Regulation risks hindering innovation

The fast pace of regulatory change by the government poses a challenge for farmers trying to earn their social licence to operate.

 

The Emissions Trading Reform Bill and the proposed Essential Freshwater Policy are the two latest examples of regulation which are set to be introduced into law before the Election and will inevitably impose serious costs or penalties on farmers as currently drafted Some provisions run counter to good, common sense farming practices, and the ETR has the potential to side swipe the sheep and beef sector, as it incentivises the conversion of sheep and beef farms into forestry.

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Social licence to operate just as important as methane reduction

Amid all the debate about agriculture’s responsibility to meet greenhouse gas reduction targets, and the appropriate levels for those targets, it may seem counterintuitive to claim an equally pressing problem is to earn a licence to operate. Just as great a threat to agriculture’s future is not whether it faces a potentially unachievable government imposed target, but a business environment in which consumers make their decisions based on their perception of the acceptability of the food they eat.

Government must provide leadership

In contrast to its positive social agenda to improve the average person’s lot by lifting the minimum wage, increasing teachers’ pay rates and attempting to increase home ownership, this government seems to have gone missing in action with respect to the farming sector. Apart from Primary Industries Minister Damien O’Connor’s rather lonely efforts as a cheerleader for agriculture, other government ministers only pop their heads above the parapet when there’s some good environmental news or forestry initiative to crow about, or a new, and scientifically flawed, methane reduction target to ask farmers to meet. 

Agricultural sector committed to meeting realistic targets

The negative reaction to the methane target range in the Climate Change Amendment (Zero Carbon) Bill should not be taken as an indication the rural sector is at all opposed to the purpose of the Bill, nor does it suggest unwillingness to be part of the solution. Industry bodies, including DairyNZ, B+LNZ, MIA and Federated Farmers, are fully committed to seeing their members do all that is realistically possible to achieve the overall greenhouse gas reduction target.

MIE tried hard, but couldn’t make a difference

MIE’s decision to disband after three years trying to persuade the red meat sector it was going to hell in a handcart has come as no surprise. But the organisation’s founders and directors are not unnaturally disappointed at their inability to gain support for their plan to solve the endemic problems of the industry.

Surveyor believes in power of cooperative model, but says it’s up to farmers

Four months into his new job as CEO of Alliance, David Surveyor is really loving the challenge of heading a global business which is so crucial to farmers, consumers and New Zealand as a whole. He has always been interested in the agrifood space, as he terms it, and enjoys getting to know New Zealand through its agricultural producers.

Moratorium would solve meat industry’s capacity problem

Word has got out suggesting some processors are in favour of a moratorium on new capacity as the only means of sorting out the meat industry’s excess capacity problem. It also appears MIE is initially supportive of the proposal, although it would need to be sure it was in farmers’ best interests before endorsing it completely.

 

My understanding is the moratorium would specifically prevent any new plants or chains operating on beef and sheepmeat around the country. This is where the plan is different from the previously floated concept of tradable slaughter rights (TSR) which proposed to set maximum permitted slaughter volumes for each processor. TSRs were supposed to enable whole plants or even companies to be closed with the costs of closure being financed by the sum paid to the owner.

 

But using slaughter volumes based on a historical average as the determining factor presents two large problems. First there was disagreement between processors on how to calculate individual company slaughter rights and second the scheme would have reduced farm gate competition at farmers’ expense.

 

The proposed moratorium would have several benefits: it would facilitate meat industry reform by providing a starting point for rationalisation, it would protect existing ownership rights, involving a willing buyer and willing seller, and it would preserve farm gate competition. A further benefit of this solution would be to encourage innovation because it quite deliberately puts no restriction on the number of shifts, chain speed or productivity gains on each chain. It would issue a licence for every beef and mutton chain with no new plants or chains permitted during the life of the scheme.

