By Keith Woodford*
Although it leaves many New Zealanders uncomfortable, there is a stark reality that the future of New Zealand’s agricultural industries, and hence the overall economy, is highly dependent on China. The reason is very simple: there is no-one else in the world who needs and wants our agricultural products at the levels we produce those products.
If action were driven by logic, then we would spend a lot of effort in trying to understand China. We would want to understand Chinese consumers, we would want to understand Chinese government policy towards agriculture, and we would want to understand what is happening on the ground in rural China.
We do know something about all of these things, but we don’t know enough. In particular, we know very little about what is happening within Chinese agriculture itself.
My first exposure to China’s agriculture was back in 1973 when I spent three weeks there with the first New Zealand China Society group to travel there since the mayhem of the Cultural Revolution, when China closed its doors to foreigners. The Cultural Revolution was still going on in 1973, but the excesses had gone and great change was occurring.
That visit to China was a life-changing experience. My Western-style economics and New Zealand agricultural science education were of little help in understanding what I was seeing. Some 43 years later I am still trying to understand China.
I recall a visit in the early 1990s when I was supervising some University of Queensland students who were investigating opportunities for Australian beef in China. The students did a great job. Our big message back to our commercial sponsors was to forget about the steaks and focus on the offal. Indeed, we came back with prospective orders which totally stunned our sponsors, who told us that these quantities could simply not be found within Australia.
The other big message we brought back from that trip was that ‘quality’ is whatever the consumer wants. And if the consumer wants offal rather than steak, then that is what we have to focus on.
Since then, I have made many more trips to China and I have seen both their agriculture develop and consumer preferences evolve. Amongst all of the change, the reality that ‘China is different’ remains as a constant. As long as we look at China from our own cultural perspectives we will make a lot of mistakes.
Currently, I am part of a Lincoln University project led by soil scientist Jim Moir where we are working with Chinese colleagues on the alpine grasslands of the Qinghai-Tibet Plateau. Up there, the livestock are yaks and sheep. Our immediate challenge is to develop the agronomy for nitrogen-fixing legumes, but the broader challenges relate to overall system sustainability. There is a lot that we are learning, but for every question to which we find an answer, five more questions arise. And the scale and diversity within China is so great that new contradictions continually emerge.
Each province of China is different, ranging from tropical environments to cold arid grasslands, with each province on average having more than ten times the population of New Zealand.
What is evident is that Chinese agriculture is developing fast. There are major constraints relating to a shortage of cultivatable land, a shortage of water, and perhaps ironically even a shortage of labour. The labour shortage relates to the huge ongoing migration to the cities. However, new technologies, often imported from the West, together with investment and land reform, are combining to have a major impact.
It is easy to forget that the Chinese dairy industry is considerably bigger than the New Zealand dairy industry, and that China has overtaken New Zealand as the world’s biggest producer of whole milk powder. It is also easy to forget that China has four times as many sheep as New Zealand. Also, China produces a lot more kiwifruit, apples, and beef than New Zealand, and probably also more wine. Fortunately, from a New Zealand agri-food perspective, China also has 300 times more people to feed than we have here in New Zealand.
Some 18 months ago, I suggested to Tony Browne, a former NZ Ambassador to China and now Executive Chair of the Contemporary China Research Centre based at Victoria University in Wellington, that we need to do a lot more to try and understand China’s agriculture, and the implications thereof for New Zealand’s agri-food industries. Tony took up that idea, and the outcome is that on 27/28 October there will be a 1.5-day conference at Victoria University titled ‘The Rise of Chinese Agriculture’.
Tony Browne and his key team of Dr Jason Young from Victoria University and Dr Sharon Lucock from Lincoln University, with me throwing in some ideas from behind, have put together 17 speakers, many of whom are coming from China itself. Professor Yuman Liu, a retired professor from the Rural Development Institute within the China Academy of Social Sciences will be talking about the dairy industry. Professor Binglong Li from China Agricultural University will be talking about China’s sheep and goat meat industries.
