Speech to Federated Farmers conference, 12 Noon Wednesday, 1 July 2009
 
I would like to thank you for the opportunity to talk to you as the Opposition spokesperson on agriculture. Can I also acknowledge the generous comments I have received from many farmers in recent months.
 
I have always been confident in the future of New Zealand’s agricultural industries. You have to be, because agriculture is intrinsic to our economy’s strength and our success. And it has been the backbone of our economy for most of our economic history because of our competitive advantage as a farming nation.
 
But while I am confident, I am realistic as well. There are a number of issues we need to deal with:

• Farm profitability is uncertain in stormy international economic conditions.
• There are broad risks in the financial strength of the agricultural sector.
• Global awareness about environmental impacts and animal welfare are forcing change in our markets, and changing the business environment - as well as affecting the raw materials farming depends on, like climate and water.

 
I’m glad you’re meeting here in Auckland, because it emphasises that the prosperity even of our largest city is dependent on the performance of our farmers. Agriculture is as relevant to Queen Street as it is to Hokitika, to Matamata, to Geraldine or to Carterton.
 
For that matter, the services that cities can provide can be crucial to our primary industries, too. In my home town, Christchurch, some of the most innovative scientists in New Zealand are rivaled only by their contemporaries in cities like Palmerston North and Hamilton in their research contribution to New Zealand.
 
There is always a risk that our economic backbone will be ignored in public debate about our economy.
 
At the start of this year, when the then new government opened its year in parliament with the Speech from the Throne, the word ‘agriculture’ didn’t even get a mention. It was the first time in at least a decade that our farmers were ignored. There is not much chance of developing the right policy for the agricultural sector, when farming isn’t even being contemplated by the government.
 
The policy environment in Wellington today, like every capital around the world right now, is occupied with the difficult global economic environment. Many developed countries are in recession. Some of them are in deep recession. We can take some comfort that demand for food holds up better in a recession than demand for the cars of General Motors or Chrysler.
 
But we can’t be too comfortable.

Reduced demand around the world is likely to result in reduced prices for our exports. Ultimately that means incomes will fall. And because the same reduced prices affect farmers everywhere, we can expect farmers in every country to redouble efforts to increase productivity and production, because this lowers costs per unit of output.

And since every farmer around the world is in the same situation, total production will increase, with prices falling and demand increasing only slowly.
 
On top of that, there is input price pressure. One of the critical elements in soil fertility is nitrogen. Industrial fertiliser is produced from gas or coal, and the price of fossil fuels are high. Persistent increases in the price of oil and gas would lead to higher fertilizer costs, so you get higher input costs and reduced demand.
 
Hand in hand with that picture, we can expect to see rising protectionism in many markets, particularly in agriculture. So that makes market access more difficult.
 
This is a tough recipe for farms.
 
There are only two ways to increase farm profitability: reducing the costs of inputs, or increasing the value of production from given inputs. A combination of both strategies is inevitable.
 
The underlying trend in the export prices for our commodity agricultural products is down, over the long term.  With some medium term exceptions, such as China’s expansion and climate events, prices for agricultural exports have been under long-term downward pressure. The strong expansion of China in recent years has helped to push up the prices of many raw materials - including some that farmers compete for, such as energy - while also increasing the price for agricultural products.
 
But relying on that to continue forever is not a prudent long-term strategy for New Zealand.
 
At the same time that we are confronting the difficult environment for farm prices, agricultural finance is under stress as well.
 
This is what I call a perfect storm: input price rises, threats to demand and now finance risks.
 
I’ve been looking at New Zealand’s accounts with the rest of the world. When you look at our merchandise trade - our exports against our imports, the deficit is large but manageable.  But we face a massive deficit in one crucial area - investment income.
 
We have been using the savings of people in other countries instead of our own earnings or our own savings to pay for our lifestyle. And the bill for that is starting to come in. The bill is coming in from banks.
 
How much do you think New Zealanders send overseas each year to the big Australian banks?
 
In the nineties we sent overseas about three billion dollars a year in profits and interest on loans extended to New Zealand banks. For the first half of this decade it was stable around about four billion dollars a year.
But something dramatic has happened. The banking system has begun repatriating enormous amounts of New Zealand money.
 
Last year, calendar 2008, the banks repatriated 11-point-7 billion dollars in profit and interest paid on loans.  That is, the New Zealand branches paid their overseas owners $11.7 billion in interest and profit.
 
