Speech: Climate Change, Trade And Agriculture

| 04/11/2009 | Reply

Speech by Tim Groser, 4 Nov 2009:

I want to talk to you about the future of NZ agriculture in ways
that I suspect may at times be politically reassuring but may also
challenge you in other ways. In fact I hope some of these ideas will
indeed challenge you: we need some new thinking around agriculture but
it cannot just be thinking at an intellectual plane. To bring it into
reality, we will need buy in from our farmers to that new thinking. The
Role of Agriculture in NZ’s Economy

You will recall – or certainly your parents will recall – the
pernicious nonsense in the 1980s that agriculture was a ‘sunset
industry’. It is wrong to attribute this view just to David Lange, the
then Prime Minister – though he certainly said it. He was reflecting
widely held views up and down the country.

Today, and twenty years on, no-one in our farming community needs to
be concerned today about this perspective. The ‘agriculture as a sunset
industry’ view is dead. It is dead intellectually and dead politically
– at least in terms of mainstream political thinking. My view – that
agriculture is going to play as important a part in NZ’s future as it
has in our past history – is the prevailing orthodoxy today. And it is
the right view – of that I have no doubt.

Let’s start with some macro political realities. The story revolves around four, closely linked themes:

the future need for increased food production globally;

the likelihood of long run continued economic growth in developing countries, particularly in Asia;

vastly improved trading opportunities for NZ agriculture; and

the political challenge of climate change for agriculture producers.

It is basically a good news story on steroids – provided we have the
wisdom to ‘go with the flow’. That is, I don’t think it is that hard to
see where global political and economic markets are moving to. We
simply need to be in that space before others fill it. World Food
Production and Population

There is a strong consensus amongst demographers that world
population is likely to grow by about 3.5 billion people before
stabilising in 2050 at around 9.5 billion. This, combined with the
expected enormous increase in wealth, particularly in Asia, implies
that world food production needs to increase 50% in the next 20 years;
it needs to double in the next forty years.

There is some scope to bring more land into production but that can
make only a minor contribution, given the pressure on arable land
around the world. The only way we can achieve this is by a sustained
and massive growth of agricultural productivity. In some major
developing countries, particularly India, the rate of growth of
agriculture productivity is declining. The vast productivity gains of
the Green Revolution are coming off the boil[1]. Agriculture and Water

Second, we need to understand the crucial link between agriculture
production and water. I know that is obvious to you as farmers, but I
wonder how many New Zealanders understand the intensity of the linkage
between water and agriculture

On this planet, some 97% of all water is salt water. Of the 3% that
is fresh, some two-thirds is locked up in ice and snow. Only 1% of the
planet’s water is liquid fresh water.

Of that 1%, an astonishing 70% is used in global agriculture. The
30% that is left has to meet all the combined needs of industry,
households – whatever. It is no coincidence that in the United States –
the world’s largest agriculture exporter – 87% of all fresh water is
used for US agriculture. But you have to drill deeper to understand the
implications.

The water intensity of milk and beef production is massive. I have
seen estimates that it takes 800 litres of water to produce one litre
of milk; it takes a thousand litres of water to produce a kilogram of
beef. I imagine the average conversion ratio for sheepmeat would be of
the same order of magnitude.

Water, ladies and gentlemen, is what we have in abundance. We only
use, I understand, about 5% of the water that falls on NZ land. There
is a whole domestic policy agenda that flows from that observation of
course – but I will stick to the international dimensions today.

Twenty years ago, I used to say, metaphorically, NZ was in effect a
‘grass exporter’. That is not the metaphor I use today. Today I say NZ
is a virtual water exporter. I do not see how China, with 24% of the
world’s population, 9% of the world’s arable land and massive problems
with water can feed its increasingly sophisticated and growing middle
class with the high quality foodstuffs, wine and other products they
will demand.

