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Luxton: Agribusiness in the New Millennium

KEYNOTE ADDRESS: HON JOHN LUXTON

Minister of Food and Fibre

"The Government's view on the Importance of Agribusiness in the New
Millennium"

Ravensdown Agribusiness Conference

Christchurch Convention Centre

19 July 1999

(check against delivery)

Ladies and gentlemen, Ravensdown shareholders, board members, guests.

The importance of Agribusiness

The theme of this week's conference "21st Century Farming" is one I have
been championing a lot of late. In fact it is one that appears to be
gaining a wide following throughout New Zealand's agricultural industries.

It is the process of future-proofing New Zealand's agribusinesses for the
commercial environment of the new millennium. This has been the primary
motivation for the Government's moves to reform the producer boards. To
improve the economic performance of each industry sector.

It is increasingly apparent that the era we are about to enter, poses a new
set of challenges for food and fibre producers, exporters and marketers.

Globalisation is changing the rules, the marketplace and the Government's
role.

Food and Fibre

The importance of Agribusiness to the New Zealand economy cannot be
overstated. Including fish and forestry, food and fibre exports generate 75%
of New Zealand's export returns.

While as a proportion of the total, this is less than it was a couple of
decades ago, in dollar terms it continues to increase. The food and fibre
sector remains incredibly important to the New Zealand economy.

And this is why National's policies of the past decade have been aimed at
improving the trading conditions for those exporters and producers.

New Zealand exporters have shown that they thrive in the low interest rate,
low tax, low inflation economy that this Government is committed to
delivering. Our job in Government is to provide the best environment for
further growth.

Changes such as the Employment Contracts Act, tariff elimination, shipping
deregulation, and stable monetary and fiscal policies are all about lowering
the input costs for New Zealand's trading sector and making the producers of
New Zealand's vital foreign currency earnings, more profitable.

The recent abolition of stamp duty is just one example of the Government
removing a barrier so that farms can restructure their businesses without
undue Government imposed costs.

Through implementing these reforms the Government has tried to counter the
impact of a long-term decline in commodity prices. But that alone will not
be enough to save the New Zealand food and fibre sector in the coming
millennium.

If commodity prices continue to fall, as they will, and New Zealand
producers do not adapt, they will struggle to prosper and many may not
survive.

To succeed in coming decades, New Zealand's producers, exporters and
marketers are going to have to become even smarter. In future our ability to
create wealth will not be bound by physical limits, but by our ability to
come up with new ideas.

The solution is to add value through enterprise, innovation and new
technology. Innovation is a driving force for economic growth.

New Zealand Inc Transformed

Many have already seized the day and as the slide shows, there has been a
huge transformation in New Zealand's agribusiness sector over the past
decade. I want to focus on these success stories shortly, but before I do I
want to look at our sheep, beef and dairy industries.

Our National Flock

In the aftermath of the removal of government guaranteed returns, there have
been huge changes in the composition of New Zealand livestock. The national
sheep flock has been in decline.

Prior to the Labour Government's removal of SMPs in the Muldoon era, New
Zealand had over 60 million sheep. Fifteen years on, current estimates put
the national flock number closer to 46 million.

This in itself is not that remarkable. What is more remarkable is that this
considerably smaller flock is now significantly more efficient and
profitable.

In the 1997-98 year the sheep meat sector exported 471,507 tonnes of
product. This compares rather favourably with the 478,981 tonnes exported in
1988-89 from a far larger flock.

In the past decade, lambing percentages across the flock have increased from
around 90% to well above 110%. With some top producing farmers regularly
achieving lambing percentages well over 150%.

Similarly out of the same flock, New Zealand is also producing, on average,
significantly larger lambs. Over the past decade, lamb weights at slaughter
have increased from 13.07kg to 15.45kg, up 18%.

At the same time, the meat industry has significantly diversified its
markets. In 1988 lamb was sold into 88 countries. A decade later New
Zealand's meat exporters are operating in 111 countries.

Our National Beef Herd

While our national beef herd has remained relatively static at 4.2 million,
our export markets have diversified and we are now exporting to 111
countries. Beef and veal exports are worth $1.1 billion and are forecast to
reach $1.35 billion for the year ending March 2000.

