Uncertainty over NZ dairy industry's future weighs on primary sector, KPMG survey shows

Wednesday 10th June 2015

The uncertain future of the dairy industry, seen as a bellwether for New Zealand's primary sector and wider economy, is concerning many sector leaders, according to KPMG’s sixth Agribusiness Agenda survey.

KPMG global head of agribusiness Ian Proudfoot said conversations about dairy have changed dramatically from a year ago when milk prices were at an all time high and people thought price-setting on the international market would be less volatile.

“But the market is as volatile as it ever was," he said. "When prices are strong you get a competitive reaction with the US responding, China recovering from biosecurity issues and positioning itself to have a stronger domestic sector, and changes in Europe with the Russian restrictions and lifting of quotas.”

The Ministry of Primary Industries' Situation Outlook for Primary Industries this week forecast dairy export revenues would fall 22 percent to $14.2 billion in the year ending June 30 then improve by a compound annual growth rate of 6.8 percent over the next four years, particularly from 2017.

But the scale of the milk price decline has shaken people’s belief there had been a step change in commodity prices due to increased demand and the key learning was that New Zealand’s primary sector doesn’t have an exclusive right to sell its products in any market at a premium, Proudfoot said.

“There’s huge opportunity to receive value from the product we produce. We can’t do what everyone else does, we have to do it differently and have to have the right people and investment,” he said.

KPMG estimates the average value return to the farmgate is between 10 percent and 30 percent of the final retail value of the product, with the return for many key sectors lying towards the lower end of the range.

“The obvious question is why companies continue to invest heavily in processing assets when it is increasingly apparent that realising significant value requires bold investments that enable companies to get closer to their ultimate customer,” Proudfoot said.

He points to the kiwifruit sector where Zespri, through innovation, has secured prices for kiwifruit that are double its competitors’ returns.

For the fifth year in a row, improving biosecurity was the key priority of the 104 primary sector leaders surveyed.

Those surveyed said the cost of Auckland’s fruit fly response was likely to be many times the incremental cost of funding full border screening.

The government has said it will introduce a specific international passenger border levy to fund a $27 million additional investment in border biosecurity and it is also updating the 2003 Biosecurity Strategy.

Proudfoot said he supports both moves but doesn’t think they go far enough.

“They should be investing a lot more in biosecurity prior to the border," he said. "Industry are most keen to invest in reducing risk that comes from offshore. People pay a premium for our products based on the whole package that includes food safety, biosecurity, and the providence story. We need to make sure we value that premium and do things to protect it."

Another high priority for industry leaders was delivery of rural broadband. While those surveyed acknowledged it would never be economic to build rural broadband from a purely commercial perspective, they argued there was a public good element.

Unlike urban areas where the roll out of ultra fast broadband was largely supporting entertainment, in rural areas it has the ability to improve productivity, attract people to work in rural communities, and deliver better health and education services, the report said.

“The answer is to consider a public private partnership-type structure which would enable the government to support construction and, once in place, usage should build to volumes which support the cost of the system,” Proudfoot said.

A key change since KPMG started the Agribusiness Agenda six years ago has been collaboration within the industry, he said.

“Six years ago we said people needed to talk to each other. We don’t have to say that now, it’s a given. What we need is to start investing in the right places – we know what we have to do, we just have to do it,” he said.

BusinessDesk.co.nz

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