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Luxton Speech: Dairy Board Annual General Meeting

SPEECH NOTES: HON JOHN LUXTON

The New Zealand Dairy Board
Annual General Meeting
12 October 1999
(check against delivery)

Chairman John Storey, Directors of the New Zealand Dairy Board and of its shareholding co-operatives, delegates, and distinguished guests.

I am honoured and delighted to return to your AGM as a dairy farmer, and also of course as Minister responsible for the country’s agriculture portfolio, at the last Annual General Meeting of the Dairy Board in the 20th century.

Mr Chairman, your Annual Report signals that this has been, for the Dairy Industry, a year of decision and destiny. I want to commend you personally for the leadership role you played, along with your directors and your executive, in opening up a new strategic plan for New Zealand dairy farmers.

You have presented a plan showing that this business can be grown from $8 billion to $30 billion, in a decade. You have got an MMP Parliament to pass a new Act enabling this industry, with the agreement of 75% of the shareholders of Kiwi and NZDG and the Commerce Commission, to create a MegaCo-op.

For the dairy industry, the point we’re at now is a bit like half time in the biggest rugby match of the decade.

We’ve played our hearts out, all of us, this year. It’s flashed past like 40 minutes. Then the whistle’s blown.

We’ve staggered off the field happy that all of us have played a brilliant game, but knowing, close to exhaustion, that where we’re at, is only half time.

Every atom of our work and our achievement to date remains at risk entirely, on the quality of our performance in the second half.

Standing here at the microphone today, I see my role as one of encouragement. On the one hand, as a dairy farmer, I am, like you, one of the players. I look forward to voting on an industry plan in a few weeks or months’ time.

As Minister with a responsibility for agriculture, right now at half time, I’m inevitably tempted to act like the coach of the All Blacks in a tough game, and give everyone a rev-up before the second half begins.

But I won't, as it is you as farmers who own this industry, not the Government. You, not us, make the ownership decisions and it is ownership issues that must now be resolved by you.

The leaders of the dairy industry came to the Government last year with an analysis of the problems facing the industry, and a commercial plan to overcome them.

The industry said to us: We’ve got problems and challenges coming out our ears. Milk supply is rocketing upwards, but commodity prices, for years now, have shown a downward drift of about two percent per year.

If we allow that downward drift to run our destiny, the industry said, then inevitably, we are going to end up in ‘gurgler’ territory. And at the speed the world’s moving, it won’t take long to get there.

A whole heap of things in the international dairy industry have been crystallising very rapidly, and at a faster pace than ever before, in the last 12 months.

Our big competitors around the world remain able, too often, to move faster, more decisively and to better commercial effect than our own industry.

The outcome of this battle matters a great deal to New Zealand. So the Government welcomed the approach made by the leaders of the dairy industry.

Your industry leaders said they were convinced, after thorough analysis assisted by the best independent international consultants, that to cope with those threats, the New Zealand dairy industry stands in need of two things:

- A more commercial framework with a critical mass in the international market, and
- A less political form of governance.

And the present situation, right now, illustrates their point exactly.

While reaching agreement is delayed, competitors are, as we speak, using the opportunity created by our delay, to make a continuous stream of efficient commercial decisions to advance their own interest, and entrench our disadvantage.

For example, in a recent report, the Australian Dairy Farmers’ Federation has identified a number of proposals in response to the fast changing world market. The urgent need to address the issues of capital requirements, differential milk pricing, and the need to seek to work more closely with other countries are among the findings.

I was pleased to see that some high level agreements were reached in the weekend. But there are many more issues to be dealt with, some just as challenging as share structure.

The challenges are not easy ones. As Minister, I have a professional obligation to keep abreast of what’s going on. There are risks in the decisions facing us. But they aim to create a prosperous future for the New Zealand dairy industry. We are reaching a stage in an increasingly globalised commercial world where there is no future, in the way we used to do things in this country in the past.

But I have to remember my place. I am NOT the coach of the dairy industry football team. These are decisions for you, not Government.

What we have done at our end in Government, at the request of your leaders, is very simple, and in order not to infringe your rights, it is also very limited.
We have passed a new Dairy Industry Restructuring Act that sets out for you and everyone else, the regulatory framework that will apply to this industry, if it decides to go ahead with the MegaCo-op plan.

You don’t have to speculate about what the response of Government would be if you decide to vote yes to reform. The answer is already there in legislation.

If the MegaCo-op proceeds, then the Act comes into effect. If the MegaCo-op does not proceed, the Act dies, and you are back in your traditional situation, without an answer to any of the problems you know you are facing.

And in that case, you would have to develop another plan and would need to come back to Government, hoping it will give you the legislation needed.

Quite clearly, your freedom under the new Act is not totally untrammelled.

Where people want to set up monopolies here, laws are in place to stop them from abusing the rights of consumers or suppliers—and so there should be. The Commerce Commission has a very proper job to do, in protecting those rights. That’s a challenge for some of you, I know.

With a new commercial structure ensuring critical mass at a higher level than anything we ever had in the past to provide strength in global markets, there would no longer be a role or need for the old statutory mechanism.

In a bygone era, it served its turn superbly. In the 21st century, by contrast, if you think about the changing markets, it’s no longer a benefit. It’s a hindrance.

The decision is yours. The Act has been passed. From here on, the fact is, as Minister, I'm a bystander now, not a player.