Knowledge Economy

But the future of the rural economy depends on more than simply efficient
pastoral farming. We have entered the knowledge age and the challenge for
rural New Zealand is to make the most of it.

The knowledge economy is about growing the intellectual capital of New
Zealand so we can innovate faster and smarter than our competitors, and
thereby earn the best possible returns.

It is about training a new generation of international marketers, scientists
and farmers who are focused on maximising returns through generating new
ideas, and building relationships with customers.

This involves far more than simply staying at the forefront of biotechnology
in the laboratories of our universities and research institutions. Though
this is of course one of the important objectives - and more than half the
Government's investment in science is in this area.

Rather, the knowledge economy is about turning that scientific capacity into
profitable exporting projects. In the knowledge economy, ideas and how we
use them are the key to the future.

Changes in the Meat Industry

A significant part of this relates to the knowledge the producer and
exporter has of their consumer. It relates to achieving quality assurance
standards that enable higher value products to be accepted on the other side
of the world.

A fine example of this is recent changes in the meat industry.

The Employment Contract Act has also allowed significant changes in
processing, with killing costs educed to $10 for a lamb and $100 for a
cattle beast.

In 1989, 59% of the lamb trade was in frozen carcasses. In 1998 the
corresponding figure was 17%. Over the decade, the chilled lamb trade has
expanded by a factor of five and now makes up 10% of all lamb exporters.
Similarly chilled bone-in cuts of lamb have risen in volume four-fold. In
the mutton and beef trade, the story is similar. Over the past decade,
producers and exporters alike have radically transformed their industry,
both in terms of markets and products.

This transformation in trading patterns in our meat industry has been
matched by a virtual revolution in many of New Zealand's other agricultural
sectors over the same period.

Of which the Dairy Industry is an excellent example.

The Dairy Industry

New Zealand exports more than 90% of its dairy production. As a result of
its export orientated dairy industry and rigorous marketing strategies, New
Zealand supplies around 31% of the international dairy market, with exports
valued at $4.7 billion. Our butter is sold in 100 countries and our cheese
is exported into in 96 countries. But we are as dependent on commodity
markets as we were a decade ago.

The Government has recently introduced legislation which will enable the
dairy industry to further expand its business by unshackling it from the
legislative constraints it currently has. If farmers vote for the Mega
Co-op and the Commerce Commission approves the merger, the way will be
cleared for new alternative exporters to compete with the Mega Co-op.

Dairy Industry - New Technology

The Dairy Industry has a bright future in the modern high tech world of
tomorrow because it is making the necessary steps to future-proof itself.
Investments in new technology and advances in biotechnology have led to some
exciting new products made from milk. Good research that has been going on
by our scientists at the Diary Research Institute and in our dairy
companies, looking at how to add value.

In the past, commercial uses for whey proteins have been limited. Today
specific whey proteins can be isolated to produce an ideal dietary
supplement for athletes.

A chocolate flavoured instant skim-milk powder, like milo but with a higher
nutritional value, is now exceeding all budget expectations throughout South
East Asia, in spite of their financial crisis.

High energy products like the bar used by Peter Hillary in his recent
Antarctic trek are another innovation. A milk calcium tablet just launched,
will help prevent osteoporosis in women. Pharmaceutical grade lactose used
in drug manufacture. Immune products and serums. Polymers for obesity
control and slow release foods and there are many more examples.

As we're increasingly able to break milk down and modify these components
over time, then we open up many new opportunities.

The Dairy Mega Co-op plan is an important and exciting circuit breaker
because it enables the Dairy Industry to break away from its current
legislative and structural constraints.

The Dairy Industry plans is to utilise its institutional knowledge and
expertise in low cost production and distribution, developed over the past
seven decades, to expand operations around the globe.

The Government is delighted with the way the Dairy Industry has embraced the
producer board reform challenge and is making its own way.

Changing Wool Industry

In the wool industry progress is slower but there has been a lot of effort
and investment from Wools of New Zealand in its Fern-mark programme.

And there are encouraging developments at the fine fibre end of the wool
market as we saw recently in London when Karen Walker and three other
designers show-cased their work to the world.

But sadly many farmers still see wool as a by-product to their meat
business.

This is something of a tragedy given the significance of the wool trade to
New Zealand historically, and the obvious advantages of the product over its
alternatives. In my view there is enormous potential to develop this market
further.

