The New Zealand economy is export-led. That is the way it has to be for a small mountainous country in the South Pacific, largely bereft of mineral resources and with minimal manufacturing, but blessed with a temperate maritime climate and lots of rain.
Alas, both history and current realities tell us that New Zealand has limited international competitive advantage in relation to technology-based engineering. That statement will be offensive to some, but the hard reality is that we cannot be considered world-leading in relation to chemical, electrical or mechanical engineering beyond small niche areas. Nor are we internationally competitive in relation to manufacture of pharmaceuticals. And when we do develop new technologies, it is not long before the owners typically set up manufacturing closer to the big international markets, using international equity to finance that move.
The painful reality is that pharmaceuticals, computers, televisions, cars, trucks, fuel and even much of our food comes from overseas. That includes rice, bananas, apricots and most bread-making wheat. Open the pantry door and have a look at the small print as to where most of the tinned food comes from. Most of it comes from Australia, China and Thailand.
To the extent that we have a steel industry, it is overseas-owned with Australia's BlueScope Steel as the parent company. This company has been receiving a little over two million free NZU credits each year under the ‘Emissions Intensive and Trade Exposed’ (EITE) support scheme, with this support valued on current carbon pricing at around $130 million per annum. Without this support, NZ Steel would be loss making. On top of this, we typically spend about $800 million per annum on imported steel.
As for aluminium, we currently export aluminium worth about $1.2 billion using approximately $400 million of imported alumina and with the profits also going overseas. The smelter receives free NZU credits currently worth about $100 million per year and it also gets very cheap power. Despite this, the $1.2 billion of aluminium exports appear destined to cease in the coming years.
Another significant non-primary source of exports in the past has been oil, largely coming from offshore Taranaki. That too is currently in major decline, with no prospect of that being reversed.
The ‘big picture’ message from all of this is that something over 80% of our total exports come from primary industries including agriculture, horticulture, timber and fish. This dependence on primary industries has been increasing rather than decreasing. There are no significant investments occurring focused on manufactured exports that will turn this around.
If we dig a little deeper into the primary industries, here are the sector components as reported for 2020 and also forecast for 2025 by MPI in their June 2021 ‘State of Primary Industries’ report.
Table 1. New Zealand’s actual 2020 and predicted 2025 primary industry exports
Sector | 2020 Actual (June year, $NZ billions) |
2025 Forecast by MPI (June year, $NZ billions) |
Dairy | 20.1 | 22.0 |
Meat and wool | 10.7 | 11.2 |
Forestry | 5.5 | 6.8 |
Horticulture | 6.5 | 8.0 |
Seafood | 1.9 | 1.9 |
Arable | 0.3 | 0.3 |
Processed food and other | 3.0 | 2.9 |
TOTAL | 48.0 | 53.1 |
The stand-out figure here is that dairy comprises over 40% of primary-industry exports.
Also notable is that arable exports are minor with no forecast increase. That will come as no surprise to those who understand the implications of a mountainous land, generally low fertility soils, and a maritime climate.
Horticulture is expected to increase, with kiwifruit continuing as the big mover. Subtropical fruit and vegetables, plus temperate apples, will also continue to contribute. The wine industry, which is largely overseas-owned, is not expected to expand greatly.
The expected increase in earnings from forestry is based on an expected increase in harvesting, with this being a short to medium-term consequence of heavy plantings in the early and mid-1990s. However, I am nervous about pricing, with this heavily dependent on Chinese infrastructure projects.
Seafood is heavily resource constrained. Processed foods are constrained by cost competition.
Following the first ‘big-picture message’ earlier in this article about the dominance of primary-sector exports, the follow-up message is that the New Zealand export-led economy would be in huge trouble without the dairy industry. Dairy currently comprises 33% of total exports. There is nothing with potential to replace it.
However, if people think this article is leading towards the notion that dairy must be allowed to continue along its present path, then they are mistaken. The dairy industry will have to change in big ways.
The first key issue where dairy has to further engage is in relation to nitrogen leaching and phosphorus runoff. The second issue relates to greenhouse gases. The third area relates to animal welfare. The fourth relates to staff welfare.
The dairy industry has been working for some time on all of these issues. But much more has to be done. Some of the changes will be revolutionary rather than evolutionary. They will involve new farming systems rather than marginal changes that chip away at the edges.
For the last four years, I have been learning and exploring about the potential to use composting technologies and associated shelters, which we sometimes call ‘mootels’, to transform New Zealand dairy while staying within a pasture-grazing system. The fundamental technology is that if cows ‘piss and poo’ into bedding that is protected from the rain, and if this bedding is then tilled to induce aerobic fermentation, then the bedding heats up, stays dry, and converts over time to compost. If the system is working well then there is no smell and there are very happy cows.
Spanning out from the specific technology, there is a range of pasture-based systems that can be employed. Some farmers are using the shelters mainly in winter including through calving. Others are also using them in summer, particularly on hot days.
The science of nitrogen leaching from urine is well understood, with winter and the second half of autumn the critical times during which every load of urine collected in the bedding reduces leaching.