The total has risen from $3.8 billion in 2000 to $11.7 billion last year.  That’s more than the entire GST revenue of New Zealand. It is more than the entire education budget. And in a single year it is far more than the entire proceeds of the asset sales programme that caused so much pain through the eighties and nineties.
 
Behind this enormous repatriation of New Zealanders’ money is a serious balance of payments deficit. It now stands at $16 billion - that’s about nine per cent of GDP.
 
In other words, our total overseas debt increased by sixteen billion dollars last year.  Debt like this is easy to run up and hard to pay back. It poses a risk for the agriculture sector specifically. Total bank lending to agriculture in April this year was $43.7 billion, or 13.8 per cent of the total lent to New Zealand.
 
Two thirds of that is lending to the dairy industry - at a time when one estimate says Fonterra could be forced to cut its payout from the current $4.55 if our dollar stays over sixty US cents. This would be very hard on some farming businesses that thought the last couple of years’ high prices would last longer.
 
Relief from interest rates would help. As Federated Farmers’ Lachlan McKenzie pointed out yesterday, every one per cent drop in interest you pay on that debt is worth $450 million. That’s a lot of money that comes straight off farmers’ bottom line.
 
How refreshing it is to hear the farming sector focussing on this issue.  In the nineties, some farming leaders used to applaud higher interest rates and the monetary policies that deliberately punished the productive sector.
 
Today, interest rates are too high at a time when banks should be reducing them.
In a recession, while banks around the world have been under pressure, the big banks here have been smirking.
 
In the current environment, a lot of farms are facing a squeeze and they will struggle to meet the payments on their debt.
 
This is serious, and it needs serious attention urgently. I’m not confident it will get it.
I’ll tell you what I would do if I were still the agriculture minister: I would immediately convene a taskforce of the best and brightest in the sector to develop a short-, medium-, and long-term strategy to the deal with the issue.
 
The huge remittances to banks are the result of the Australian banks funding our balance of payments deficit. They are taking an enormous clip of the ticket for doing it.
 
We need to rely more on our own savings, instead of spending the savings of others.
 
And we need some fresh thinking on the balance of payments problem too.

We need a broad-based focus to reduce our imports. We could make a start if we were able to reduce our dependence on imported oil.
 
If we could develop reasonably-priced biofuels and other forms of new energy, and reduce waste energy, we would score a huge opportunity for farming:

• Potentially a new source of revenue for farmers.
• Potential cost-savings.
• A contribution to a better climate and the natural resources our farms depend on.
• And a substantial reduction in our trading deficit with the rest of the world.

 
On top of all these advantages, it would help us to prosper in a world where consumers are becoming more demanding, and asking more searching questions about sustainability.
 
This is partly about how we manage our emissions - but it’s about a lot more than that as well.
 
If New Zealand is going to achieve a higher price for our production than our competitors, then quality and a perceived advantage as being more environmentally responsible will be part of our national brand.
 
As every responsible study shows, clean performance means we need to be responsible about our carbon emissions, too.
 
That’s why the Opposition is taking a constructive approach to working with the government on emissions trading. Only yesterday we voted with the government on a new climate change bill, in a spirit of working in the best interests of all our industry sectors.
 
Some conclusions are inescapable. As a general principle, polluters, one way or another, will have to bear the cost of their emissions.  There are developments on the table, such as Gordon Brown’s proposal yesterday for a global development fund to help poor countries replace their emissions with cleaner alternatives.
 
The world is also moving closer to a global carbon trading scheme. Once that happens, New Zealand taxpayers will not long pay to subsidise polluters, as we are now. Any government of New Zealand is going to have to deal with emissions if we are a prudent country. What won’t work is hoping that the problem goes away.
 
And I continue to believe environmental sustainability is a competitive advantage for New Zealand. When you see the ugly factory farms in many parts of the world, and you compare their practices to the clean and open countryside we farm in New Zealand, you can see we have a huge opportunity.
 
I know there are few New Zealanders as passionate about the land as our farmers.
And so as the world cares more about the good of our planet, this should be an enormous opportunity for us.
 
It will require care to seize the opportunity, though, because it is implicit in seizing the opportunity that we will live up to our promise.
 
We can’t just say we are cleaner and higher quality than our competitors. We have to BE it.
 
Consumers will not be impressed if we are seen to be dragged into better environmental performance kicking and screaming.
 
If you want to know what happens when change takes too long, ask the pork industry how its animal welfare standards are perceived by the public.
 