I suspect the Chinese authorities do not believe it either and that
is why they decided – in a sense you could say we just ‘concurred’ – to
negotiate their first ever FTA with a developed country with NZ. It is
a huge strategic advantage. This is not a theoretical point I am
making. In the last 12 months, with world trade tanking everywhere, NZ
exports to China increased some 62%. World Income Growth

At the global level, forget this nonsense about the rich getting
richer and the poor getting poorer. Most of the ‘rich’ (i.e. the
developed world) are getting a bit richer slowly and most of the ‘poor’
(i.e. the developing world) are getting richer much faster. As they get
richer, they demand more protein. Protein is what we do.

Here are the facts about economic development. Between 1980 and 2000
the number of countries growing at 5% or more – an astonishingly high
rate of growth by historical standards – hovered around 50. That number
of countries – 50 – is in itself remarkable. But the wealth creation
process has strengthened since then. Fast forward to 2006. In 2006, 104
nations grew at 5% or more. The ‘poor’ (i.e. developing countries) are,
as I said, getting richer much faster than the developed world.

Sure, the rising tide never lifts all boats – some developing
countries are being left behind. And within developing countries there
are huge inequalities – particularly amongst the poorest developing
countries. There are still tragically one billion people – a sixth of
the world’s population – that suffer from chronic hunger. But world
economic growth lifts most boats. And that is transforming NZ’s trading
prospects.

The deepest recession in 70 years has masked this. But my view – you
are welcome to your own – is that this long term structural trend is
still in place. We will see further massive wealth creation in the
developing world. It offers enormous opportunities to NZ agriculture.
Trade Prospects

NZ, in my view, now faces the most promising and positive outlook for trade in forty years.

This might seem a very strange observation to make in the middle of
the worst downturn in world trade. But that is cyclical. I am talking
about longer-term structures.

NZ, and NZ agriculture in particular, has faced a transcendent
challenge over the last 40 years: to find markets, largely closed to us
since our traditional market in Britain disappeared in 1973 into the
morass of the EU Common Agriculture Policy.

At that time, there were no operationally effective rules governing
trade in agriculture in the then GATT, the predecessor of the WTO.
Nobody outside academic circles had heard of FTAs or ‘Closer Economic
Partnership Agreements’. We had one, utterly useless so-called FTA with
Australia – the NAFTA. But that was an FTA in name, not in substance.

I am not going to describe the history of the transformation to
where we are today, even though it has dominated all of my professional
life. The fact is that we are now back in an entirely favorable space.
We have not been there for decades. It is an international trading
environment replete with opportunity for NZ. It is good and it is going
to get better:

Australia is our largest export market. We have completely free
trade there via CER, bar one remaining battle over Australian SPS
restrictions on apples. We are working on that.

We will have completely free trade with our third largest market,
China, in about ten years. And so far, we are the only developed
country to have that status in what will become the world’s largest
economy. It is sucking in imports from NZ, and not just food and
beverages – education services, tourism and some niche services and
manufacturing too.

South East Asia – the 10 countries of ASEAN – have now merged with
CER into a new giant Free Trade Zone with an agreement called the
‘AANZFTA’. I appreciate that this sounds like a central European city
somewhere near Bratislava, but it is real and important to our future.

It will start coming into effect on 1 January 2010 and progressively
provide better and better opportunities for NZ exporters over the next
decade. South East Asia is collectively NZ’s third largest market for
exports. We have four or five markets in South East Asia each now
taking around a billion dollars of NZ exports. That is serious money.
The Prime Minister and I have just returned from one of them – Malaysia
– where we concluded an FTA with our eighth largest export market that
will go further and faster than the AANZFTA.

We are negotiating an FTA with Hong Kong. I have also just concluded
a further set of negotiations at political level with my Hong Kong
counterpart and I believe we are very close to concluding that
negotiation. If so, it will build on the China FTA and cement further
NZ’s privileged place in the greater Chinese market.