People are crying out for natural fibres and as our fashion designers
showed, the potential to be innovative and imaginative is unlimited! But as
a fibre it must be more in line with market demand.

New Products

However, the most remarkable changes in New Zealand agribusiness over the
last decade have not been in any of the traditional pastoral industries
however. Rather they have been in the development of new products and new
markets. For example in pharmaceuticals, nutriceuticals and dietary
supplements.

Other new products while not new per se, are still new for New Zealand. And
it is in this area that success stories abound.

Flower exports

Take the flower export industry for example. It is now earning more in
export dollars than the wine industry. The most recent figures indicate New
Zealand's flower export earnings are around $140 million a year.

Much is often made of the National Government's plans for deregulation in
New Zealand's agricultural sector. But deregulation is a continuum and now
we are reaping the benefits.

The exciting thing from my perspective is that Kiwi entrepreneurs are
clearly finding many of the market opportunities they seek. And across so
many parts of the agricultural sector.

Success stories
Take another example - New Zealand's avocado producers. In 1990 the
orchard-gate value was $3.5 million. Today it is over $25 million!

Or kiwifruit which in the 1998 season saw a remarkable increase in returns
at the orchard gate of $257.7 million up from $157.6 million the year before
- a whopping 53% increase in returns per hectare.

Wine Industry

And then we have the wine industry - widely regarded as the glamour industry
of the export sector.

Since 1990, export volumes of wine have increased from 4 million litres to
15.2 million litres. In the same time, the area of land in wine production
has risen from 4880 hectares to 7356 hectares. By the end of 2001 another
2000 hectares are expected to be in production.

Export earnings for wine already exceed $100 million and with significant
winery developments underway all around the country, the industry expects to
more than double that in the next decade.

From my perspective one of the most significant aspects of all this
enterprise, is that it is not dependent on Government instigation.

Most of these rapidly growing industries have no statutory framework in
place. And in my view, the success they are clearly achieving, proves what I
have often said. That the best thing the Government can do for agribusiness
is step back and let the participants get on with it.

Vegetables

Vegetables is another exciting area where there are many new varieties -
mushrooms and peppers for example. New Zealand now has a billion dollar
vegetable industry - half of it exported.

Asparagus

New Zealand has also achieved great success in the asparagus trade.

According to a recent report in the Christchurch Press, a single Japanese
buyer has been purchasing the entire South Island asparagus crop for the
last ten years.

The buyer told the newspaper he was so impressed by the quality of the crop
he wanted to double the tonnage he bought over the next few years.

In the asparagus industry like in all food industries, the key to success is
developing a relationship with the consumer. The Japanese buyer in this
article was quoted as saying Japanese demand for New Zealand asparagus had
not been dented by the recent economic downturn in Japan because, "consumers
in Japan have leant that the cheaper, skinny asparagus grown in hotter
climates like the Philippines, has little taste".

As a result consumers were willing to pay more for the South Island product.

It is this sort of customer relationship that will provide New Zealand's
agribusinesses with the certainty and prosperity that they are seeking for
the coming millennium.

Olives

Throughout our agribusiness sector, there is evidence of innovation and
smart business practice. For example a new olive industry is responding to
the growing demand for gourmet products and oils.

Other new high earning niche market products now being produced in New
Zealand include Wasabi, and truffles, another product in which a New Zealand
innovator appears to have gained a global edge on his competition through
successfully seeding an Oak grove with the necessary fungus.

New Zealand also has a whole new range of medicinal products such as St
John's Wart, echinacea and ginseng now being commercially produced.

And I haven't even mentioned seafood. An industry that exported $6.5 million
worth 30 years ago will this year earn $1.3 billion.

Seafood is New Zealand's fourth biggest export earner after dairy, meat and
wood products.

Seafood Industry

Last week I visited Crop & Food's Research's Seafood Unit in Nelson. It was
exciting to see the application of innovative research contributing to
increased export earnings. New Zealand research placing hoki as a superior
quality fish away from surimi.

Cutting edge research is not only vital to the seafood industry, it is
essential to the whole economy. In the Nelson region alone the local scallop
industry employs 200 people in the processing area and approximately 180
crew on the 60 scallop vessels. One thousand full-time equivalent jobs are
provided by the Nelson-Marlborough mussel industry.