Cow comfort relates to cows being out of the wind and rain. This flows through to less feed required and also less feed wastage, less mud, and avoidance of pasture pugging. The cows give thanks by producing more milk.
Both I and the people I work with are also confident these systems can considerably reduce nitrous oxide emissions compared to standard New Zealand dairy systems. Nitrous oxide is the key greenhouse gas that often gets forgotten about in public discourse. Work is needed to measure this. I am also working with a team from Canterbury University who are seeking funding for work to reduce methane emissions through use of biofilters within the shelters.
Composting shelter systems don’t come cheap. However, the farmers I am learning alongside are happy with their investments, and I am confident these shelters can pay their way when used efficiently. In contrast, most banks frown as soon as they hear of plans that sound like ‘building a barn’. Some education of banks is needed. These shelters and ‘mootels’ are very different to what most people think of as a ‘barn’.
Recently I completed a project for AGMARDT bringing together what I have learned about these systems over the last four years, and setting out the R&D programmes that are now needed if these systems are to become mainstream. That report is in the public domain and can be obtained by emailing me at kbwoodford@gmail.com
The ‘bottom line’ is that these systems need to become mainstream, but we won’t get there unless they are embedded without formal research, development, extension and education systems.
*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. You can contact him directly here.
44 Comments
Encouraging to see the work you are doing Keith, especially those four key issues.
Might I suggest a fifth?
Educating farmers about these four issues.
Some seem to get it, some don't. And I suspect it depends a bit on where they farm (Waikato verse Northland re waterways protection as an example).
Rastus,
My rural-focused articles are also published in Farmers Weekly so farmers do read them, albeit typically a few days later.
Dairy farming is currently very profitable but both farmers and their bankers are very nervous about debt levels and hence there is a focus on debt reduction rather than capital spending.
Farmers are also very nervous about Government policy and where it might head.
Keith Woodford
For a great leisure read which covers intergenerational farming changes (UK), I'd recommend English Pastoral, by James Rebanks.
'A heartfelt elegy for all that has been lost from our landscape, and a rousing disquisition on what could be regained'
Pretty much how farmers lost their 'feel' of the land.
CWBW,
The MPI report does not seem to be explicit as to whether the estimates are real or nominal. But they are likely to be nominal. On that assumption, the key drivers of returns will relate to international prices and the exchange rate rather than internal inflation. Both dairy and overall primary exports are forecast to increase approximately 10%. But the underlying exchange rates are also not explicit.
My own assumption is that over the next three to four years some cold breezes will flow through into New Zealand's foreign exchange markets, raising export returns but also import prices. Good for farmers but not for most other people. However, economic expectations theory ,for which Nobel prizes have been awarded, says that on the assumption that current markets are well informed, then current exchange rates are close to the best point estimate of future exchange rates. Of course those point estimates will be wrong but with equal probabilities in both directions.
Given that 83% of exports are from primary industries, the export-led economy will to a large extent go wherever the primary industries takes it. Hopefully it will be high international prices for these products for which I have some optimism (apart from log prices), rather than a low exchange rate, that creates high returns in NZD.
KeithW
As always Keith, insightful article. Your stats refer to only merchandise exports ie physical stuff going on ships or planes.
- Is there a summary that includes all export earnings, eg including for example IT/software SaaS companies whose revenues are growing at pace?
- Interesting discussion how much location of ownership really matters in todays world. We all love to get wound up about foreign ownership and profits slipping away. But in the IT industry we're seeing a lot of reinvestment of capital back into NZ after companies like Sequeent and Vend are sold to offshore owners. :)
nizzy,
I agree that the numbers I refer to are physical exports that go on a ship or a plane.
I will take the question of virtual products involving IP 'on notice'. It will probably require an article all by itself to address those issues. Actually, that is the space in which my own little company operates - when I work overseas it is exporting information and not physical products. But I don't think it is easy to run an economy on that basis.
KeithW
I couldn’t agree with you more Keith the one piece of the conversation still missing is provision of true sustainable finance to move into the composting system ( not greenwash financing at rates marginally below market).
Government involvement/ central bank support could move the pendulum rapidly into sustainable economic dairying.
I don't disagree with you Faulkner about the importance of sorting out finance for widespread dairy 'mootel' conversions. But I think there are other missing pieces. For instance, dairy farmers will not convert in large numbers to the mootel system unless there is a long-term supply of bedding material (wood chips, straw, hemp, miscanthus, biochar... ) at affordable/competitive prices.
Here is an article about how biochar sequesters carbon i.e. it is a biological form of carbon capture and storage. NZ should be looking into this as a domestic option for carbon sequestration.
https://synbiobeta.com/could-carbon-sequestration-be-the-future-of-agri…
The Europeans are really interested in biochar - the European Biochar Industry have a detailed white paper on the topic.
"The EBI has elaborated an extensively researched paper which demonstrates, on a scientific basis, that biochar and biomass pyrolysis is a key technology in the fight against climate change."
https://www.biochar-industry.com/
In NZ the dairy industry could be a key player in the large-scale application of biochar. Not just for carbon storage but for other synergy reasons - such as improved soil quality, increased water retention, decreased leaching...
