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Address to International Large Herds Conference

Hon JIM SUTTON Minister of Agriculture Minister for Trade Negotiations

Address to the International Large Herds Conference

Christchurch Convention Centre

9am Tuesday, 14 March 2000

Mr van der Poel, Ladies and gentlemen. The world produces approximately 548 million tonnes of milk a year from all sources cows, sheep, goats and buffaloes. New Zealand produces about 11 million tonnes.

Around 5% of the total world milk production 27.4 million tonnes goes into international trade. New Zealand exports around 1.4 million tonnes of dairy products.

That seems like small beans the big beans are in the $4.79 billion those exports earned.

The dairy industry has become our single biggest export industry, and is set to get even bigger, with estimated earnings of $5.7 billion by 2003.

In global terms, New Zealand is now the No 2 exporter, with about 30% of the world's trade in dairy products, but in the not too distant future it is likely to challenge the European Union as the world's biggest exporter of dairy products.

When we add up the total contributionof our land-based industries (meat, wool, dairy products, horticulture and forestry) to our overseas earnings $13.3 billion this year and a projected $16.1 billion in 2003 the beans can be seen as broad beans indeed.

It reinforces my long-held view that our land-based industries remain the cornerstone of the nation's wealth and that a vibrant and internationally competitive agribusiness sector is vital to New Zealand's economic success.

I know that the outlook for the dairy industry in New Zealand is coloured at this stage by the uncertainties regarding the formation of a Mega Co-op among the larger dairy companies, but those uncertainties aside, the industry is still in expansion mode.

While the number of dairy herds continues to decline because of amalgamations of properties and farmers retiring from dairying, the average herd size continues to expand.

Over the past 20 years, it has grown steadily from just over 120 cows to just under 230.

It is not so long ago that a farmer proposing to milk 350 cows would have been regarded with suspicion.

Today, you have to have 500+ cows just to qualify as a Large Herd,and I understand that your association is considering raising that figure to nearer 700.

Last season, there were 563 herds with more than 500 cows, and in Central Otago the average herd size was 704.

Okay, so that Otago average was based on only 5 herds, but in my own electorate, which includes the Timaru and Waimate districts, we had 112 herds with an average of 437 cows.

After a decline in the late 1970s and early 1980s, the national dairy herd has expanded every year since, reaching 3.3 million in 1998-99 and projected to increase to 3.75 million by 2002.

Combine these trends with the industry's emphasis on quality, a continuing move into the manufacture of premium-priced value-added products, the prospect of stronger international markets and a competitive New Zealand dollar, and you have the ingredients for a rather more prosperous dairy industry over the next few years.

However, your prosperity hinges on two things What happens here in your own country and what happens overseas.

I'll talk about world trade first.

Looking down the list of export destinations for New Zealand dairy products, it seems that there is barely a country in the world that does not appear.

All the countries you would expect are there the US, Japan, Malaysia, the European Union.

But so are many that you would not expect to see.

We export butter to El Salvador, Panama, and Mozambique, cheese to Kuwait and Morocco, and milk powder to the Maldives, Nigeria and Bolivia.

Jamaica is our 14th largest export market for cheese and curd!

That we have developed so many markets for our products is a testament to the dairy industry and its unique skills and characteristics.

You have a good product a good reputation.

You produce efficiently and effectively, from the farm right through to the final exported product.

You are flexible and adaptable.

You have excellent market development and promotion skills.

You are meeting the very varied nutritional and food requirements of different peoples around the world.

All this, despite the numerous barriers and obstacles that face the New Zealand dairy industry in the international market place.

More than any other New Zealand agricultural sector, the dairy industry is affected by foreign government policies which are designed to protect their own domestic industries or simply keep imports out.

The average tariff on industrial products internationally is less than 5%.

Tariffs on dairy products of 200% and 300% are not uncommon.

You face quota restricted markets.

You face high domestic subsidies and you face export subsidisation by other countries. It means that even in the freer markets, your trade and returns are affected by other countries protectionism.

As Trade and Agriculture Minister, I am determined to see you get a better deal.

The World Trade Organisation offers significant opportunities in this regard.

Despite the high profile failure of last years Ministerial Conference in Seattleagricultural negotiations are proceeding.

The first negotiating session will take place next week.

There are some encouraging noises coming out of Europe and the United States.

It would appear from recent statements by Dan Glickman, the US Secretary of Agriculture, and Franz Fischler, the EU Agriculture Commissioner, that the thinking on either side of the Atlantic is now starting to converge, and both have professed a will to push for a successful new round of talks on agriculture.

Both have played down the failure of the Seattle meeting, and both have emphasised the need to involve developing countries more in the trade liberalisation process.

Our aim is to significantly improve access to markets and the terms and conditions of that access, and to significantly reduce the subsidisation practices of others that impact on world trade, including through the early elimination of export subsidies.

I cannot promise you any quick fixes But we and others of a like mind, including the Cairns Group and the US, will be working hard to achieve them.