Lew Dagger, a Kiwi who has been living in Yunnan Province for close on 15 years but working all over China, will be talking about horticulture. Sharon Lucock from Lincoln University, who is herself Chinese, will be talking about her research documenting the experience of 28 Kiwis who have lived and worked in China on agri-food endeavours, and why China is so different. Shanghai-based Mark Tanner from market research company China Skinny will be talking about Chinese consumers. And there are another 12 speakers who will be addressing the range of China-related issues along the agri-food value chain from consumers back to producers, including China’s rapidly evolving policy framework and investment issues.
The conference is aimed at Kiwis who either are involved or plan to be involved in exporting food to China. The key audience is industry and government people rather than academics. For those who are interested, here is the online link to the conference.
Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.
26 Comments
NZ needs to focus on consolidation of milk supply and invest in marketing high value products. Fonterra took the wrong path, expanding on WMP and let in the smaller companies who are doing much better at higher value focus.....and now they're getting fonterra suppliers. Fonterra had a volume vision and its backfired badly
New Zealand dairy has expanded too fast based on increasing land prices driving Canterbury dairy conversions. The real measure is Return on Capital and correct me if I am wrong but this is around 2-3% per year for the national average? This says it all
Interesting article. what I get from this is under pressure from accountants who demanded ever increasing profits, many NZ companies, including agricultural ones expanded into China. Because of Chinese laws, they couldn't just set up a company there, they had to create a partnership with a Chinese one. This in effect meant giving our technology to a Chinese company. Fonterra did this, Zespri too. A non agricultural example is Rakon. Yet in effect all they have really achieved is given their technology, intellectual property and possibly the product itself to a potential competitor.
Unspoken in Keith's article is the plain fact that sooner or later China's capability will grow to the point where they will no longer need to buy from us. Who do we sell to then? Especially if China's capacity becomes such that they become a net exporter?
You're right, murray86, but the transfer of technology is a requirement of the Comprehensive Strategic Partnership (CSP) that New Zealand has signed with China.
As article four of the CSP states, "The two sides intend to consolidate and expand practical cooperation in agriculture and animal husbandry, including strengthening understanding and cooperation in the area of product trade, in particular animal product trade, supporting the capability-building of China’s dairy sector, and the commencement of a key agricultural cooperation programme – the Food Supervisory and Traceability Cooperation Programme. Both sides will continue to advance cooperation in the areas of finance and investment. Both sides reaffirm that they welcome the investment involvement of the other side’s companies."
Murray86,
There is no need to give technology to Chinese companies. One good example (of many) is Fonterra who have their secret methods for producing mozzarella cheese which is used in Chinese pizzas.
It is highly unlikely that China will ever become a dairy exporter as they are highly unlikely to ever become competitive on international markets. Feed constraints and effluent management are major issues.
KeithW
Keith states that we need a deep understanding of China, and I agree. But it is not easy. I am told that you can only get a Visa into China for One Month. If say Fonterra sends one of its Overseas Sales people to China to make contacts, they not only have to speak and understand say Chinese Mandarin, but get to grips with other chinese dialects. Then they come back to NZ and Fonterra sends a second Overseas Sales person to China ( for another month) and they have to try and pick up with the contact people and companies made on the first visit. A time consuming and difficult task.
But they can report on Dairy Products being sold in Supermarkets and stores and maybe restaurants.
Did they pick up on Infant Milk Formula Sales ?? And if they did, and reported it back to Head Office Fonterra, then Fonterra Management and Directors are guilty of not heeding what their Overseas Sales staff were telling them. So now Fonterra has come late into this market, with a joint venture into Beingmate, who are chinese and understand their own market.
The NZ Dairy Industry --Marketing Arm (NZ Dairy Board and Fonterra )has always had a very strong ethos of deep understanding of any country they have traded with. Unfortunately I don't think the CEO's (past and present) have had much experience in Sales and neither have many of the Directors.
that's the problem they can not run there own operation, it has to be majority owned by the Chinese so they have limited ability to monitor or control outcomes instead they are just along for the ride.
not funny that it not a level playing field between the two countries when it comes to business
Jack,
The standard business visa is one month, and for those of us with APEC cards, we pick these up on arrival in China with no prior application. Most business people use this system. For those who wish to stay longer than 30 days in a single visit there are other options. Fonterra and other companies have staff there on long term assignment using these other options. Some Kiwi businessmen have been living there for more than 10 years and I know of one who has been domiciled there for some 30 years. But you are right: China is not an easy place to do business.