We just need to be very careful and not paint the farmers into a corner with blaming climate change on cows, this is a bit of a joke. Speaking of a joke, the latest climate change conference with even more hot air coming from politicians. Things are not going to change from any of the major polluters of this world and everyone knows it, time to wise up NZ. The day that I can no longer afford milk or a burger while China keeps on pumping out power from more and more coal fired power stations is the day I really get pissed off.
But China is doing all the worlds dirty manufactering. The average Chines citizens carbon footprint is way less than a westerners. One of the big issues has been that we cannot let the 3rd world come anywhere near the resource use per capita of the first world. Of course they are screaming not fair. This needs to be addressed.
Its all very complex , but I am hoping for some small progress. nothing earth shattering , but with consensus of most countries.
The hi tech world is largely passing many of us by, but it's big. I just we could keep more of it in NZ Inc ownership. However, sales to foreigners do create some turnover, much of which is re-invested, of which Xero is the hero. Yes, I like milk, but great tech is the future.
And isn't this exactly what I said.
"Our plan to expand the vege operation and get the animals off basically sort of got derailed by the pandemic, because we needed a lot more labour for the vege operation than we do to run the stock, and our access to labour from the Solomon Islands or Philippines and things like that basically just went away"
Arrogant SoB.
To a degree , though I think alot of pruning etc was not done.
I'm not really defending him , i do not know the details , i was just saying we need to look at criticisim with an open mind , and don't immediately jump in with the "NZ's the most efficient dairy producer in the world" line. As Keiths composting barns are showing , there ia always better ways of doing things.
solardb,
Yes. There are a number of alternatives. In situations where shingle is available, then cement stabilised shingle works remarkably well and at very low cost. Also, in a system working successfully, all the moisture goes skywards and none comes out drainage pipes. Different environmental councils will have different requirements.
KeithW
Thanks . I wasn't thinking of leakage into the water table, was just wondering if there was a usable runoff collected.
One of my ideas is a solar powered glass house type system, to use effluent in winter to grow a fodder crop such as fodder willow , or some type of reed. More for dairy shed excess .
"Dairy currently comprises 33% of total exports. There is nothing with potential to replace it."
No mention of the services industry as an export here, nor what NZ could do to mobilise/attract human capital to create a software-based tech economy.
Until now, the only 'competition' the dairy industry has faced has been plant-based alternatives. However, synthetic milks and other products will eventually scale and destroy the dairy industry. Fonterra et al either need to pull a Tyson Foods trick and diversify towards the future consumer or be eroded into obsolescence.
Inefficiently converting scarce arable land and pristine water into a commodity - with all its negative externalities which are not in the transfer price - which faces extinction sounds like a bleak future.
Please define 'pristine water'.
Dairy has always, and is currently increasingly so, faced 'competition' for land by horticulture, lifestyle blocks, and urban development. Between 2017 and 2019 over 130,000ha of dairy land had land use change away from dairy. That's approx 350,000 dairy stock reduction. Every year more land gets lost to dairy.
Fonterra has had investment in plant based food for a while now.
Having just been through winter and then having two dumps of rain in October amounting to over 300mm I'd willingly learn how to change to a compost barn system. Actually I would have before this winter.
Next door is a goat farm with two huge sheds that I keep eyeing up. Wonder how milking goats are doing?
Just make sure with goats that you have a processor and marketer lined up. One reason goats have been successful is that supply has been matched to increasing demand within a 'whole of value chain' framework.
I have forgotten where you are farming. But if you send me an email I might be able to find someone with a compost barn for you to visit.
KeithW
this bit and also on aluminium caught my eye
"To the extent that we have a steel industry, it is overseas-owned with Australia's BlueScope Steel as the parent company. This company has been receiving a little over two million free NZU credits each year under the ‘Emissions Intensive and Trade Exposed’ (EITE) support scheme, with this support valued on current carbon pricing at around $130 million per annum. Without this support, NZ Steel would be loss making. On top of this, we typically spend about $800 million per annum on imported steel."
The Greens and to a lesser extent Labour will close these NZ industries as soon as possible by removing their carbon subsidies and have NZ import more "clean" steel from China.
I've always thought that New Zealand science should be focused on biology, food, farming and medical science.
What in the wide world are we doing with the likes of rocket technology? More clutter in space?
And what are we doing with IT start-ups? Initially, NZders are all agog at these wondrous new start ups.
We know that after they develop their product they can't wait to bugger off overseas and list on some other countries' stock market: eg "Rocket Lab" and "Zero", or are bought out by some USA mega company enriching the entrepreneur but not NZ as a whole.
We certainly seem to produce amazing scientists: I have been stunned by the number of NZ epidemiologists that have come out of the woodwork during the Covid pandemic. I didn't realise we had so many, so obviously they don't depart NZ in numbers.
I think the mainstream media gives far to much attention to these rock stars of digital applications. I mean where's the payback to NZ of a company that digitally facilitates the collection of church collections in the US, but the likes of the NZHerald has endlessly fawned over them.
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