We have completed negotiating an FTA with the GCC or Gulf States.
This is our seventh largest market if you count Oman, the UAE, Bahrain
and the others as one. This will come into effect around mid 2010.
There are a growing number of NZ companies which see major
opportunities in these wealthy countries.

The Korean FTA negotiation is underway and proving predictably very difficult but we will soldier on.

We have agreed with India – the other emerging developing country
superpower – to negotiate an FTA and I fully expect that the few
remaining procedural steps can be finalized soon to allow that
negotiation to get that underway early next year. That too offers major
step change for our exporters though it will take years to negotiate.
And remember this about India: this is a country that in the month of
January 2009 – the height of the fears internationally about the
recession – added 15 million new mobile subscribers. Watch India. It
will play a major role in NZ’s future. Cricket and Sir Edmund Hilary
have, metaphorically speaking, provided the best foundation for our
bilateral relationship in the 20th Century. But we will need more than
this for the 21st Century.

I am still hopeful we can initiate FTA negotiations with the United
States. This will not be in the form I and others had envisaged 20
years ago. It will not be a bilateral negotiation. Rather, it will be a
negotiation among a group of APEC economies including NZ, Vietnam,
Australia, the US and others and is likely to be called the TPP, or
Trans-Pacific Partnership.

There is also a possibility of a giant pan-Asian FTA embracing the
whole of ASEAN or South East Asia, the three East Asian giants of
Japan, Korea and China, plus India, Australia and NZ. The first
concrete step has been taken in a meeting of Heads of Government,
including Prime Minister John Key in Thailand literally a week or so
ago. As the PM said, it is very much a ‘work in progress’ but I see no
reason why that ambitious vision can not be realized in a longer time
frame.

Above all this is the WTO Doha Round. You may recall I used to chair
the Agriculture Negotiations there. I don’t know when it is going to
happen, but I stick to my long held view that this will not be the
first ever multilateral trade negotiation to fail. It offers NZ major
new opportunities.

I am describing here a world that is totally different from the
dismal outlook for NZ trade faced forty years ago. The only
operationally useful ‘instruction’ I ever received from anyone in the
1980s was from a distinguished former President of Federated Farmers,
Brian Chamberlin. As I set off to live in Geneva in 1985 as our chief
agriculture negotiator, Brian said ‘Tim, we’ve got nothing now (his
actual choice of words was rather more agricultural) so anything you
can get us has got to be an improvement’.

It looks incomparably better to me today and I am sure Brian would
agree. We have far more opportunities than we could ever use. It will
take years to realize these opportunities, but I see no justification
for settling for mediocrity. And we have a political leader, I can
assure you, who sees it in these terms.

We do however have a problem. We may have solved in all practical
senses the ‘access to markets’ problem. But in these new markets, this
is a far more complex world that we face.

Of course our old markets, including the EU, matter enormously to NZ
agriculture – sheepmeat is the stand-out example. I have spent half my
life in Europe. This Government will never make the mistake of
forgetting the importance of Europe, which, to its credit, has done a
great deal to reform its agriculture policies. There is more to do yet
to be sure, but give credit where credit is due.

But we expect the real growth to be about Asia. And that raises the
issue of fashioning new supply chains for very different consumers whom
we do not know all that well. Supply Chains

A century ago, NZ became either the richest or the second richest
country in the world because our tupuna, or forebears, ‘got’
globalization. They deeply understood it. They did not sit on their
backsides. They took risk and made something of themselves and of New
Zealand. It is now our turn to understand deeply what is going on
internationally, get off our backsides, and start to move this country
to a more ambitious vision of its real potential. As the PM likes to
say ‘one thing is clear: we are not going to get rich selling to
ourselves’.

In the 19th Century, our forebears started with a market-oriented
perspective. They asked themselves: “What does the market want?”

Well, first question: who was the market? Answer: our forebears
understood the ‘market’ was not the tiny domestic market of NZ; the
real market was the world’s most important country – Great Britain, the
then dominant world power.

Here, our forebears, or certainly our European forebears, had one
huge advantage compared with New Zealanders today asking themselves the
same strategic question: they deeply understood the culture of the then
world’s super-power; by and large, they had all come from Great Britain.

Like our forebears, we need to understand that the NZ market is not
the real game. It is the international market that must command our
attention. With respect to agriculture, whereas we were fifty years ago
a food basket for Britain, we have the opportunity today in the 21st
Century to be a food basket for the Asian middle class.

There is however one crucial difference and it is about supply
chains. Our forebears knew their customer – essentially the British
housewife – and fashioned a few simple but highly effective supply
management chains to meet the distant customer’s needs. We face a far
more complex challenge in fashioning supply chains to our Asian
customers. How well do we know these customers? The true answer, I
suspect, is ‘not that well’.

One example: halal. I have just come back from Indonesia and
Malaysia where we are trying to work carefully through some highly
sensitive issues relating to halal certification issues. But don’t
think it is just a problem. It is also a huge opportunity if we get it
right. The PM and I visited Fonterra’s newest plant in Asia a week or
so ago – a large and sophisticated plant in Malaysia’s capital. It is
fully halal certified and plays into Malaysia’s ambition to be a ‘halal
hub’ for food and food ingredients.

The global market for halal food and associated products has been
estimated at around US$2 trillion and it is only going to grow as the
Indonesia, Malaysian and other Islamic middle classes’ purchasing power
grows. NZ is already the largest exporter of halal dairy products, the
largest exporter of halal sheepmeat and probably the third or fourth
largest exporter of halal beef. If we can establish the climate of
confidence required, we can consolidate our competitive position.

More generally, NZ’s point of differentiation is quality and food
safety. Is it still low cost? Well, that is a moot point. We still have
to remain highly competitive but we are no longer the lowest cost
producer. As Dairy NZ has stated:

“In 2003, NZ could claim to be amongst the lowest cost dairy
producing nations in the worldHowever since then, NZ’s cost of milk
production has increased while South and North American nations as well
as regions of Europe, Asia and Africa have become more competitive. As
a result, there is now evidence that NZ dairy farmers no longer have a
competitive cost advantage”.[2]

Before we slash our wrists or shut up shop and go to Uruguay, let us
reflect on this. International trade in anything is rarely dominated by
the lowest cost producer. You compete on more than just price and we
have a fabulous dairy industry with great strengths and deep roots. Why
do you think Fonterra is the largest single exporter of US milk?
Because of its marketing and distribution strengths.

We need to be very careful about our cost structures. But we need to
be even more careful about maintaining our extraordinary record of
productivity growth in agriculture. Costs in themselves are relevant
only in relationship to total factor productivity. If trade flows were
determined solely by costs, all production would shift to the lowest
cost producer. That is clearly not the case.

Second, our brand is quality. This is our point of differentiation.
And here I want to focus on the link with environment, the challenge of
climate change, a set of complex issues around the production process
and product traceability. I sum up the dilemma in the heading ‘the
Customer as the new Trade Regulator’. The Customer as the new Regulator

Food miles was the first concrete reminder that in this new
sophisticated world we might face trade barriers that were not imposed
by Governments but by our customers – or more precisely, by those
companies like Tesco and Walmart who are the commercial interface
between our exporters and our customers.

In this case, it was a perceived product quality/value issue around
climate change: the customer should seek out food produced closer to
home on the rather primitive and usually wrong assumption that such
food would be more ‘climate friendly’. Forget reality. Perception is
everything.

Across the other side of the world, we were shocked by the disaster
around melamine in milk. This was no ‘perceived’ crisis; 1300 infants
were hospitalized with renal failure and several died. We all saw the
TV pictures of desperate Chinese mothers who had weaned their babies
and unable to find milk formula they could trust for their baby.

Every NZ adult who has ever nurtured his or her own child must have
shivered at the thought. Thank God it did not involve any NZ milk.
Because of that, there has been no loss of confidence by the Chinese
consumer in our milk – quite the contrary. But these events have been
brutal reminders that food quality – both perceived in the case of food
miles and only too real in the case of the criminal poisoning of milk
by melamine – that NZ’s reputation as a quality supplier is our most
precious asset.

Let me again quote from Dairy NZ – for obvious reasons it is better to use views from within your own industry:

“The control over market access is arguably shifting from agreements
between nation states to agreements between producers and retailers.
Global retailers are incredibly powerful in the market because they
control what products reach consumers in practically all developed
nationsKey areas of risk include animal husbandry practices, and also
perceptions of the environmental impact of farming. These concerns,
regulation and market imperatives mean that farmers have to manage
their compliance with various standards and codes of practice that are
aligned with international expectations.This is both an opportunity and
a risk for NZ”[3].

So what are we talking about? Something theoretical out there in the future? Not quite.

Let’s start with the largest company in the world – Walmart. Every
hour of every day Americans spend US$36m in Walmart stores. Walmart is
putting in place a Sustainability Index. It is based on complex matrix
containing key supply chain processes and then factors in impacts on
natural resources, something called ‘people and the community’ and
energy/climate change.

A few months ago a British supermarket chain called Waitrose banned
a series of fish deemed to be either over-fished species or harvested
by what they considered were irresponsible fishing methods, including
bottom trawling. Now bottom trawling happens to be the method of
extraction for New Zealand hoki. So our hoki were banned.

Presumably the supermarket’s costs went up and they were unable to
find alternative suppliers of some species such as swordfish, so did
they suffer commercial consequences? Nope: it was a huge commercial
success.

According to NZTE research the idea of buying only sustainably
managed fish proved so popular with their customers that they moved
within a few months from having 4% of the British retail market for
fresh fish to having 10% market share. As for NZ hoki, our problems
became compounded when the Wall St Journal took up the issue with an op
ed targeted at NZ hoki entitled ‘From the Deep Pacific: Ugly and Tasty
with a Catch’. The NZ Seafood Industry has worked overtime to counter
this. Frankly, we don’t need reputational risk like this.

There are numerous other examples involving Nike and its complex
codes any supplier needs to conform to; Starbucks, Dell, Intel and even
good old McDonalds, one of our key purchasers of NZ ground beef in the
US. I know about that. I negotiated the tariff rate quota of our beef
exports which I still remember as some 213,000 tonnes. Some things just
get fixed in your mind.

Well McDonalds apparently is now extending environmental concerns
through its supply chain. It buys its fish from sustainably managed
fisheries and has policies in place (probably aimed at Brazil) not buy
beef from cattle suppliers who destroy rainforests. It is also working
to end use of antibiotics in food products, reduce pesticides, and find
more humane slaughtering methods.

Let’s just tease this out a little bit, with particular reference to
climate change – a common theme of this new regulatory framework.

First of all, I know some of you, maybe many of you, don’t really
believe NZ should take this issue seriously and in particular believe
NZ agriculture should be left out of any climate change response by
Government. Well, we live in a free society and you won’t find this
Government ridiculing people with different views.

My view is on climate change is very straightforward and I have two
ways of expressing it simply. The first involves a political metaphor I
have stolen from Governor Schwarzenegger. Aware that there were
skeptical scientists as well as the UN IPCC science view, he put it
this way: “If my son is sick and I have nine physicians saying take him
to the hospital and one saying ‘it is a natural phenomenon and he will
get over it’, what do I do? I take my son to the hospital’.

Second, for a country that depends on trade and its customers, what
sounds common sense to you? The rest of the world is saying ‘let’s go
down this road’ but NZ says ‘no, no. we’re going down that road. We
think you are wrong’. Does that sound like even half way real? Not to
me. Perhaps we should ask the guys at McDonalds and Walmart to give us
their view?

Now I know there are more complex issues around climate change, the
role of agriculture. We are very conscious of the need to tread
carefully and the need to have a genuinely global agreement in place to
make any sense of the matter. The PM has also launched in New York the
concept of a ‘Global Alliance’ designed to coordinate international
research around agriculture and climate change. I believe this will
prove to be a major initiative for NZ. Watch this space.

In terms of our Government, we use constantly in our internal
discussions on climate change the measuring rod we put in front of New
Zealanders in our Election manifesto. We said that we would not try to
be ‘leaders’ in climate change but that New Zealanders would expect us
to play a fair share in global efforts. We think that is rooted in kiwi
psyche. We also think that although it is a very general test, it is
easily understood and can be applied in many practical ways.

More personally, and as you may know, I am both the Minister of
Trade and the person responsible for the international climate change
negotiations. Let me make this plain: I am not about to give away with
one hand in the name of climate change what I and others have been able
to secure with the other hand in the name of NZ trade interests. But we
have to have some balance here. I don’t think it is in NZ’s agriculture
trading interests just to try and wish this away.

The debate in NZ has been very confused here, and possibly
deliberately confused by certain political personalities. I have not
time to develop this in detail but let me make my view clear. The risk
is not that if we do not come on board climate change, the EU or the
United States is going to erect new barriers to NZ agricultural
exports. This is scare-mongering made by people who either have other
motives or who have a superficial grasp on the real issues.

Sure, there is a long-term threat around something called BTAs or
unilaterally imposed ‘Border Tax Adjustments’ and, under certain
negotiating scenario, that could turn out to be real in say, 5-8 years
time if the NZ Government were, to be frank, stupid enough to opt out
of all climate change obligations. But that is not going to happen in
the next few years.

The real risk is not about Governments. It is that our customers, or
rather the retailers that make the crucial decisions on sourcing, may
walk away from NZ over environmental, climate change or other PPMs –
the technical term for production processes and methods. That is a real
risk. Don’t treat it lightly, would be my advice.

We need to have integrity right throughout the supply chain. It
won’t be achieved easily and we will have to live with inconsistencies
as we seek to close the gap between the objective of ‘100% pure’ and
current practices of some of our producers who just want to shut their
eyes to this challenge.

But it is not just a challenge. There is a huge opportunity.
Finally, all these regulatory frameworks require product traceability.
I remember when this first came on the scene in international trade
negotiations in the 1980s. Most farmers saw it as a cost – which it
was. But I recall arguing that only very sophisticated countries could
do traceability well on agriculture and we are certainly a very
sophisticated country. We will be way ahead of most of our competitors.
For the most part we have the management and science capabilities to be
cutting edge here and turn a threat into a competitive advantage.

Conclusion

Ladies and gentlemen, we face unusually favorable long-term prospects for NZ agriculture and trade:

We are a world class agricultural player in a world that has to grow food supply by 50% in the next 20 years;

the likelihood of further massive income growth in developing
countries that cannot provide the protein that their huge emerging
middle class will demand.

Water is crucial to all agriculture, consuming 70% of all the
world’s fresh and liquid water. Our competitors have massive water
problems – our problem is the opposite – marshalling better the massive
waste of water that falls on our land.

And finally, we have essentially solved the transcendent problem
that has bedeviled NZ agriculture for 40 years: access to markets or
the right to sell our competitive products. Our trade policy has been,
by any measure, an outstanding success and there is more to come.

Against that we face new challenges:

In Asia, we need to develop new and more complex supply chains with customers we do not understand deeply.

In our traditional markets in Europe and North America, we face
completely new demands and potential restrictions on our exports. But
it is not about Governments, traditional agriculture protectionism and
Government-imposed restrictions. It is about our customers and the
giant retailers who decide sourcing. But we have the sophistication and
systems that can rise to this challenge.

I said at the start of my address that I don’t think it is that hard
to see where global political and economic markets are headed. I added
that we need to be in that space before others fill it. I think we can
do this. You need to be with us.

Category: Oceania, Research

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