Not to mention the 300 plus jobs in the New Zealand salmon industry in the
same area.

Biotechnology

New Zealand is also world leader in genetics and biotechnology research and
needs to remain so. But the challengers are rising thick and fast.

There are a range of innovations occurring in the medical, industrial,
environmental, horticultural and agricultural fields. The primary sector
needs to grab these opportunities without endangering the trust and faith of
consumers in the process.

The debate over genetically modified food is gaining momentum. Consumers
want to know what they are eating. But there is another aspect to the debate
that should not be overlooked. All food industries involve products which
have over time been selectively bred for preferred traits.

Biotechnology may speed up and more directly achieve such results. The
opportunity for genetic manipulation of pasture species to produce twice the
level of quality dry matter could dramatically improve pastoral farming
viability in New Zealand. Equally the ownership of that skill by our
competitors could lead to our demise. The stakes in these games are high.

In this respect, closing our eyes to new technology is simply not an option
for a country so dependent on agricultural exports.

Boysenberries

Cutting edge research is the way of the future.

New research by AgResearch shows there are plenty of market opportunities
out there just waiting to be tapped. The squashy boysenberries for example
which make such delicious jam are also rich in the most potent form of
anti-oxidants - elements which scientists increasingly associate with
protection from common ailments.

On this news John Molyneux of Berryfruit Export observed "if there's a
proven health benefit, it opens up a whole new vista of opportunities for
us."

Indeed it does. But equally importantly, New Zealand's agribusiness
entrepreneurs have the ability to turn such an opportunity into a profitable
earner.

Trade Liberalisation

With trade in agricultural products firmly on the agenda for the upcoming
WTO round, the next decade could well be a golden one for New Zealand's
agribusinesses. Earlier this month Lockwood Smith and I attended the APEC
Trade Ministers meeting where the enthusiasm for the new round was exciting.

As trade liberalisation delivers us new markets, what New Zealand has
learned in the last decade about competing on the international stage will
put us in a perfect position to exploit whatever gains are made.

Moreover New Zealand is in an ideal position to exploit its knowledge of
trade, to leverage business opportunities with our trading partners, and
even within the economies our trading competitors.

In the developed world, the retail environment is becoming increasingly
complex and demanding. While many of our competitors will find this
threatening, for New Zealand traders already at the forefront of this new
environment, food safety, consumer satisfaction and quality are already well
understood.

More sophisticated processing also brings the benefits of free trade. It is
often the commodity products that face quotas and tariffs.

Conclusion

In my opening remarks I touched briefly on producer board reform.

It has been a whirlwind few days for the Government and the three major
single-selling boards - dairy, kiwifruit, and apples and pears.

We have sliced through more than a decade of debate to agree in principle on
a new direction for farmers and growers. The changes proposed by the dairy
industry are epoch making.

The intention of the producer board reform process has always been to
encourage industries to embrace change themselves. To encourage new
investment and innovation and to move away from our commodity trap.

In the meantime the Government will stick to the formula which has delivered
so well to date. We will continue to work to reduce input costs to New
Zealand's exporting businesses.

We will continue to work towards lowering the cost of the tax burden and we
will continue to follow a path of fiscal discipline and sound monetary
policy to ensure the favourable interest rate and exchange rate environment
remains in place.

For a food producing nation, the key to the future lies with industry
investing in research and technology. Our ability to develop world beating
products is what will stand our primary industries in good stead in the
knowledge economy of the future.

In the final analysis New Zealand's agribusinesses are doing New Zealand
proud.

Kiwi ingenuity, Kiwi enterprise and Kiwi smarts are winning over the export
markets that New Zealand is so dependent on. More importantly perhaps they
are winning them over in the best possible way - by appealing to the new
tastes and concerns of consumers and by developing relationships.

So to return to the question posed by the conference organisers when they
invited me to speak here today: "What is the Government's view on the
importance of agribusiness in the new millennium?" The answer quite simply
is that agribusiness is vital to New Zealand's economic future.

It remains the dominant source of New Zealand's export dollars, and as the
many examples illustrate, it is clearly something that New Zealand and New
Zealanders are good at.

ENDS

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