 

So a casual observer might ask what a moratorium would actually achieve, but on closer analysis there is an element of subtlety about such a scheme which would not necessarily produce immediate results. However over time the outcome would be beneficial for the overall efficiency of the industry without the pain of a more radical approach. It is important to recognise the reality that any restructure has a human cost, as chain closures inevitably imply job losses.

 

The government would have to introduce regulation to allow the moratorium to occur in the first place. This gets back to the government’s stated position which is ‘bring us a solution which is supported by the majority of the sector and we will be prepared to intervene.’ The key question therefore is whether or not the moratorium proposal would gain support from the majority, both farmers and processors.

 

If MIE gets behind the concept which I understand it is seriously considering, this would mobilise the farmer side of the equation. It would also be helpful if Beef + Lamb NZ and Federated Farmers also supported it. That leaves the processors who have traditionally found it hard to agree about anything. Therefore it is highly likely the scheme could fail to gain a sufficient level of processor support.

 

This is where MIE’s role will be extremely important, assuming it does a thorough analysis of the concept and decides to throw its full weight behind it. It may then be able to exert influence on the cooperatives through those board members who are sympathetic to MIE’s goals which may be a tipping point in helping to get this scheme adopted.

 

Therefore the most important part of this exercise is to ensure a thorough and robust assessment of the potential benefits and negatives of the introduction of a moratorium. This I suspect is what the government would insist on seeing, before it would take the risk of regulating the meat industry.

 

The proponents of this capacity moratorium appear to have thought through the potential fishhooks associated with the scheme. Chain licenses are site specific and cannot be transferred between sites because it is essential to prevent a new plant or chain opening up where a chain has been closed. It is critical to prevent freeloaders taking advantage of another company’s investment in rationalising capacity. The Commerce Commission would have oversight of the licensing scheme through an annual review similar to the Fonterra milk price regime. Existing foreign ownership of meat companies would be protected, but new investment would be subject to OIO restrictions.

 

I understand the suggestion is the moratorium should last for 12 years, unless an agreed trigger point of capacity reduction were reached sooner than that. This will be a point of contention, but clearly there must be a period of certainty to encourage investment.

 

The experience of the 1990s with Trial Run Holdings is relevant here. This involved the industry contributing jointly to the closure of Weddel’s plants, ensuring the equipment was sold overseas to prevent it being used again in New Zealand,. Rationalisation could equally be achieved by a group of companies funding the closure and disposal of identified excess capacity.

 

But after the Weddel’s closure there was no mechanism in place to prevent the entry of new capacity, either plants or chains. The net result was barely two years of relative peace with enough livestock for all companies, after which the industry descended once again into a state of procurement competition caused by new capacity coming on stream.

 

This is the best plan I have seen for addressing the excess capacity issue, because there is no compulsion and no automatic lessening of competition which could attract the attention of the Commerce Commission. I am hopeful, if not optimistic, this will be the solution MIE will support and could herald a new era for the meat industry.

Plenty of interest in moratorium proposal

Although not all parties are in favour of it, the proposed moratorium on chain and plant licences has provoked a lot of debate and reaction from all parts of the red meat sector.

Changes afoot in red meat sector

The much maligned red meat sector may at last be about to undergo a structural change if a majority of processors and farmers can reach agreement on a proposed capacity moratorium. Past history suggests that is a big IF, but a document being circulated among processors, Meat Industry Association (MIA), Beef + Lamb NZ, Federated Farmers and the Meat Industry Excellence (MIE) group contains a realistic basis for agreement on a solution to the capacity problem which has dogged the industry for years.

Election result should be good for agriculture

Beef+Lamb NZ’s Manifesto which was issued before the Election contains a very concise summary of the red meat sector’s wish list for the next three years, although it doesn’t necessarily include the big elephant in the room of meat industry restructure. But the National government’s attitude on that one is well known and unlikely to change until the industry can present an agreed solution favoured by a majority of industry participants.