KeithW
1st rule of business.
Never give your customers the intellectual property, nor the actual property to fend or build a better one, for themselves!.
1st rule of Government.
Never give away your sovereign state, in reverse equity.
1st rule of investment.
Never keep all your eggs in one basket. They might hatch and the hens might produce things wei cheaper than we can ever imagine.
1st rule of Bad Management.
Never trust a Politician with your Futures.
If your overheads cannot see, what the overheads are doing, with our overheads blatant help then why are we trying to compete with a much cheaper market, we helped em build and therefore prosper at our expense and then hope to share the profits.
1st rule of recognising you was stupid, following a downwards spiral, throwing endless debt at a problem, you paid for with endless debt., that USA stitched up their customers with.
Dumb and dumber are we. Look in the mirror, look up above you, look at who is in bed with WHO.
It ain't the World Health Organisation...is it.
And some people think I am a sick little parrot...but I am not quite as stupid as most.
I couldn't be.
You voted for em.
So we are dependent on China because 'there is no-one else in the world who needs and wants' the stuff we produce 'at the levels we produce' it. This is a description of abject business failure - an outcome arrived at via producer laziness and myopia. Attempting to show this as a consumer-led outcome is folly
Moreover, the costs of this myopia and folly are immense and increasing - to our economy (in minimally- or non-productive agricultural debt), our society (in extending dependence on minimum- or low-waged agricultural labour), our environment (in the degradation of soils, water, ecological health and diversity). These are formidable costs to pass to future generations. The political costs to the country, it might be added, are also not inconsiderable.
The argument that 'quality is whatever the consumer wants' is fallacious. There is no single 'consumer'. There are consumers and consumers, with entirely different wants. Nor, therefore, is there any single measure of quality. There are numerous measures of quality - from the most basic functionality through to factors of premium desirability. And margins and customer loyalty follow the same ascending scale.
The educated, wealthy world does want high value agricultural produce. But the dominant players in New Zealand, and the dominant means of production, aren't set up to provide it. This is the truth of our dependence on China.
Finally, production trends internationally indicate that educated, wealthy Chinese consumers will have an enlarging choice of premium agricultural produce from elsewhere in the world, as well as from their own producers. So New Zealand's high volumes of undifferentiated agricultural produce are likely to slide even further down the value scale.
We may talk about 'customer preferences' but in reality our approach is predominantly determined by what seems easy to produce. In Professor Woodford's quality equivalence, if we can find someone to buy 'offal' why bother producing 'steak'?
Workingman,
The quality equivalence you ascribe to me is your construct, not mine.
The key issue is that if people do not understand the culture and cuisine of the people who they are trying to sell food products to, then the outcome is typically failure. There are many examples of that, and invariably these failures come as a surprise to the people conerned.
Keith W
Thank you, Keith Woodford, for your response. I’m happy to expand my reply.
Your statement is that “‘quality’ is whatever the consumer wants. And if the consumer wants offal rather than steak, then that is what we have to focus on.”
I contend that this does set an unsupportable equivalence and is seriously misguided as an understanding both of business and of quality. Moreover, the implications of this approach are both far-reaching and detrimental, not merely to the agricultural sector, but to our economy, society and environment.
It seems to me that you are confusing ‘quality’ and ‘sufficiency’. In my experience it’s a confusion prevalent in a commodity environment and, thus, commodity thinking.
In its most basic reference, quality is a matter of avoiding getting things wrong (during the last few decades, the quality people have been through every factory in the world with this message, and techniques for its application). In other words, quality, in this reference, brings things up to a certain standard of sufficiency. The food shouldn’t poison you, the car shouldn’t break down, and the industrial world has largely arrived at this standard. As a measure of quality it is now redundant. Quality has moved on. In plain words, there are now few duff products – they all perform to an acceptable standard according to cost of input and cost of purchase. That is, they are at a common standard of sufficiency.
So ‘offal’ needs to be well-produced, as offal; just as ‘steak’ needs to be well-produced, as steak. The products are both sufficient to purpose or expectation. But they are not of the same quality.
