been paying attention to the Government's "economic transformation" agenda could be forgiven for being a little puzzled. Ever since Britain joined the Common Market, New Zealand has needed little persuading that farming doesn't have much of a future.
Warehouse founder Stephen Tindall probably put it best when he explained to The Business 18 months ago why he was investing so much of his money in the high-tech sector.
The problem, he explained, was that farming would eventually be restricted by land use, and therefore as a country we needed to concentrate on shipping "tiny little things at high prices" instead of "big bulky things at low prices".
But seven years after the Knowledge Wave conference attempted to chart a new course for our economy, and two decades after the Labour Party publicly declared that agriculture was a sunset industry, it appears the politicians have had a major rethink.
Not only has our dairy industry been allowed to create a virtual monopoly, but it has also persuaded the Government to hand over a huge chunk of cash for further research and development.
While Labour has not yet completely lost faith in our high-tech stars, its latest big announcement shows it is putting most of its money where our mouths are: in food and farming.
At the end of June, it will hand over $700 million to a Crown-owned company for an endowment fund to be known as Fast Forward, and each year for the next decade or so a portion of the fund will be dished out to farming and food-related projects.
Industry is expected to roughly match the funds - meaning the sector could benefit by as much as $2 billion over the next 10 to 15 years.
The aim of the exercise, it seems, is to ensure that New Zealand will once again be seen as the land of milk and honey - except the milk will be pharmaceutical-grade lactose products, and the honey will be manuka wound dressings.
While this vision of the future has obvious appeal to those working in our land and sea-based industries, some scientists worry that - at the risk of over-stretching the agricultural metaphors - New Zealand will be putting too many of its eggs in one basket, and ignoring other areas of research that could be even more lucrative. And they say (see "Please Sir ...", page 27) the Government's commitment still hasn't delivered the coherent science strategy the country really needs.
Anyone old enough to remember cassette tapes will indeed realise that the Government's change of heart is not so much a case of "fast forward" as "fast rewind". It was in the early 1900s, after all, that a small dried milk powder factory in the Manawatu spawned a hugely successful business known as Glaxo Laboratories. Today, GlaxoSmithKline is one of the world's biggest drug companies, although few New Zealanders seem to know about its Kiwi roots.
Even the name of the new fund is not original. Until 2003, businesses could apply to NZ Trade & Enterprise for money from a fund also known as Fast Forward, which came under the Business Growth programme.
But the new fund bears little resemblance to the old one. According to Agriculture and Forestry Minister Jim Anderton, the latest version of Fast Forward is not just a good idea, but "an opportunity, which does not come along very often, to change the economic destiny of New Zealand".
It is difficult to forget that Anderton was once seen by business as Satan in a suit. Many probably still hold that view. But in case anyone needs reminding, agriculture is still our biggest export-earner by far, and food is suddenly sexy.
Thanks to a booming Asia, and other developing countries, demand for Western food products is growing rapidly. "Food is the new oil," enthuses Alex Duncan, Fonterra's general manager of strategy and economics.
According to Duncan, Fast Forward had its genesis in talks Fonterra held with the Government about its desire to eventually list on the sharemarket. The co-operative has made no secret of its ambition to expand internationally, and the Government was keen to talk about ways New Zealand could get the maximum benefit from our single largest business.
"We made a commitment that if the Government was going to come up with a significant amount of money for co-ordinated funding, then we would rock up with a significant amount ourselves," he recalls.
Both sides are careful to avoid the impression that there is any sort of subsidisation going on, lest we run afoul of World Trade Organisation rules. But in any case, other major players in the primary sector, such as Meat and Wool New Zealand, Dairy New Zealand, the Meat Industry Association, Zespri and PGG Wrightson, have apparently pledged to match the taxpayer funding.
Duncan confirms none has yet actually signed on the dotted line, but according to Anderton, the Government is confident it has already secured almost $100 million a year from the private sector.
"I could never have convinced my Cabinet colleagues if I wasn't able to say `hand on heart, we're going to get the money we are counting on'," he insists.
As for the thinking behind the fund, it was a simple case of figuring out which industries were making the most money for New Zealand and giving them a boost, says Duncan.
Contrary to popular belief, New Zealand is now more dependent on agriculture and pastoral production than it was 25 years ago, despite all the efforts to broaden our economic base, he says.
"Ten years ago or even five years ago, the thinking was we needed small-scale manufacturing and IT and making chips here, and of course that's all been commoditised by the Chinese. They're even putting small German manufacturers out of business. But one thing you can't take from here and plant in Shanghai is the green pastures of the Waikato, and our climate.
"There's a lot of people who put the success of the dairy industry down to Fonterra and what happened in 1990 and all the rest of it, but a lot of it is due to the fact that our farmers are incredibly adaptable and very efficient and apply a lot of human capital to what they do, and are blessed by a generally temperate climate."
