Where to for Chiwi agrifood

The current plan for Chinese Yili to buy Westland Co-operative Dairy has brought renewed discussion about the role of China within New Zealand agrifood industries. Of course, the Westland issue is just one part of a much greater issue about the trading and political relationships linking our two countries.

There is a need for ongoing debate because the issues are profound. There is also a need for the debate to be informed.  I hope that what follows here will contribute to an informed debate.

The starting point is to recognise that China is easily New Zealand’s biggest agrifood destination. And every year it continues to grow.

There is a fundamental logic behind why this is happening. It starts with the ongoing growth in the Chinese economy, combined with the shift in that economy from saving to consumption.

Yes, in percentage terms China’s growth is now only around 6.5% per annum, which is much less than the 10% per annum for most of the last fifty years. But in absolute terms the economy is now growing faster than it was ten years ago.

China is self-sufficient in grains for its human population and this is a fundamental principle of national security. However, China cannot produce the plant-based foods needed by animal agriculture. So, China has to import a lot of feed for pigs and dairy. It also makes economic sense for China to import some animal products rather than trying to produce them itself from imported feed.

The only catch from a Chinese perspective is the need to ensure stable supply lines from trustworthy partners. They need partners who will not play political games with them.

There is of course an irony there. New Zealand also needs partners who do not play power games with them. Is China such a country or not?

There is no clear answer and so many New Zealanders are very worried about our dependence on China. There is a widespread concern that China will undermine our democratic systems.  This will undoubtedly be the focus of ongoing debate.

China is authoritarian. No argument about that.  It is also a country of censorship.

When in China, I find the internet restrictions frustrating, but there are workarounds whereby those ‘in the know’ can navigate through the firewall. But yes, compared to Russia for example, which I find relatively open, China is very authoritarian.

I have no doubt that China does its share of spying. Every country does that. Unfortunately, it is the way of the world. We are ourselves part of ‘Five Eyes’ which has its own spy focus on China.

I find it interesting that China does not try to tell us how we should run our society. However, we have a tendency to try and tell the Chinese how they should run their society.

I have myself been fortunate to spend significant time in China, with visits going back 46 years to 1973. I have been able to travel and work in regions that foreigners seldom visit.

I have three overarching ‘take-aways’ about China. The first is the pace of change – the China you saw last year is already different this year.  The second is that once over there, things can seem quite different to what we read in the media. The third is that as Westerners there is much about China we will never understand.

On reflection there is a fourth take-away. There are lots of so-called China experts who do not appreciate how little they themselves know. Unfortunately, their clients do not realise this either. China is sufficiently complex that I don’t think Chinese themselves really understand their country.

So, let’s now look at the Kiwi side of our agrifood systems.

We are blessed with some great natural resources for food production and we have learned to produce some food products with great efficiency. Stand-outs are meat, dairy, kiwifruit ad wine.

We are also very good at processing and associated quality assurance. However, some of our processing industries have always had a heavy foreign influence.

We are good at marketing commodities and some ingredients but have a poor record when it comes to consumer products.

There are marketing exceptions, with wine being a great success as a consumer-branded product. However, our wine industry is predominantly foreign-owned and managed.

So that leaves kiwifruit as the outstanding NZ-owned and managed example. The key issue there is that plant-variety rights for Sungold allow New Zealand to own both the brand and the category. Other products are typically much more difficult to differentiate than Zespri’s kiwifruit.

The other outstanding example is A2 Milk which is the largest company of any type on the NZX. By value it has close to 50% greater market value than Fonterra, and far ahead of all non agrifood companies. It is a genuine consumer-focused company.

However, although A2 milk has its head office in New Zealand, all of the senior officials and all of the intellectual grunt are offshore. Most of the capital is also now owned offshore, with most shares traded on the Australian stock exchange. We really did let that one go!

Quite simply, we did not get the A2 vision and we did not invest the capital. As an A2 believer since 2003, I remain frustrated at the path New Zealanders collectively chose.

I often read commentators saying we need to diversify away from China and find new markets. The problem is that no-one apart from India is growing like China. And good luck to those who think India is an easy market.

The irony is that in dairy, wine and meat, it is the foreigners who have found New Zealand rather than vice versa. Most of our products are sold FOB at portside in New Zealand. It is others who develop the markets.

There is an additional problem that there is a lack of equity capital in New Zealand to drive the market development process. We invest in farms but we don’t like spending our own money on market development. And when we do, it often goes wrong.