And all I can say today from the sideline as an interested spectator, with the second half about to start, is: Please don’t drop the ball. If you do, the strong probability is that you will rue it over time.

South America

The lessons of the International Dairy Market were underlined, for me, when I visited South America a month or so back, to look at their agriculture, and represent New Zealand in trade discussions. These very frequently involved dairy access issues.

A vast potential is being unleashed in that continent. The Dairy Board has shown foresight in being among the first New Zealand companies active there. By processing local milk, and investing in local brands that provide outlets for your milk, it avoids or mitigates some significant import barriers and engenders a lot more local support. Competitors like Nestle and Parmalat adopt exactly this approach and they are doing it very successfully.

South American companies are growing. Multi-nationals are moving very strongly. Parmalat is aggressively positioning as are other EU and US companies, in the South American market. Nestle’s Brazil operation alone now matches the Dairy Board’s worldwide revenue (although this includes non-dairy products).

I endorse the Dairy Board direction of strategic alliances and joint ventures. But I agree with your industry leaders. Existing structures and restrictions do prevent your industry from expanding to match the pace of some of its competitors, and without action, the disadvantage thus incurred will grow with time.

Obviously, if we want to match them, then we will need to take the same risks they take. Some farmers may not want their money at risk in that way. Fair enough. They need an escape route. But I believe a majority of farmers know these are challenges we have to face and overcome, as a matter of survival.

The Government's Role

But what, I hear some farmers cry, is the Government doing nowadays, to assist the farming industry? Think about it. Most Government reform over the last decade has been aimed at helping our exporters remain internationally competitive. By eliminating tariffs and restrictions on parallel importing, all of you today get your farm and factory inputs at world prices. That’s a revolutionary change for this country.

Low inflation, a stable exchange rate, interest rates less than half what they were 10 years back. The lowest taxes in my lifetime as a farmer.

The Employment Contracts Act, deregulation of transport, electricity, postal services, telecommunications, shipping, and the meat industry have slashed the costs you would otherwise face today. Cull cow prices would be $100 per head less without the Employment Contracts Act—as they were in the late 80s.

None of those processes is complete yet, and you certainly can’t look for them to be completed under any Government wanting to turn back the clock. Like the dairy industry, the New Zealand Government today is part-way through the modernisation programme the nation needs to be truly internationally competitive and able to face the 21st century. We cannot afford at national level, any more than you can at industry level, to face the future by turning our back on it, and retreating into some past daydream as some New Zealand political parties are proposing.

We have to pick up the challenge and move forward, if we want to be successful.

Trade Access

The Third WTO Ministerial meeting will be held in Seattle late in November this year. Expect it to launch a new round of multilateral trade negotiations.

For the past year, our Government has been working to achieve an agenda and negotiating framework that advances New Zealand’s trade interests. Our objectives got a big boost from the APEC Leaders Meeting in Auckland last month.

APEC leaders representing more than half the world’s total international trade, strongly endorsed the launch of a new round built around a comprehensive negotiation on industrial tariffs, services and agricultural products, to be concluded within three years. Of great significance to the dairy industry, they also called for the abolition of agricultural export subsidies.

That has real potential to improve world dairy prices, which are currently set, in large part, by subsidised Common Agricultural Policy (CAP) product out of Europe and Dairy Export Incentive Programme (DEIP) product out of the USA.

The GATT established rules for manufactured exports for 50 years. Agriculture, after a delay of half a century, is on the WTO agenda now, for meaningful achievement without any further unreasonable delay.

New Zealand’s involvement in the WTO and APEC is an important investment aimed at reducing and eliminating the $500m your industry pays currently in direct tariffs to foreign Governments. We are equally active, however, in our efforts to open new markets walled off by even more costly non-tariff barriers to export trade.

To those myopic New Zealanders who say the Government should not have spent the equivalent of one and a half days of welfare payments on hosting APEC in Auckland this year, I say: Open your eyes, understand what it means to the people of this country in the long run, and think again.

New Zealand faces the highest import barriers of any significant trading nation. The New Zealand dairy industry has the most to gain from any liberalisation. To those who think that we should not reduce our barriers until others do, I also say, think again. Tariffs off your farm inputs or your household spending lowers your costs. So you automatically benefit.

New Zealand has limited leverage over large economies to trade our liberalisation for others. We have greater leverage by leading by example and working with like-minded groups through CER, the Cairns Group, APEC and the WTO.

I commend your industry for the help it has given to Government to ensure that New Zealand makes progress in this whole critical area of trade reform.

The Government and NZDB work closely on trade issues around the world.

Conclusion

Mr Chairman, in your period as Chair of the New Zealand Dairy Board you have given this industry a new sense of urgency. You have reinforced its impetus to face market pressure and embrace the need for strategic change.

Having worked with you over the last 20 years I have a real respect for your ability and dedication to the New Zealand Dairy Industry. I am absolutely certain that your wealth of experience is not going to be lost to the industry. I am sure the industry will continue to use you in its quest for more commercial and less political means of serving the global marketing interests of the industry.

To the incoming Chair of the NZDB Graham Fraser, congratulations. I know that you will continue the very proud tradition of leadership of the New Zealand Dairy Board and I wish you well.

I believe the industry, if it embraces change, will be well-placed to go into the new millennium. Obviously, farmers have to be informed about why change is urgent and necessary. I wish all of you the very best for the current season which is off to a flying start around most of New Zealand.

ENDS

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