However, it's also hard to avoid the conclusion that while the Government has a renewed faith in the primary sector's ability to lift our GDP, its commitment is driven as much by panic as recognition of its potential.
Helping to focus minds is the fact that Fonterra's rivals such as Nestle and Unilever have R&D budgets that dwarf New Zealand's entire food industry.
"They are getting themselves together and they are thinking of different models for undertaking their research as well, where they're outsourcing a lot to China and India, and not even so much doing it in-house," says Duncan. "We have to be open to all of that in New Zealand."
And as the Government's own literature on the subject admits, we are barely keeping up.
While output in the sector has been growing at a compound rate of 5 per cent a year over the past decade "this relatively limited strategy is now showing cracks", says a recent Ministry of Economic Development paper.
The paper agrees that commodity production has limited potential to deliver the goods, and it notes that fewer New Zealanders are choosing careers in the pastoral and food sectors.
"The dairy industry, for example, currently needs 3000 more employees, and other countries are eroding New Zealand's long-held cost advantage in producing these commodities."
One of the fund's first initiatives is likely to be a virtual research institute that will focus on innovative food products. To be known as the Food Innovation Network, it will link existing campuses in Palmerston North, Christchurch, Hamilton and Manukau.
Quite how Fonterra's own research facilities will link with the network is still being thrashed out, and those in the industry say it is inevitable there will eventually be some form of rationalisation.
Anderton admits the Government was concerned that Fonterra had started moving some of its research facilities to Australia.
"There was a concern when we were looking at all of this, that New Zealand retain its leadership in R&D in these primary sector industries, and because we were growing our industries in a global sense, we didn't lose the intellectual grunt and IP [intellectual property] to offshore investments in R&D."
And looming on the horizon are other major challenges, such as the inevitable day when farmers will be forced to pay the full cost of their carbon emissions.
Extensive work is already under way into possible methods of mitigating farming's negative effect on the environment, and that is another good reason for boosting R&D, says Anderton.
No one is suggesting New Zealand simply be turned into a giant dairy farm that will supply India and China with all its milk, he insists. The aim is to expand overseas, by selling our superior knowhow.
"Just as Heineken clips the ticket when Heineken beer is sold in New Zealand with New Zealand hops and New Zealand everything _ they clip the ticket because they've got the IP and the marketing ability - now that's what New Zealand has to do.
"We're not suggesting we be the resource base that feeds the world because how could we? We're a small set of islands near Antarctica. But we're smart enough to use our intellectual capacity and our extraordinary knowledge in horticulture and agriculture and everything to do with land and sea-based production, so it can be transferred around the world."
So what happened to the idea of the "weightless economy", and the hope that clever companies like Navman would put us on the world business map? Anderton admits to some disillusionment, after years of being involved in taskforces trying to stimulate development in areas as diverse as information communications technology, design, film, telecommunications, and biotechnology.
"We gave those things a real run and we put up a lot of money... We're not going to be the Switzerland of the South Pacific and we're not going to be a Nordic haven. In truth that was always bullshit. We have had for our whole history one competitive advantage in world trade terms and that is our agriculture resource base ...
"There is a change here _ there's a change in attitude at Government level. These industries are being put right at the top of our transformation agenda."
Travis Glare, general manager of science strategy for AgResearch, is understandably delighted at the turnaround.
"We've been hearing about agriculture as a sunset industry for 20 or 30 years, but if you look at what the country actually makes its money from and what we continue to be good at, it's primary industries," says Glare. "Are we really going to become another Nokia, and drag New Zealand into mobile phones where there will always be other people in our space? The world needs food, and we're perfectly positioned for that."
Yes, the primary industries are acutely aware they are going to have to produce more from less land to stay competitive in the future, he says.
"I think it's exactly the same pressure ever since we started farming. New Zealand has got to be better at it than everyone else. It's why we've kept ahead of the game - because we have farmers who have kept ahead of the technology. Every time it's talked about as a sunset industry, it's just kept getting better and better."
The best aspect of Fast Forward is that it will give the industry some certainty, he says.
"If the Government is going to guarantee to maintain science capacity, then the industry can have faith in investing long term, and that changes the way we do science. We'll get off this treadmill of year-to-year projects and start talking about New Zealand's future, and not just survival."
Glare's only reservation is that it has yet to be decided exactly how the money will be distributed. However, everyone seems to realise the last thing scientists need is even more bureaucracy, he says.
"If it creates another fund for us, then so be it. It means larger amounts of money than we're seeing at the moment, so maybe it means some of the other ones will amalgamate."
In the meantime, Glare is looking forward to filling in some of the skill gaps that have opened up in recent years.
"It's a fairly put-upon research community in New Zealand. They're fairly cynical, as they've seen a lot of announcements. They're waiting till they actually see the form of it, and making sure a good dollop of it goes to research, for example.