Quality starts where sufficiency ends. There is no truth in asserting that ‘quality’ is whatever the customer wants. One customer merely wants sufficiency. They want, in effect, the commodity – a bucket that won’t leak. And regrettably much New Zealand business thinking is satisfied with producing the sufficient commodity. And sufficiency is usually a matter of price – the investment that one feels able to make in a product, or wishes to make in a product.
Quality extends these considerations. A customer seeking quality has the wish to invest more in a product. The reasons may be both rational and non-rational. But wealthier, better educated customers do seek to make these investments, whether in organic tea or an Aston Martin. The trend to premium products is well known and closely follows improved education and higher disposable wealth. These customers/consumers seek more than sufficiency; they seek superior tangible product characteristics and superior intangible product rewards - that is, they seek measures of quality.
I contend that if New Zealand agriculture is to prosper in the 21st century (and a country supported by borrowing desperately needs to build its prosperity), it needs to get beyond sufficiency and think about quality. They are not the same thing. One is a commodity, barely enriching the producer or the consumer/customer, and the other enriches both the producer and consumer/customer.
India now has indisputably the world's biggest dairy industry — in terms of milk production; last year India produced close to 137.70 million tonnes of milk, 50% more than the US and three times as much as the much-heralded new growth champ, China.
http://www.apeda.gov.in/apedawebsite/SubHead_Products/Dairy_Products.htm
Or Japan,
I found this most interesting and, as someone mentioned, similar to trends in Europe with fully automated robotic operations.
"Jin Kawaguchiya gave up a career in finance to help revive Japan’s ailing dairy industry -- one robot at a time.
In a country that relies increasingly on imported foods like cheese and butter, Japan’s milk output tumbled over two decades, touching a 30-year low in 2014. Costs rose faster than prices as the economy stagnated, eroding profit, and aging farmers quit the business because they couldn’t find enough young people willing to take on the hard labor of tending to cows every day.
But technology is altering that dynamic. On the northern island of Hokkaido, Japan’s top dairy-producing region, Kawaguchiya transformed the 20-cow farm he inherited from his father-in-law 16 years ago into Asia’s largest automated milking factory. Robots extract the white fluid from 360 cows three times a day and make sure the animals are fed and healthy. The machines even gather up poop and deposit it in a furnace that generates electricity."
http://www.bloomberg.com/news/articles/2016-10-03/biggest-robot-dairy-i…
Kiwidave,
We do export food to Japan, with cheese and beef being important products. In general, feedlot beef sells at considerable premiums over grass-fed, with Wagyu and similar the most highly valued. ANZCO is a company that has always had a high focus on japan. One of the challenges with Japan is that the population is now in decline (more deaths than births) and economic growth is very low.
Here in NZ we also have robot milking of dairy cows, albeit only a few farmers have gone that way currently. I work with some of those farmers.
Keith W
There is more competition for those markets today.
http://www.beefcentral.com/trade/mounting-export-challenge-to-australia…
http://farmfutures.com/blogs-brazil-makes-big-push-asia-11316
http://www.ers.usda.gov/topics/international-markets-trade/countries-re…
Yes, there are opportunities in Indonesia. In about two weeks time some 20 Lincoln students will be heading there for a six week visit on Prime Ministers Scholarships, and their task will be to develop business plans for agri-food products.
In relation to beef, Indonesia seeks to be self sufficient, and has put barriers in place against our NZ beef (and also beef from other countries). Our Government (and some other countries) are challenging those barriers but it is proving to be a long drawn out exercise. So currently we export much less beef to Indonesia than say six years ago. Australian 'on the hoof' exports fit into a different category which the Indonesians allow. The overall GDP of Indonesia at official exchange rates is only about 10% that of China, and that does limit the export potential relative to China.
KeithW
Rumpole,
Yes, many of us are interested in doing food business with India, but there are all sorts of challenges. In relation to dairy, they are the worlds largest producer, some four times larger than China. And they do export milk powder. So that is not an easy market. They also export beef. And the cool store and freezer logistics are much more primitive than China. Also, we do not have trade agreements in place with India - not for lack of trying.
KeithW
Great article thanks Keith. Responses seem to be 60/40 protectionist v. confidence in NZ ability to continue to innovate at a faster rate than competitors , and leverage advantages in land and water. Is the NZ rate of innovation is accelerating again, after a lull with the focus was on capital gain?
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.