Risky business
OPINION: In the same way that even a stopped clock is right twice a day, economists sometimes get it right.
In the KPMG Agribusiness Agenda, the head of global agribusiness for the organisation, Ian Proudfoot, says the extent of the downturn in milk returns for the 2014-15 season was not expected and has sharpened the focus on the progress the dairy industry has made in adding value to milk produced in New Zealand.
He says with more processors for farmers to supply, the increasing competition for milk is raising questions about the future structure of the industry and the necessary regulatory framework.
Proudfoot touches on the issue of the changing nature of the dairy industry with more processors entering the market that can offer attractive packages to supply them as opposed to Fonterra
“Many scenarios were suggested, but few had Fonterra retaining more than 70% of total supply, and most had 15-20 companies picking up milk within the next 10 years. As a result, overcapacity in dairy processing was raised as a real risk to the industry for the first time, particularly given expectations that demand for liquid products will outpace powders into the future.”
He also expresses concerns about the ability of NZ milk to retain a reputation premium in the market. He says the involvement of Fonterra in a number of milk pools around the world, and greater involvement of international traders in the NZ pool, is a risk.
“People noted the experience of the Australian wheat sector that lost its reputation premium as traders became more involved in the industry and began selling Australian wheat as ‘Grade 1 wheat any origin.’ This would be a real concern if the same happened to New Zealand milk.”
Proudfoot says it is recognised that the regulatory environment that requires Fonterra to be all things to all people presents practical and strategic challenges to the co-operative, and will have to change if their market share reduces. He says the biggest challenge for the industry is how it can more effectively add value to our growing milk supply.
It was noted that the primary focus of the dairy industry over the last 10 years has been production growth. He says even with the value add investments made, this means the proportion of product being converted into specific value add product is now lower than 10 years ago.
“It is wrong to assume, however, that the remainder of our dairy production is being turned into basic commodity products. We have some of the most sophisticated dairy ingredient processing capability in the world, and our ingredient and foodservice solutions are globally sought. Over the last decade, the dairy sector has made a huge investment in processing assets to handle the growth in milk production, with most of this going into drying technologies,” he says
As well as a strong focus on the dairy industry, the KPMG report notes that biosecurity, food safety and the need to get more young people into the agribusiness sector are key issues in the minds of business leaders.
SOPI also notes that the need for high speed broadband into rural NZ is a high priority, now ranked 2nd equal.
Proudfoot states that people expect NZ agricultural businesses to deliver value from 21st century markets, yet we’re providing them with only 20th century communication services.
“Fast connectivity in rural areas not only supports economic growth. It enhances healthcare delivery, overcomes isolation and enables the unemployed to develop skills and become productive. In my view it was not surprising the issue rose up the priority ranking in this year’s survey,” he says.
