New Zealand has 5-year window before 3rd-world farmers undercut prices: KPMG

Monday 19th April 2010

New Zealand has as little as five years to shift to a high-value producer of farm products from a lowest-cost producer before South America, Africa, Asia and Eastern Europe scale up production enough to undercut prices of bulk animal protein, says KPMG.

The report by KPMG partner Ian Proudfoot advocates the brand value of a clean, green image. It cites an Interbrand valuation for the Pure New Zealand brand in 2005 of US$13.6 billion. That exceeds the US$9.3 billion of meat and dairy exports New Zealand shipped in the 12 months ended Feb. 28, according to government figures.

The report is a dose of realism for those expecting an increasingly hungry globe to ensure a growing market for New Zealand’s farm exports. And it suggests the nation has to rethink its image as a farmer.

“For many years, the New Zealand agribusiness sector has traded on a belief that our commercial advantages were cheap land, abundant grass and plenty of water, making this the lowest cost place to grow food in the world,” the report said. “This is no longer true. Farm prices have risen significant over the last 20 years, making land in New Zealand among the most expensive in the world.”

The nation now has the chance to avoid European farmers’ mistakes in under-estimating the threat of new world farm produce after WWII.

New Zealand “must learn from the European experience and respond to the new competitive environment,” the report said. “There is no Common Agricultural Policy to support industry in New Zealand.”

The KPMG report comes as a US researcher is advising New Zealand companies to tone down the clean, green image in favour of advocating the quality and craftsmanship. Seattle-based Hartman Group’s research for New Zealand Trade and Enterprise showed Americans don’t have a good understanding of sustainability, food miles or traceability, the NZ Herald reported.

New Zealand is going to face competition from large-scale intensive farms in regions such as Western China and South America which are closer to markets, have less onerous regulation and cheap labour. Instead of racing competitors to the large-scale, commodity end of global supply, New Zealand must build its reputation for using global best practices, according to the KPMG report.

“Sustainability is a priority for agribusiness,” KPMG’s Proudfoot said.

That requires better management of New Zealand’s ‘liquid gold’ water supply, speedy implementation of a national traceability scheme for livestock, fast broadband in rural areas and a grown-up discussion on the potential and risks of genetically modified crops and species.

Moving up the value chain, though, may be costly, providing a challenge for the sector in raising the required capital. That includes the nation’s farmer cooperatives “will need to be flexible in how and where they source capital.”

It may become more common for the co-ops to adopt what KPMG called ‘non-supplier investment structures’.

Fonterra Cooperative, the world’s biggest dairy exporter and New Zealand’s biggest enterprise, has proposed allowing outside investors to buy tradable units in a new fund tied to its production and dry shares, held by farmers.

The cooperative has been at pains to say units in the fund don’t have the rights of its shares. Under its proposal, farmers would be able to trade shares among themselves and the fund would help provide enough liquidity to ensure a market. Fonterra would lose its redemption risk, where it is obliged to buy back equity, which resulted in more than $700 million of cost from the 2007-2008 drought.

Silver Fern Farms issued shares that trade on the Unlisted platform in a step that signaled an unwinding of the South Island meat cooperative.

Businesswire.co.nz

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