Agricultural trade, and the dairy trade in particular, have for too long been excluded from enjoying the full benefits of the multilateral trading system.

I want to work to rectify that and I don't intend to let the grass grow under my feet.

In just over a week from today I am going to Canberra to talk with the Australian Federal Trade Minister, Mark Vaile, about our bilateral trade agenda under CER and the exciting new possibilities for promoting free trade in Asia, and the

work we have launched to explore the concept of a linkage between CER and the ASEAN Free Trade Area.

I'm also going to spend time in Melbourne getting a hold on the state of the Australian dairy industry Victoria is their biggest dairy producer and just where they are going with their industry, which is also on the brink of a very significant deregulation process.

I am not overlooking the possibilityof some significant linkages between some Australian dairy companies and ours.

Their co-operatives are looking to their future survival just as much as ours are. I am also going to China and South Korea, where we have significant trade access issues.

China continues to grow as an export market for New Zealand, but they don't make access easy.

My main engagement in Seoul is to address an APEC Forum which has been organised on the personal initiative of President Kim.

Trade liberalisation and reform is very much on the agenda, but getting agreement takes time and patient negotiation.

I guess it's a bit like going to your bank manager for a loan to build a big new rotary milking shed, or to buy a run-off It takes a lot of talking, a lot of patience, and several visits, and sometimes you get a flat "No!"

While I am in China and Korea, I shall also be meeting with Trade New Zealand officers and New Zealand companies who are exporting to those countries. Who better to tell me what's going on than the people on the ground actually doing the selling

Marketing is the key for dairy products as it is with all of our exports.

Our dairy competitors are growing in strength.

They continue to innovate and target our markets.

Our clients are changing the way they do business.

Large retail chains are increasingly looking for relationships with suppliers who can supply items across an entire product range and throughout the entire year.

In dairy products, this might mean that a supermarket chain wants not onlycheese and butter, but also fresh milk, fresh cream, yoghurt, reduced cream, flavoured dairy food and a host of other products all from a single supplier, perhaps all under a single brand.

Consumption patterns are also changing.

In the UK, consumption of butter is falling by around 4 percent per annum.

If New Zealand is selling only butter to a UK supermarket then the exposure of New Zealands brands may also be falling by 4 percent a year.

That erodes some of the value in a brand that New Zealand farmers have worked so hard to create.

To build on that value, New Zealand companies may want to use the brand on products that are growing in market even if those products are not necessarily made from New Zealand ingredients.

Marketers, milk processors, and many industry and farmer leaders are now telling the Government that they need new flexibility and freedom to adapt and expand their businesses.

Entrepreneurship and innovation in production, processing, manufacturing and marketing are key to New Zealands future success.

Many in the industry see major change in the New Zealand dairy sector as inevitable.

Some go further and say that if New Zealand is to stay ahead of the competition and build on the successes of the past, then major change is essential.

So how will the New Zealand dairy sector respond to these challenges

I believe very successfully, by drawing on the kind of professionalism and skill that has made your industry the world leader it is today.

But that answer depends on our dairy businesses developing and implementing strategies that are able to respond effectively to the challenges of the future.

The Governments policy on change in the dairy sector is clear.

The Government supports reform of agricultural industries, like the dairy industry, provided it is supported by farmers and is in the national interest.

I'm disappointed that the major companies have failed to agree on the so-called mega-merger proposal.

Thousands of dairy farmers will share that disappointment as polls have already shown strong support for a mega-company.

Bigger companies overseas have merged and it is a shame that agreement could not be reached here.

Many industry leaders believe the current regime is not sustainable and no doubt many participants in the dairy sector will now want to consider how they see the future development of their industry.

It is not the Government's place to do this.

Speculation by me on what the industry may or may not propose in the future would not be in the interests of the sector or New Zealand.

Sometimes people forget that farmers own the assets that make up the dairy industry and they must be consulted and be in support of whatever new proposals are worked out.

The door remains open, the legislation is still there to be used at least till the September 1 deadline.

There are risks in our current position the world is still changing. To reduce the impact of limited access to key markets, our industry needs to be more integrated into those markets, adding value to our brands.

In summary then:

Many industry leaders believe that the current regime is not sustainable in the medium to longer term.

Leaders believe the sector needs more flexibility and innovation to meet future market demands.

The Government supports reform of agricultural industries, like the dairy industry, provided it is supported by farmers and is in the national interest.

For the merger to proceed it must gain the support of 75 percent of farmers shareholder-votes and Commerce Commission approval.

The Commerce Commission process applies to determine the public interest whenever any organisations propose mergers or acquisitions that might result in a dominant position in a market or strengthen an existing dominant position.

The Government will not legislate to change either of these requirements.

The New Zealand dairy sector has achieved a great deal and has an enormous amount to be proud of.

While things wont always be easy, its potential is tremendous.

I am confident that with the kind of talent that resides throughout the whole sector, it will make the most of this potential.

Thank you for your patience and attention.

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