As our food producers are challenged to contribute to the Government’s “double export value” policy, we need to regain the innovation momentum to become a food superpower.
How can that happen, and what’s stopping us from getting there as soon as possible?
‘Exciting opportunities’
Nicola O’Rourke is feeling buoyant.
An investor in fast-growing export start-ups, O’Rourke squeezes in a phone call from the car as she rushes between meetings.
“I’m seeing a lot of opportunities at the moment for businesses that have done a really good job of getting to, say, $5 million in revenue and are now poised to go global.”
That’s good news for O’Rourke and even better for New Zealand.
The former general manager of Lewis Road Creamery is parlaying her nous for growth into what she calls the CPG space: consumer packaged goods.
“Most of these companies are at an early stage and are now looking for the next level of investment to scale offshore,” she said.
“So, I’m optimistic. I think there’s some exciting opportunities happening in New Zealand now.
“I think very soon, probably in the next three to five years, you’re going to see some big exits happen, which will be a bit of a wake-up call.”
We could do with some high-profile successes right now.
With the economy slumped, it’s hard to see how New Zealand can meet the Government’s ambitious goal of doubling the value of exports in 10 years.
The food and fibre sectors are reporting a seemingly endless stream of bad news, yet there is pressure to play a substantial part in delivering the goal.
Consider the numbers.
Food and fibre represent 62% of our current exports, and while it is not yet known how much the doubling of export value means, primary sector exports will certainly need to grow from $54.3b to as much as $100b, with a compound annual growth rate (CAGR) of 7.2%.
At first blush, that seems tough.
According to MPI’s Situation and Outlook for Primary Industries (SOPI) report (June 2024), export values fell in the previous 12 months, and headwinds suggested tough times would remain, especially in China, our largest market by miles.
But we’ve been here before.
In 2013, fresh out of the Global Financial Crisis, the Key-English Government announced the exact same goal for exports.
Primary sector export growth was targeted at $64b by 2025.
The current forecast is $58b – not quite double, but a solid 70% growth and CAGR of 6.1%.
And the 2034 goal is not all up to the primary sector.
As Graeme Muller, from TechNZ, points out, software is growing at 24% a year, forecasting a contribution of $12b in 2025.
If this continues, the tech sector could be meeting more than its fair share of the target.
So, the target has some precedent. But a goal is not a strategy.
How will it actually happen?
Trade minister Todd McClay is pinning hopes on more Free Trade Agreements (FTAs), trade missions and a strategic focus on India.
But the bulk of the task will fall on the industries themselves.
Just where will the growth come from?
And what must we do to make it happen?
The challenge
So, let’s surmise, if the export value of food is to double, then something must change – business as usual won’t cut it.
For one thing, while we probably have enough land to double value by growing more, agricultural export volumes would have to increase by a whopping 63% over the next decade to meet the target and our social licence to do this is unlikely, given our existing footprint is already pushing the limits of planetary boundaries in water, greenhouse gas emissions and biodiversity loss.
“If we think we can drift into the future with an incrementalist approach to achieve the growth we are talking about, we’re out for lunch,” veteran food leader Lain Jager warned.
The answer is we need to do two things: get more value from what we already do and create new categories that don’t yet exist.
In other words, innovation.
Let’s be clear, though: for innovation, we need science to generate the knowledge and then commercialisation to create the value.
New Zealand has good form in this.
From our European and Polynesian explorer roots to refrigeration, rye-grass genetics, kiwifruit re-branding and bold trade deals, we’ve earned a reputation for ingenuity, even if there is a little mythmaking along the way.
We’ve been good at getting more from less.
New Zealanders might be surprised to learn, for example, that despite farming’s dominant role in the economy, agricultural land area has shrunk from a high of 152,000sq km in 1981 to 102,000sq km in 2021.
And yet export revenues have more than doubled.
According to Westpac, agricultural productivity hit a high of about 40% in the 1980s and remained at an impressive 30% a decade later.
We’ve grown the value of red meat, apples and kiwifruit while herd sizes and crop areas have shrunk.
Dairy, grapes and avocados have expanded their footprint, but the growth in value far outstrips the growth in volume.
So far, so good.
Doubling the value of exports yet again begs a question: Can we continue with the current formula? Will more of the same deliver a different outcome?
Four challenges suggest not.
First, productivity seems to be flattening.
Westpac said that “multifactor productivity grew by an average 5.6% per annum between 1985 and 1999, slowing to just 1.4% between 2000 and 2009. Much of the earlier gains came from increasing economies of scale, greater mechanisation, and changes in land use. Productivity growth in agriculture has since averaged 1.7% per annum between 2010 and 2023”.
Assuming that sheep, beef, and dairy cattle stock levels continue to fall and that the land available for pasture and horticulture remains largely constant, then productivity would have to return to the 1980s levels.
That won’t happen without innovative change.
Second, we’re entering an era of disruption.
Shocks to the system, such as Covid and Cyclone Gabrielle, hint at a volatile, uncertain, complex and ambiguous future, or Vuca.
A Vuca world describes the situation of constant, unpredictable change that is now the norm in certain industries and areas of the business world.
A key feature of this Vuca world is the exponential nature of change, which is hard for many people to fathom.
In our daily lives, change seems incremental and linear, but the changes posed by technology, say in precision fermentation, artificial intelligence or synthetic biology, can be sudden and explosive.
It’s hard to imagine a world without smartphones, but the iPhone was launched only 14 years ago.
Similarly, the threats posed by climate change are networked; that is, they could cascade from one simple change, say in Atlantic Ocean acidity, to a collapse in planetary weather patterns.
In a Vuca world, the past is not a reliable guide to the future, so repeating the actions that delivered export growth will not do it this time around unless we change our business models to be resilient to volatility.
Third, in the past 20 years, dairy has provided a king hit for export growth.
The success of dairy conversions and the sale of infant milk powder in China has played a disproportionate role in the near doubling of exports.
While there is sound evidence that milk production could increase here in New Zealand - after all, we are great at growing dairy - would we get the social licence to do so?
And if we did, would there be a market for it given the geopolitics at play globally, and how long would that market exist given the global race to produce cheaper alternative dairy proteins?
Fourth, New Zealand is not heavily invested in research and development (R&D).
In the Global Innovation Index 2023, New Zealand ranks 24th in innovation inputs and 31st in innovation outputs, suggesting a gap in converting inputs into tangible outputs.
Moreover, New Zealand’s top R&D investor is Xero (digital financial services), with an R&D intensity of 31%. (Research intensity is calculated by dividing R&D expenditure by total sales revenue).
Fonterra, which is in the top three R&D investors, invests just 1%.
This alone indicates a substantial difference between high-tech and primary sector innovation investment.
If we are to double primary sector exports, then we need innovation to deliver the change.
New Zealand needs to leverage its research, science and education strengths if we are to become well set up for innovation in food.
Part one of a three-part article - read part two, “Food innovation: Three opportunities for New Zealand”, tomorrow.