Now I support giving that sector time to change. I also hope that a review of the animal welfare code for pigs this year will impose higher standards. But none of us should be uncertain about the costs to the entire industry of the strategy it followed.
The public saw it as too slow to change, instead of adopting a strategy of having the highest quality.  The reputational damage has made the pork industry the subject of more letters to my office than anything else right now, including the smacking referendum.
 
If it can happen in that sector, it can happen in any other. We cannot be seen to be the source of dirty water or unsustainable users of resources.  We cannot be seen as polluters when our industry is based on healthy growth, on food and on good health.
 
So overall, we have an environmental challenge.  We have a challenge to the industry’s financial stability. We have a squeeze on its cost structure. We have a struggle in global markets.
 
The solutions will be discovered by science. Sustained, deep and ongoing investment in research and development in the industry is crucial - to identify cost-saving opportunities, and to identify new processes and new products that will extract more value.
 
As has been well rehearsed now - I put my stake in the ground for research and development in the primary industries sector.  The NZ Fast Forward Fund was a commitment of seven hundred million dollars, which would earn interest and private sector partnerships and grow to be worth two billion dollars over its lifetime.
It’s been replaced by a relatively puny seventy million dollar annual commitment - for just four years.
 
There is no guaranteed long term commitment. There is no chance to earn interest and fund very large projects from an annual appropriation when science has to compete with every other demand on taxpayers’ purses.
 
It would be unfortunate if the message that politicians drew from this episode is that there is no political problem with cutting r&d. I believe there is a huge divide over this issue between the different sides of politics. Our side says the way out of our problems is investment in r&d and people. Our side says the way out of our problems is investment in knowledge, training and skills.
 
This is an important debate, and it is crucial for farmers. But whatever choice government makes, it is now up to our agricultural industry to lead investment.
 
Investment in science and in research and development is the most significant commitment we can make across all of our agriculture, to determine our own future.
 
Investment in marketing, and in market-responsive structures. Investment in talent, in creativity and in the strong communities that attract people to rural lifestyles.
 
Our r&d, our talent, and the structures underpinning them give our agriculture a competitive advantage over competing countries with temperate climates. Our competitive advantage is our science and research. It is our people and our lifestyle.
 
Our competitive advantage in the future will be in our superior products. In costs driven down by innovation, not exploitation. In processes focused on delivering a better product to consumers. In environmental sustainability driven by science, not wishes.
 
And the agriculture sector is going to have to lead investment to keep us at the forefront in all these areas, because innovation is not going to come from anywhere else.
 
It won’t happen on its own.
 
And it isn’t happening fast enough in other parts of the economy. When you look through our economy to where the wealth has been created, there are some pretty compelling facts to confront. One is that our corporate sector has spent most of the last twenty years - overall - destroying shareholder wealth.
 
When you compare stock market results to the performance of farms and agri-business, you get a clear picture of where the strength of our economy resides. I understand the stock exchange chief executive was invited along to Treasury recently to lecture State Owned Enterprises about behaving more like the corporate sector.
If they were to behave like our corporate sector, they would destroy value.
 
They would grow productivity more slowly than comparable overseas businesses.
They would focus not on doing a better job, but on sending more of New Zealanders’ cash to overseas owners.
 
The stock markets agenda is to lobby for more privatisation of our SOEs, rather than focusing on growing more successful New Zealand corporates that deliver returns to shareholders by doing well in global markets.
 
I would have more New Zealand corporates behave more like our most successful agri-businesses. Then they would grow productivity faster than the average of the New Zealand economy. They would focus on expanding their international connections. They would grow the scale and and expertise they need to be world class businesses. They would build on genuine, science-led innovation and send the returns back to creative and entrepreneurial businesspeople in the many communities around New Zealand that are at the heart of our agriculture.
 
As I started out saying - there is a lot to be confident about in our agriculture. But I am a realist too.
 
Realistic that we need to deal with the massive debt problem, and the too-high interest rates we are paying to Australian banks. $11.7 billion a year in profits and interest payments? That’s where earnings from agriculture are going.
 
Realistic that we need to invest in r&d and creativity to come out of tough global conditions stronger.
 
Realistic that we need to turn environmental challenges into an opportunity.
 
And realistic that we can do all of this.
 
But it will take a fierce commitment of energy and co-operation across the sector.

I saw a comment from Don Nicholson that New Zealand's best exporters are found out there, in the fields and paddocks of New Zealand under rain, sun or snow working every single day, to bring wealth to New Zealand. I agree with that, and it’s up to the rest of us to match that commitment and to add our work to their success.

Tags: Agriculture, Economy, Banks, Interest rates, Biofuels, Oil, Environment, Research & Development, Climate change