 

I contacted Nathan Guy, at present acting Minister of Agriculture, to find out the government’s priorities for the next term and how they dovetailed with the B+LNZ and Federated Farmers manifestos. He responded in some detail, stating satisfaction with the strong support received from rural New Zealand which gave confidence the last government was very much on the right track.

 

Major initiatives would be RMA reform, a strong policy requirement of the Prime Minister, continuing focus on strengthening biosecurity protection, investment in science and innovation which has increased 70% since 2007/8, attracting more young people into careers in agriculture, more free trade deals, an increase in water storage and developing the potential of Maori agriculture.

 

This all seems pretty consistent with the two manifestos, although there will never be enough money to go round all the priorities listed. Feds’ push for $600 million additional investment in science over the next three years with specific reference to the three Centres of Research Excellence which missed out on the last funding round may be a leap too far. $1.5 billion is already committed for next year with a large proportion going towards the primary industries through universities, the Callaghan Institute, the Sustainable Farming Fund, AgResearch and Scion.

 

PGP funding of $708 million has been allocated across 18 different projects with matching industry investment with an assessed potential to generate returns of up to $11 billion by 2025. My impression from Guy was very much the intention to proceed with present policies which all appear to be on track to deliver the desired outcomes.

 

My first question to B+LNZ’s chairman James Parsons was whether he saw any change to current policy settings following National’s re-election as well as whether there were any specific areas where more action and investment were needed.

 

He is very committed to the success of the PGP programme, citing the Red Meat Profit Partnership as a prime example of the benefits from providing a platform from which nine partners – six processors, two banks and B+LNZ – could combine forces; there was no way this would have happened without government funding.

 

One of Parsons’ main concerns is to achieve the goal of the People Powered report produced in July to attract an average of 5000 people a year into the industry. However as the report shows over the next 10 years, the most important factor will not be the absolute number of entrants, but the change in the make up of the workforce. In 2012 44% of the workforce had a tertiary qualification, but this will rise to 62% by 2025.

 

Government response has been to raise subsidies for agricultural degrees at tertiary level or higher, as well as looking to improve information and material available to careers advisers. I suspect this will not be nearly enough on its own to achieve the required rate of increase. It remains a mystery why a career in agriculture, New Zealand’s largest export sector by a country mile, continues to be less attractive than a whole range of other less exciting and productive choices.

 

Other priorities for B+LNZ include environmental policy with a sensible discussion about nutrient allocation, reduced regulation where appropriate, and negotiation of improved trade access agreements with important trading partners where New Zealand is at a disadvantage. Specific examples of priority agreements on tariffs which must be pursued vigorously are Korea and Japan, particularly on beef access, where progress has been slow.

Japan’s commitment to the TPP has stalled over dairy access, while Australia has a sub optimal FTA which provides for reducing beef tariffs, while New Zealand beef tariffs into Korea will be higher than those enjoyed by Canada and Australia from 2015. Non tariff barriers on Chinese imports of beef and green runners and beef to Indonesia are also an issue in need of urgent resolution.

 

Parsons corrected me when I raised the necessity of introducing NAIT for sheep if we are serious about controlling disease outbreaks such as Foot and Mouth. This would impose a conservatively estimated cost of $80 million on sheep farmers to track stock in the event of an incursion of what is a wind borne disease. NAIT is more relevant to food safety than biosecurity problems. An infinitely preferable mechanism for tracking livestock would be the mandated introduction of electronic Animal Status Declarations to avoid the use of paper records, impossible to trace quickly and comprehensively.

 

One topic notable by its absence from the manifesto is a Government Industry Agreement with the meat industry, already signed with the kiwifruit and bee industries. B+LNZ suggests road testing a GIA document for an outbreak of FMD before the industry would be willing to make a commitment.

 

On balance the new government’s agricultural policies appear to correspond to the wishes of the red meat sector which is a good start, built on the solid foundation of the last three years’. At a time when global demand for beef and sheepmeat is robust, this is a good time to emphasise the sector’s importance to our economy.