If we do want to develop overseas markets then kiwifruit and A2 Milk have to be the outstanding cases to study.

So, what is the path ahead?

I have not given that path here, but I will say that each product category has its own unique specifics and therefore its own path.

What I have tried to do here is provide some basics on which any debate has to be conducted. If people think there are simple answers to any of these issues then they are wrong.

As for a future without China as a major market, I shudder to think what that would mean.

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.
This entry was posted in Agribusiness, China, Dairy, Meat Industry, Uncategorized. Bookmark the permalink.

9 Responses to Where to for Chiwi agrifood

  1. Derek Daniell says:

    I learned a lot from your Chiwi blog. I really appreciate your realistic commentary, often challenging the official line.

  2. Well done, Keith on the mark as ever. Yes there must be genuine informed debate on this crucial issue for New Zealand. Please remember your wisdom that most people don’t know that they don’t understand China. Also where are the other markets?
    These comments could equally apply to the appalling UK situation of Brexit – lies and belief we’re still a major world marketplace. Think again older Brits particularly!

    • Keith Woodford says:

      Thanks John,
      In regard to Brexit, my position is evolving, not because the facts have changed but because my understanding of those facts is changing. Amongst other things, I had not appreciated the importance of the EU in relation to keeping the two parts of Ireland from tearing each other apart. I cannot see any solution to the Ireland issue without at least a customs union. But the reason my perspective is only ‘evolving’ is that even a customs union is more complex than it sounds. In any solution, I think that rules around immigration remain challenging, not from movement within the EU but into the EU from other parts of the world. But I am very much a learner in all of this Brexit stuff.
      Keith

      • jbj4549 says:

        Thanks again Keith, interesting thoughts on Brexit, which I agree with.
        My main reason for mentioning Brexit was in relation to your own vital debate about Chiwi which you surely need to have and the dangers that can arise.
        Our appallingly bad campaigns pro & anti Brexit must be a warning about how politicians & others either don’t understand and/or deliberately mislead the voters, aided by mischievous social media campaigns. Beware of falling into a similar trap in NZ.

  3. Rod St Hill says:

    Keith, I’ve enjoyed your articles since I discovered your blog. Re China, I visited the country many times when I was involved in international education. I suspect that not many in Australian or New Zealand appreciate how far the Party tentacles stretch. There was a Party official at every business meeting I attended. They rarely said anything – just sat quietly and smoked (most of them smoked). I believe that China desires to become the worlds most powerful economic state. And it has enough momentum now to achieve that and fairly soon. Whether its ambitions go beyond that is debatable, but it does flex its military muscle sometimes. In terms of Chinese ownership of Australian and New Zealand land and agribusiess it is not all that large proportionately. It just creates a lot of debate. I think it would be worhtwhile to have a serious debate about foreign ownership in general.

    Re Brexit, I think David Cameron was reckless to promise a referendum and, because the politicians did not think the vote would be for Brexit, they never really planned properly for it. In any case, the majority was small and neither Wales nor Scotland were in favour. The Brexit mess is largely political. If I was a betting man, I would put my money on a no-deal exit (now in October it would seem). To be fair to Prime Minister May, although she was against Brexit, she has done everything she possibly can to broker a sensible way out. I think she may be highly regarded by historians eventually. I do not think history will look favourably on David Cameron.

    • Keith Woodford says:

      Hello Rod,
      Yours is a familiar name but I don’t think we ever met.
      Yes, the party secretaries are ubiquitous. It is a powerful role. But not necessarily nefarious.
      As for Brexit, if I were a betting man, I would now be putting my money on a second referendum. But there are fish hooks everywhere. Corbyn and May will need to agree on the wording thereof.
      KeithW
      kbwoodford@gmail.com

  4. Floyd says:

    Keith,
    Do you see Chinese investment in processing facilities eg Westland co-op different from productive land?
    I’m not against overseas investment at all but there are examples in the Australian beef industry where Chinese interests own the land, transport and processing facilities, whole carcasses are being exported with very little value added the local economy once the capital expenditures are complete.
    Do we expose our agri businesses to the same risk and if so how could we mitigate those risks?
    Regards
    Floyd

  5. John W Hill says:

    Floyd, I hate to tell you this but we have been doing this since February 15, 1882. On this date the sailing vessel Dunedin left New Zealand and 98 days later arrived in England. Her cargo was frozen meat and assorted agricultural products. The profit from this cargo after all debt was paid was 4,700 English Pounds. From that day to this things have changed very little.

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