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Home / Business / Economy / Official Cash Rate

NZ too low on value chain: Bollard

Brian Fallow
By Brian Fallow
Columnist·NZ Herald·
20 Mar, 2015 04:00 PM3 mins to read

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Alan Bollard says research shows only 10 per cent of what consumers pay for infant formula goes to New Zealand farmers or processors. Photo / Nick Reed

Alan Bollard says research shows only 10 per cent of what consumers pay for infant formula goes to New Zealand farmers or processors. Photo / Nick Reed

Alan Bollard says country misses vital returns by just upping primary production.

During a flying visit home to Wellington former Reserve Bank governor Alan Bollard has reflected on New Zealand's response to rising incomes in East Asia and the risk of remaining stuck at the low-tech, low-return end of the value chain by just pumping out more primary production.

Bollard, now head of the Asia Pacific Economic Co-operation secretariat (Apec) in Singapore, says the infant formula trade illustrates the dominant role of services and intangibles like intellectual property in modern value chains.

He points to research on the infant formula value chain by consultants Coriolis for the New Zealand Pacific Economic Co-operation Council, which found only 10 per cent of what the end consumer paid was captured in New Zealand by dairy farmers or processors (usually Fonterra).

The lion's share (around 58 per cent) went to the firms who formulate the end product, adding to the base powder a range of ingredients to simulate breast milk as far as possible, and another 30 per cent to retailers.

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The return on assets is also highest for the multinational infant formula manufacturers at around 29 per cent, compared with 17 per cent for retailers, 9 per cent for the dairy processors in New Zealand and 7 per cent for the dairy farmers at the start of the chain - although Coriolis adds that 7 per cent does not include capital gains on farm land.

People have talked for years about the need for New Zealand to move up the value chain.

"But first you have to identify what value is being added and who is best placed to add it and how much it matters where in the world that happens.

"Can it happen in source countries, does it need to happen in market countries or, as Singapore has shown, can it happen in between, in hub countries?"

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In an industry seen as straddling the border line between food and pharmaceuticals, a lot of value is added in Singapore by large multinationals to powder sourced from New Zealand and subsequently sold elsewhere in East Asia.

"What strikes you from that [Coriolis] study is that there don't seem to be intrinsic reasons why New Zealand could not have captured that value," Bollard said. "But it would have to have had much more focus on post-powder operations."

He suggests part of the reason might lie in the culture of science, which puts less value on research delivering intellectual property than on more fundamental, public good research like the quest for ways of curbing emissions of methane from ruminants.

"You don't win Nobel prizes for working in the service industry," he said. "There would be a general feeling that desk jockeys don't add much value to the system but actually that's not what the market is saying.

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"The market is saying that is where the value is. The successful value-adders are doing R&D that is capturable. That seems to have to happen post-powder."

A potential opportunity lay in bone-strengthening formulation targeted at ageing populations worried about osteoporosis.

Bollard said he wondered sometimes if the problem was not so much a lack of marketing nous as a lack of capital.

"These are capital-intensive operations. The three plants being set up in New Zealand to make formula are all Chinese. They will be bringing in market-end connections but they also bring in capital," he said.

"There is something about the way returns between Fonterra and farmers go that isn't cycling into future capital expansion.

"There you have to look at governance and incentives in the dairy industry."

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