[This post was first published in the Fairfax NZ Sunday Star Times on 23 November 2014]
The big agribusiness news this week is that Australia and China have reached a free trade agreement. This has come as somewhat of a surprise to our Government here in New Zealand who thought negotiations still had some way to go. They have been even more surprised at the apparent quality of the agreement. And our Australian cousins have been quick, entirely for their own internal purposes, to claim their agreement is better than what New Zealand achieved some six years ago.
We can afford to be generous in our congratulations. In the greater scheme of things it demonstrates that globalisation of food trade is increasing. When the dust settles on the Australian agreement, New Zealand will take up with the Chinese on any issues that the Aussies have bettered us on. New Zealand will undertake those discussions with the same politeness that has characterised New Zealand’s previous negotiations with China, and which have held us in such good stead in the past.
For the last six years, we have been able to congratulate ourselves on getting an advantage over the Australians in regard to China trade, but it was inevitable that Australia would eventually catch up. They would probably have got there somewhat earlier but for a somewhat rambunctious style of public utterances.
Within China, there are three extremely important policies in regard to food, and these are driven from the highest level of Government. They relate to food security, food safety and improving rural incomes.
Food security is about having enough food. Food safety is about the quality of that food. Improving rural incomes is about ensuring that all of China’s people are benefitting from increasing national wealth.
Underlying these policies is an even more important concept, that of social harmony. The Government of China understands very clearly that the potential for social discontent is the greatest risk of all.
China has only 120 million hectares of arable land. This is the equivalent to about 800 sq metres per person This is about the size of a traditional New Zealand urban section, or twice the area of a town house block. This is still enough land to produce all of the rice, wheat and other crops needed for human consumption, but it is not enough to provide animal feed for the meat and dairy industries. Effluent management is also a big constraint.
China’s other rural problem is a shortage of labour. In China’s rural villages there are now very few working age people under the age of 45. Part of the problem is that much of China’s rice lands are hillside terraces, with the terraces too small to mechanise. Using the language of economics, the marginal value product of labour on these lands is very low. This leads to low rural incomes.
China’s rural development policy is to urbanise most of its population. Back on the farms, new land tenure systems are emerging, with land aggregation, long term leases, industrialisation of agriculture, and co-operative arrangements.
China is working through all of these arrangements with a fascinating mix of forthright action combined with caution and regulation. The New Zealand approach has always been to respect the challenges that China faces, and to work with the Chinese. In contrast, Australia’s negotiating style has tended to be more forthright.
In recent days, the media focus has been largely on the dairy effects of the Australia–China agreement. However, the New Zealand and Australian industries are somewhat complementary. New Zealand has marked advantages over Australia in regard to commodities such as whole milk powder based on large scale processing, combined with a pasture-based low cost of production. Australia has an advantage over New Zealand in that its dairy production is largely non seasonal and hence much more suited to consumer-ready value-add products. It is notable that even Fonterra is increasingly using Australia for its production of value added products such as infant formula.
In any case, the threats to New Zealand’s dairy industry come from elsewhere. For example, Chinese company Yili has this week announced the construction of an 80,000 tonne per annum milk powder factory in Kansas in a joint venture with Dairy Farmers of America. Also, most of the retail competition for the dominant UHT (ultra heat treated) milk is coming from Europe. Last week in Beijing, Fonterra’s Anchor UHT milk was selling for $NZ5.30 per litre and Goodman Fielder’s New Zealand sourced Meadow Fresh was at $NZ3.60. The Anchor price was fully comparable to European brands in the same supermarket but the Meadow Fresh price was lower.
The biggest agribusiness advances for Australia from its China free trade agreement are likely to be in beef, lamb, wine and quality horticulture products. One thing is sure, Australian agribusiness is gearing up after wallowing for decades behind the mining juggernaut. One spectacular example is the building of a new privately funded international airport, largely for freighting food to Asia, on the Darling Downs in Southern Queensland. There is indeed a new mindset.