New Zealand has a 'missing middle' of large food and beverage export firms, needs to intensify production, and process more primary products before exporting them, a report commissioned by the Ministry of Economic Development says.
The amount of capital invested in the food and beverage industry needed to be trebled over the next fifteen years, as firms needed to make significant increases in investment to transition to selling more packaged goods.
Firms in the industry were generally farmer-owned and hence were under-capitalised for expansion up the value-added chain.
'We need to change'
Minister for Economic Development Steven Joyce said the government wanted the food and beverage (F&B) industry to add more value to primary produce in New Zealand.
Joyce today released a report from research firm Coriolis showing a snapshot of the industry. Demand for high-quality products from a growing Asian middle-class was boosting demand and opportunities for the industry, he said.
“The industry exports NZ$25 billion in food and beverages each year. Much of this is ingredients which others use to make finished products. The report estimates that international consumers pay from NZ$140-200 billion at the checkout counter for food products that are primarily of New Zealand origin," Joyce said.
“It’s not all about producing more. It’s also about capturing more of that value for New Zealand. New Zealand is about the same size as Italy, yet Italy exports twice as much food and beverage by value as New Zealand as well as feeding a population of 60 million,” he said.
Incidentally, Former Economic Development Minister Gerry Brownlee made the same observations in 2010, when he released a Coriolis report on the F&B industry. At the time, Brownlee said many sectors of the industry had failed to forward-integrate along the value chain, and that New Zealand needed to process more primary produce here before exporting it.
Missing middle; Need more capital
Coriolis highlighted what it called a 'missing middle' of large F&B export firms below dairy-giant Fonterra. It said New Zealand's food and beverage sector was under-capitalised relative to its peers, and as a result was less profitable.
Historically, New Zealand had been a producer of ingredients through farmer-owned co-operatives, Coriolis said.
"Despite media comment, the New Zealand F&B industry is still owned by New Zealanders. Four of the top five New Zealand F&B firms are owned by farmers. There is nothing wrong with farmers owning the food industry. This is a common situation across peer group counties all of whom have a somewhat similar structure of ownership of primary production," it said in the report.
Broadly speaking 50% of what was sold in a supermarket anywhere in the world was fresh perishables (e.g. meat, seafood, produce, dairy) and 50% was consumer-ready packaged shelf-stable products.
"The export mix of peer group countries match these proportions (i.e. 50/50). New Zealand, on the other hand, is 80% weighted toward perishables and only 20% shelf-stable," Coriolis said.
"In the last 10-15 years New Zealand’s F&B industry has begun to transform into a producer of consumer ready packaged goods. Processed/packaged F&B are showing rapid growth, and over the next 20 years New Zealand’s F&B exports will likely come to resemble those of peer group countries," it said.
"The government’s Economic Growth Agenda (EGA) has set a target of tripling New Zealand’s F&B exports over the next 15 years. While this is a clearly a stretch target all of our research suggests it is possible."
To achieve this, the path forward over the next 20 years was about turning ingredients into packaged/processed foods (e.g. infant formula instead of milk powder). This transition would require large amounts of new investment in research, plants and equipment, sales and marketing.
"Conceptually this will require something approaching tripling the amount of capital in the F&B industry. Firms will need to make a significant increase in their investment to make this required transition to packaged goods," Coriolis said.
Producer owned co-operatives strived to maximise returns to members, which limited the availability of capital to fund growth.
"Nevertheless, international investors are providing a large and constant in-flow of capital, particularly in the areas of strong growth potential going forward (i.e. beverages and processed foods)," Coriolis said.
It highlighted the 'missing middle' by comparing New Zealand's F&B industry to Denmark's:
And the under-capitalisation of the industry relative to Denmark:
So how do we get there?
New Zealand had considerable untapped capacity to export more from the food and beverage industry, Coriolis said. It was a country the size of Italy or the United Kingdom, but with the population of Singapore. "However Italy feeds a domestic population of 60m people and exports twice as much F&B as New Zealand."
New Zealand had had a long period of bringing new – often increasingly marginal - land into production. However, this easy growth appeared to have come to an end. Multiple pressures were now coming to a head: The growth of lifestyle blocks and “urban sprawl”; and the drive to continue to increase primary production.
Intensification was therefore the path forward for the industry, the report said.
As a result of these pressures, primary production was moving into a phase of intensification. Examples of intensification included conversion of sheep paddocks into wine grapes, conversion of rain fed beef farms into irrigated dairy farms, and flat wild catch of seafood being supplemented by more aquaculture
"New Zealand can’t ignore these issues. As a country New Zealand has a competitive advantage in pastoral agriculture. It also has strong agricultural science, and research capability in its Universities, private institutes and Crown Research Institutes," Coriolis said.
"At the mega level New Zealand now needs to leverage these capabilities and build on its existing strengths to develop ways to increase production without degrading the land and water," it said.
There was nothing unique with the problems facing New Zealand, and other countries had very similar pressures.