"But we really don't want anyone thinking this is going to save our research community. It's just one of the things that needs to happen."
For his part, Anderton is confident that success will breed success.
"If this fund is as effective as we hope and expect it to be over time, then it would be disingenuous to think any Government would stop doing what is really working well, or that the private sector wouldn't see the benefit of R&D which they have neglected for years."
And contrary to what many businesspeople believe, the concept is not anathema to the idea of a "weightless economy", says Ministry of Agriculture and Forestry policy head Dr Paul Reynolds.
It's not just commodities and added value products we are shipping offshore, but the systems and knowledge that will help other countries develop their own primary industries, says Reynolds. And then there are other spin-offs, like the success of Hamilton's Gallagher Group, which has turned the concept of the electric fence into a enormously successful international security business.
Recalls Anderton: "When I first became Minister of Economic Development, I had people writing to me wanting to send a spaceship to Mars and all these crazy ideas. But we already have our spaceship technology, and it's in our primary production industries. Up in Massey University they are working on a project to reduce methane emissions of cows and sheep in a variety of ways. Just say we crack that, then every agricultural-based economy in the world will be beating a path to our door."
However, it might take a little longer for some other sectors to get with the programme, he concedes. Hopes that the meat industry might finally get its act together have recently been dashed, and aquaculture is not yet "even on the same page", he admits. The wool industry is also clearly struggling to reinvent itself.
"But here's an investment for the future which is going to take us somewhere where in a sense we should have been, and we never got the opportunity to get there, and now we've got to do it because if we don't, there are other countries that are going to do this. The Brazils, the Uruguays, China, and India - they're going to get their act together. These are big countries and they're going to do it, but we can be ahead of the game."
Given that the Fast Forward fund has been almost universally welcomed, it hasn't been particularly easy for the National Party to pretend to be outraged. But National's spokesman for research, science and technology, Dr Paul Hutchison, still has some concerns.
Hutchison says he is surprised the Government has not yet secured any binding pledges from the private sector, and that issues like the governance structure, and what will happen to intellectual property, have not yet been sorted out.
He is also keen to point out that it will take a while to get the fund up and running, so it won't be spending significant sums for some time yet.
Hutchison may have to decide exactly what National would do with the fund if it finds itself in power later this year. There is no danger the money would be taken away, he confirms. But it is also possible a National-led Government would change the mechanism by which it is delivered.
One critic who may not be around to witness that development is New Zealand Institute chief executive Dr David Skilling.
For the past five years, Skilling has devoted a huge proportion of his waking hours to grappling with the very conundrum that Fast Forward is intended to address. Unlike most of those in the industry, he has no vested interest in the outcome, and his main concern is that politicians and businesspeople might think our R&D problem is now solved.
While $2 billion might sound like a lot of money - and it is, by New Zealand standards - it's not that much when spread over 10 to 15 years, he notes. And as a proportion of GDP it still won't bring us anywhere near the R&D spending of countries like Singapore, which is something like 3 per cent.
"If this fund is a way of beginning to change that, then that's a good thing because what happens in that agricultural space and in terms of the profile of our food and beverage exports matters pretty significantly for us. Because it is such a big exporter and employer, and it is facing some pretty significant challenges from climate change and other low-cost competitors and the like, investing in that sector does make sense and it may lead to some differences in focus and emphasis as well."
But like the National Science Panel (see "Please Sir ...", above), he can't help wondering if we are still failing to see the even bigger picture.
"If the Government had pitched the Fast Forward fund as the first of half a dozen equivalent funds that would be launched over the next five years _ like biotech, and ICT - then I would be a lot more relaxed. But the sense is that this is it. This is our big shot. And I just don't think it's sufficiently material to really shift the needle."
In October, Skilling will hand over the institute's reins to someone else. While the move is for professional rather than personal reasons, he admits he is considering heading overseas.
Despite all his hard work, Skilling senses that New Zealand is not really any clearer now than it was five years ago about the path it needs to take to ensure we lift our living standards.
Farmers' lack of enthusiasm for changes to Fonterra's capital structure, for example, appears to show that we are comfortable with the status quo, he says.
"That is probably generally true of many sectors of the economy and that is concerning, because when you go up into Asia you get a sense of what the world is going to look like in a few decades' time. There's real competition and New Zealand needs to be pretty close to the frontier if it wants to succeed in that world."
Fast Forward is a good start in advancing towards that frontier, he believes - but not much more than that.
"I guess my sense is that we don't have a very coherent sense of what a sustainable economic strategy is at the moment. There's a lot of angst, but we're not getting serious about things like broadband, education, and R&D, and investing significantly behind those. We keep doing just a bit over here, and a bit over there.
"Until we've got a more coherent view of what our strategy is as a country, I think we're going to struggle."