Radical is the new normal
Rod Oram’s presentation to theIrrigation New Zealand Conference
Napier, April 8th, 2014
Securing the future
Kiwiki on Facebook / Twitter @RodOramNZ
[email protected] / +64 21 444 839
Agenda
• New Zealand• Dairy
• Paradox• Revolution
The world• …is doing OK, broadly speaking
• Some economic traumas…...and big changes…still to come
• But most economies are showing more stability and momentum• Europe first signs of recovery• Australia slogging• US strengthening• Asia succeeding
• …enough for us to earn a living
Our growth• …is gaining momentum
• Largely driven by Christchurch, whole milk powder, housing market, consumption• Export volumes growing only slowly…as is business investment
• Reserve Bank forecasts• Growth in year to March: 3.0% in 2014 3.5% in 2015 2.4% in 2016 2.3% in 2017
Our economy is constrained• The economy is constrained by e.g.
• Skills and capital shortages• Weak business investment• Limited government investment
• As a result “potential GDP” (the rate at which the economy can grow without causing inflation)is low
Government Strategy Mk III• “Business Growth
Agenda”• 6 ingredients of
business growth
• All driven by incremental change• Doing a bit more,
a bit better
• Some big goals• E.g. lift exports
from 30% of GDP to 40%
• Failure guaranteedif the game is more of the same
NZ’s exports remain far too small a contributor to the economy….…and have stagnated at 30% of GDP…government goal of 40% by 2025
Our exports• 2013, in value terms
• Exports to China: +45%• Exports to world: + 4.4%
• Dairy exports: +17%• All exports: + 4.4%
• Volume of dairy exports grows slowly
Agenda
• New Zealand• Dairy
• Paradox• Revolution
Opportunity• Growing world demand for dairy products• NZ response
• At home…more cows, more intensity – national herd doubled in 20 years• Overseas…some milk buying, & investment in farming
Rabobank…on NZ competitiveness• t
Holding our own
Our impressive rise in volume• But some
overseas producers growing fast
• E.g. Ireland:
• 50% more milk by 2020• +5bn litres
• 100% by 2025• +10bn litres
Our impressive rise in costs
Diagnosis - Value Creation• World Economic Forum – Global Competitiveness Report
• Competitive advantage measured on a scale of:• 1 = low cost of natural resources to 7 = unique products & processes
New Zealand scores 3.8Ranks 36th
Diagnosis - Value Capture• Value chain measured on a scale of:• 1 = role in chain mainly confined to one step, eg resource extraction• …to 7 = involved all the way down the chain, capturing extra value
New Zealand scores 3.8Ranks 58th
Value – creation and capture• $25.3bn – Shipped value of our food & beverage exports (fob)
• $140bn - $200bn – Consumer value of food & beverage products primarily of NZ origin; source – Coriolis Research
• 1 Fonterra plant in NZ makes infant formula for Pfizer
• 8% Pfizer’s Chinese market share for infant formula
• US$12bn Nestlé paid for Pfizer’s infant formula brands
• = 3 x Fonterra’s net asset value
NZ investment in value add…in NZ• Fonterra’s UHT plant at Waitoa
Chinese investment in value add…in NZ• Mengniu’s infant formula plant at Pokeno
Is US$3,500 still the long-run price?
Agenda
• New Zealand• Dairy
• Paradox• Revolution
Paradox
Abundance Scarcity
Poverty
Cows Scientists
Poverty
Tourists Engagement
Poverty
Sustainability
Weak Strong
Re-invention
Scarcity Abundance
Wealth
Lacto-pharmaceuticals Milk powder
Wealth
Travellers Tourists
Wealth
Sustainability
Strong Weak
Agenda
• New Zealand• Dairy
• Paradox• Revolution
Comvita – a 10-year transformation
Comvita’s value chain• Building it by…
• Floating on NZX to raise funds• Buying back distribution• Investing in retail• Investing in science• Investing upstream in bees
• Virtuous cycle…• …each step generated new cash flow to
take the next
Comvita: High science, high value• 250gm of honey
• Clover honey…………………………….. 1
• Comvita wound care……………………. 25x
• Comvita wound dressing………………. 55x
2010 EBITDA 2010 total environment cost as a % of EBITDA Source: Trucost 2012, KPMG
22
153
84 100
223
89 97
26
134
670
482
0
100
200
300
400
Airlines Automobiles Beverages Chemicals Electricity Food Producers
Industrial Metals
Marine Transportation
Mining Oil & Gas Producers
Telecom & Internet
US
$ in
bill
ions
800
700
600
500
52%22% 42% 43%
87% 224%
71%
59%
64%23%
2.5%
Full environmental cost of food production US$199bn
Opportunity:
• Reducing farming's environmental impacts will:• Improve nutrient and resource efficiency• Increase value, resilience and sustainability
NZ Agricultural Greenhouse Gas Research Centre• Global Research Alliance on Agricultural Greenhouse Gases• Proposed by NZ government at Copenhagen in 2009…to:
• Reduce emissions; increase food production• Help developing countries to join global climate change frameworks
• Alliance now has 36 countries + 3 observers including the EU• = 70% of global agricultural GHGs; agriculture = 15% of total GHGs
• Three main workgroups:• Livestock, led by NZ and Netherlands, 483 projects identified to-date• Croplands, led by US, 429 projects to-date• Paddy Rice, led by Japan, 60 projects to-date• Secretariat: NZ
• NZ Agricultural Greenhouse Gas Research Centre: $48.5m over 10 years• Four main workstreams: Mitigate methane; mitigate nitrous oxide;
increase soil carbon; deliver farming solutions
Our opportunity• 1 litre of milk = 940 gm of CO2 equivalent
20,000,000,000 litres = 18,800,000,000 kg of CO2 eq
• 18.8m tonnes of CO2 eq per year is not a waste product, a liability
Closing the nutrient cycle…is a brilliant business opportunity…
healthier cows and soil…= more food
Ruataniwha - a major initiative• Challenging…and on some issues pioneering
• Scale• Nutrient control• User price structure• Infrastructure proposition• Ownership structure• Government funding
Ruataniwha - a personal view, pre-draft decision• Storing water ✔ But climate change accelerating
• Environmental flows ✔ But flushing is a fix not a cure
• Farming upside ✔ But perpetuates commodities
• Nutrient management ? Controversial, unproven approach
• Ecological integrity ? Offsets aren’t integrity
• Economic viability ? Water price, contract are a big ask
• Corporate structure X Ownership complexity, conflicts
• Government funding X Debt; must be long-term equity
• Economic development X Doesn’t lift region up value chain
• Public trust X Case not yet compelling
a• a
How about creatingthe NZ-China Global Centre for Dairy Nutrigenomics
“You’ll have no future…
…if you don’t make onefor yourself”
…Johnny Rotten: