As if Brexit wasn’t a big enough shock, the US presidential election has really set the cat amongst the pigeons. Commentators of all nationalities and political inclinations have literally no idea how a Trump presidency will affect the world order, from trade agreements and global interest rates to immigration or deportation, let alone internal security issues and relationships with other nations, writes Allan Barber.
After predictions of imminent disaster, share markets have been cautiously positive and interest rates have started to rise, while there has been an initial fall in the New Zealand dollar. This has nothing to do with our dollar, but merely reflects its relative global importance; however, it provides a small but welcome relief.
The first definite result of the Trump victory is the ditching of the Trans-Pacific Partnership (TPP) agreement in its present form with no possibility it will be signed between now and January before Obama’s term ends. This may be unfortunate, although there is enough concern about the dispute resolution provisions in the agreement that mean it may not be an unmitigated disaster. The main disappointment will be the loss of the opportunity to achieve parity with Australia for beef access to Japan.
The end of TPP provides impetus for the Regional Comprehensive Economic Partnership (RCEP) agreement to be negotiated as a priority. RCEP involves 16 countries including 10 Association of South East Asian Nations (ASEAN) members and the six states with which ASEAN has free trade agreements (FTAs) – Australia, China, India, Japan, New Zealand and South Korea. Negotiations were kicked off in 2012, but despite regular meetings, have not yet resulted in an agreement. But the two largest members of RCEP aren’t part of the TPP negotiations. China will now see a great chance of taking the geopolitical lead in the Pacific from the US, while India also appears much more enthusiastic about free trade under its present government.
Trade agreements alone will not enable New Zealand to achieve the Government’s goal of doubling exports by 2025. Two recent reports, Westpac’s Industry Insights – Meat and Wool and KPMG’s Agribusiness Agenda – have drawn attention to the urgent need to lift the game considerably to have any hope of lifting exports to the point where these will improve the country’s standard of living.
The Westpac report focuses specifically on the sheep and beef sector and makes the interesting point productivity gains have mainly come from improvements to the sheep flock, whereas recent increases in value have almost exclusively come from beef exports. The industry suffers from commoditisation which results in products being sold because they are cheaper, not because they are of better quality than the rest of the world’s.
This is the curse of being a farming country with plentiful grass at the bottom of the world which has to export between 80 and 90 percent of its output. The main role of meat exporters is to process farmers’ livestock and achieve the quickest and best price available, so they can pay a competitive price for it within fourteen days. This isn’t consistent with achieving a premium for a high quality, luxury product. Under present circumstances consistent annual gains in export returns just won’t happen.
The report suggests further productivity gains will be hard to come by, so increased value must come from improving returns or cutting costs. It highlights the lack of a credible and coherent story to promote the New Zealand brand as a major impediment. The first action proposed is to tell the story that proves our grass is greener and produces better animals. The cross-industry work in Ireland under Bord Bia is a ready-made example of what can be achieved when government, processors, farmers and food manufacturers pool resources and commit to a common goal.
Other suggested actions include better market selection, particularly for lower value parts of the animal (exporters have been doing this for years and markets fluctuate considerably), increasing chilled and pharmaceutical exports, and vertical integration by cutting out middlemen. Efficiency gains proposed include increasing farm size, rationalising processing plants, livestock transport and stock agent involvement, and reducing the Ministry for Primary Industries’ inspection costs. Unfortunately, none of these will result in the quantum leap needed to change the industry’s economics to the benefit of all participants.
KPMG’s Agenda is more visionary, but probably with less relationship to reality. It proposes three alternative scenarios: ‘complacency reigns’ which implies continuation of the status quo, ‘change adopted by some’ participants and ‘being on the leading edge of change’. The first scenario implies an inability or unwillingness to adopt new technology, a reliance on the occasional good year usually when the dollar falls out of bed, and a gradual disconnection with markets and consumers. The third scenario requires compound annual growth of 4.85 percent if agribusiness exports are to reach $100 billion of exports within 20 years.
The truth will almost certainly be somewhere between scenarios one and two which foresees some parts of agribusiness adopting principles of leadership, collaboration, value creation from foreign investment and a number of global brand successes. For this to occur, New Zealand agriculture must gain the support of the whole community through universally excellent farming practices and the community must adopt realistic expectations of the country’s most important source of wealth.