Integrated agri-food value chains

[This post was first published in the Fairfax NZ  Sunday Star Times on 1 June 2014]

Many New Zealand agri-food companies are still struggling to understand the global shift to integrated agri-food value chains. This move has been playing out most spectacularly in the infant formula industry, where the small companies have been badly caught out, but the trend is much broader than that.

A key driver is the need to have food safety systems in place that span from consumers back to producers. It is not simply a case of the food having to be safe, it is also a case of there being a transparent evidential trail. Food testing is just a small part of this system.
A major focus has to be on overall business systems that react to first stage mistakes before they compound into major events. It was just such a failure to react to the warning signals that led Fonterra down a shambolic path with the botulism scare in 2013.

There is also a key idea relating to provenance. Consumers not only want to know that something is safe; they also want to know that they are buying is what they think they are buying, and that the brand is genuine.

The food industry has a global problem with food integrity. The problems have been well displayed in the meat industry. Over the last year the extent to which horse meat has been found in processed meats within Europe is astounding. Manuka honey has also been falsely exploited.

The related problem is fake brands. It is not only in watches and fashion wear where this occurs; it is widespread globally across food marketing. Wine is possibly the specific product where fake branding is most common.

In New Zealand the issue of fake food brands is probably very minor. The challenge is to demonstrate the integrity of our brands globally. In some cases, co-operatives and other forms of mutuality have been the vehicle by which this has been attempted. However, increasingly it is now the big corporates, with an existing market presence, that are integrating back from the markets to production.

Here in New Zealand we are seeing this best in the dairy industry. The giant French-headquartered Danone, plus the big Chinese dairy companies of Mengniu and Yili, have all been developing their own processing capacity here in New Zealand. This trend will continue.

Ironically, it is the dominance of Fonterra that is now accelerating these overseas dairy investments in New Zealand. Overseas companies do not like the inherent imbalance of power that they see. These companies currently have little choice but to come to New Zealand for whole milk powder. They can buy cheese, skim milk powder and butter from many countries, but New Zealand is the only major source of whole milk powder.

Their response is to invest back into the supply chain, both here and elsewhere. I expect to see increasing Chinese investments in whole milk powder processing both in America and parts of Europe, as well as further investment in New Zealand.

Last week I was travelling through some of China’s horticultural provinces and I saw clear evidence of the same corporate drive to secure supply. With colleagues, I visited a diverse horticultural processor which has a particular focus on apple juice concentrate. They now have plans to invest within China in up to 50,000 ha of apple orchards. That is an area more than six times our total area of apple orchards in New Zealand! And that is just one company. Last year they employed 420 new graduates.

The key words one hears again and again in China are ‘modern agriculture’. Land reform now allows companies to acquire long term leases from the traditional owners. This is essential for the necessary large scale capital intensive development. The way the rules are applied varies from province to province, but in many cases if 80% of farmers in a village agree to lease their land, then the village leadership can act on behalf of everyone and all of the contiguous land can be acquired. The Government itself is learning to step right back from the leasing process, and rentals are determined by market forces.

The Chinese system of land tenure is rapidly evolving. The state will always be the ultimate owner of land just as it is in New Zealand, but land use rights will be increasingly secure.

The global messages for New Zealand farmers are clear. Non-corporate farmers have two options to get closer to consumers. One is to operate as direct suppliers of differentiated products via farmer markets or through direct sales to restaurants. But for most producers the way forward is to have a formal alignment to a value chain which sets and monitors production standards and which has brands that reach out to the global market place. The days of auction selling and unknown product provenance are coming to an end.

[In the days 10 days since writing this post for the Sunday Star Times, and before posting it here,  I note that further examples have emerged both of fraud food and new integrated supply chains.  The first is that Fonterra reports that, in an unnamed country, discarded Fonterra milk powder bags were retrieved from rubbish tips and refilled with fraud product. And in Australia, Camperdown Dairy International has announced its new business model which spans from farm ownership producing 100 million litres of milk per annum through to consumer branded  infant formula and premium milk powders.]

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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2 Responses to Integrated agri-food value chains

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