"The experience of high relevant global peers (e.g. Denmark, Ireland, Oregon) strongly suggests intensification will continue going forward and that strong increases in production are possible. These peers clearly have strong lessons available for New Zealand," Coriolis said.
10 Comments
Yes; we need to process what we produce into high value products our overseas buyers want but I've been listening to this all my life it seems. Farm, forest and fisheries products exported in their raw state is a mugs game, so why are we doing it? And it's getting worse not better. NZ fish sent to China for filleting (FFS) or Fonterra selling basic milk powder when Chinese mums will pay hundreds for a (well sealed) can of NZ produced baby formula.
Is the MO "don't do it; talk about it" ?
Why? - Processing costs money, lots of money and its debatable weather NZ would be cost efficient at processing. NZer's are expensive to employ, finding capital in NZ is impossible (unless its a property deal) and they your exporting air not the product. The conclusion is floored. You don't see Nestle doing alot of processing inside Switzerland!
This is a wasted arguement. We can not process and should not process. It should be done where the costs of processing are the lowest. i.e China, Indonesia etc. What is great is owning the processing assets offshore. Fonterra is very good at that. Zespiri licencing its fruit to Italians and Chilians is good. But the rest fail - PPCS failed with Norwich in England.
The meat industry is a basket case and should have been forced to consolidate. Instead the Southern Tribes see it better to fight than to look after the industry and farmers long term interests.
What is a shame is the level of foregin ownership who suck profits and product out and divid and conquer primary producers.
Great piece of research but conclusions are puzzling. Remember a management consultant is a man who knows 101 ways to make love but doesn't know any women.
Fair enough Golden Fox but the fact is we do have succesful processing here. Tiwai point, for example, even imports the raw material but uses an abundant natural resource to add value and jobs. Our wine industry doesn't export raw grapes. So why sell milk powder when there are customers willing to pay a hundred times the price for NZ branded and packaged baby formula?
Modern industrial process is more capital than labour intensive, that is where we are lacking. Our households, businesses and farmers have chosen to (and continue to) spend their surpluses or have previously relied on debt finance to such an extent that there is no surplus. No wonder we are capital constrained. Forty years of current account deficits tells you all you need to know. A major cultural shift is required.
Tatua seems to have done quite well selling their Dairy Wip(Cream combined with compressed air)
Maybe if there were lots of little dairy companies like Tatua, then some would concentrate on their ingredients, and some would have other stratergies.
One problem I see with Fonterra is its almost too big to fail. Monopoly type companies can make really dumb decisions and no one really knows what they have done because there isn't much competition to show up their mistakes
Kiwidave. Tiwai point is probably noy a good example unless your being sarcastic. It uses subsidized power, we pay for it. Also they export a commodity not a finished product.
Did the authors actualy ask Fonterra why they decided to move in the direction they did? It's my understanding they looked at the possibilities and found that specialist ingredients was the way to go and so have deliberately moved there, fair to say Denmark being in Europe there is the question of access being much easier.
I don't think Fonterra is the be all end all but they are out there doing it not writing hypothetical reports.
Zespri a a co op?
Hi Alex, this report raises issues similar to what we were discussing in an earlier thread. http://www.interest.co.nz/rural-news/58963/allan-barber-assesses-what-crafar-farms-saga-has-taught-us-your-view .
How to MED and Steven Joyce qualify the return foreign capital (investment) generates for the NZ economy. I heard Joyce on RadioNZ news say that it will generate jobs. What sort of jobs?
What I see as happening in the world (euro debt crisis, wealth gap in US, finance company collapses et al. John Banks memory lapse....) I think NZ would be more sweat shop than lap top, in other words hello third world.
Foreign capital has a home (provenance), and that's where all the benefit is going to flow. For example sweatshop labour, Nike, Apple, so on and so forth. The way I see it Steve Joyce and the MED crew are advocating for and encouraging this sort of investment; same as David, Sir Henry and the M.A.F sound system.
Steven Joyce also claimed on RadioNZ that 'NZ was founded on foreign investment'. What a joke, is he being paid a retainer by someone? Maori were completely disenfranchised by such arrogance. Unless foreign investment came to live in NZ, foreign capital was used to exploit us and our resources, similar to the scenarios outlined in posts in the attached link. Vestys' investment in the meat processing industry is an example. All profits went straight back to england, the NZ farmer was left to scrape and rake to make a cake (apart from well connected ones).
So baby boomers lived beyond their means, and they spawned short sighted materialistic off spring, but lets keep our strategic assets and resources and sell what we can produce to those who want what we got.
Why does Italy export twice as much F&B as New Zealand?
Because it has a massive market on its doorstep, has no currency risks, its agricultural sector is supported by subsidies, it has a climatic advantage and it exports a significant number and quantity of high-value products that have high brand recognition.
And all this from a country known for its history of culinary excellence
New Zealand?
Lamb, kiwifruit, butter, apples, low-end (these days) Sauvignon Blanc.
All generic, none of them exceptional compared with other offerings in the consumer arena and a long way from the market.
It's astounding that people dream up these comparisons
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