Posts Tagged ‘Agriculture’
BigCake’s four big themes have been:
1. Economically we are in a hole
2. We need to recognise we are in a hole
3. We can extricate ourselves if we get our act together
4. NZ is still a pretty sh!t hot place, so while climbing out of the hole, we need to protect what’s great about living here.
Regarding numbers 1 and 3, the NZ Institute thinktank has been a major influence.
Following up on yesterday’s post. Below I’ve cherry picked facts from the institute’s latest paper, A goal is not a strategy, to show that NZ is in a hole. Many challenge the way we like to think of ourselves:
Innovation and education
• New Zealand has the highest proportion in the OECD (equal with Ireland) of highly skilled people living in other OECD countries.
• None of the 10 MBA programmes offered around the country focuses on developing the skills needed for international business success.
• In New Zealand innovation is often confused with inventiveness. As a result there is a tendency to think that if R&D output is increased then innovation will increase. Unfortunately for New Zealand, which is quite good at inventiveness, innovation also depends on successful commercialisation of the new way of doing things, and New Zealanders are not so good at this.
• New Zealand’s innovation and business sophistication score is low relative to the scores for many other advanced economies indicating there is great potential to improve innovation, and that doing so would lift economic performance substantially.
Agriculture
• In 1990 New Zealand had around five hectares of agriculture and forestry land per person; today it has less than three hectares per person. Population growth will reduce that further.
• Productivity per hour worked in agriculture is not very different between New Zealand (NZ$40) and Denmark (NZ$50). But in New Zealand the productivity of agriculture is around 83% of the average for the whole economy (NZ$48) whereas Denmark’s agricultural productivity is only around 47% of Denmark’s overall average productivity (NZ$106). Despite outperforming New Zealand in agriculture, agriculture is not the powerhouse of the Danish economy.
• Denmark and New Zealand have almost identical food and agriculture, beverages and tobacco exports per capita. However, New Zealand uses a greater share of its total workforce (6.8%) than Denmark (2.6%) to achieve the same result.
Entrepreneurship
• Two-thirds of New Zealand entrepreneurs are home based and tend to be ‘solo’ operators with few employees. Many of these people are satisfying their desire for independence, to be their own boss. These small independent businesses are likely to have quite low productivity. The relative abundance of these small businesses is therefore likely to be contributing to low overall relative productivity.
• New Zealand has too few highly skilled entrepreneurs targeting international business success. The shortage means the product of New Zealand’s inventiveness – large research output, inventions, and new business opportunities – is not being converted into international business success.
Exporting
• New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.
• New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.
• Commodities are well known for their cycles, and reliance on them would mean New Zealand would continue to be exposed to volatility and price shocks.
General
• New Zealand and Denmark have similar small populations yet the institute calculates that Denmark’s GDP per worker (NZ$170,386) is more than twice New Zealand’s GDP per worker (NZ$83,842).
• New Zealand’s manufacturing labour productivity is the same as that of agriculture, at NZ$40 per hour worked. In comparison, Denmark’s manufacturing labour productivity is almost 90% higher than New Zealand’s, at NZ$75 per hour worked.
• Despite strong doses of economic liberalisation, New Zealand’s GDP per capita remains lower than the OECD average and much lower than Australia’s. New Zealand’s private economy labour productivity is 57% of Australia’s.
• New Zealand scores relatively poorly on measures of infrastructure development, placing 35th in the world with the quality of roads, railways, and electricity ranking worse than the OECD average.
It’s a pretty big hole, but it’s one that we can get out of if enough of us accept we are in a hole. We also need to accept that something more needs to be done to get us out our hole than we are seeing at the moment.
In A goal is not a strategy, which everyone interested in the above issues should read, the Institute again sets out the case for change and the bare bones of an economic growth strategy. It says New Zealand needs to:
• Focus on the internationalisation of high value,differentiated export sectors
• Prioritise labour productivity improvement efforts on these sectors, and
• Reallocate resources from low to high productivity sectors.
[Photo credit - horslips5 via Flickr]
The NZ Institute’s latest discussion paper – “A goal is not a strategy – focusing efforts to improve NZ’s prosperity” – touches on one of BigCake’s observations about how this country attacks its economic growth issues.
We’re playing “bloody tiddlywinks” while countries, even of a similar size, play big boys’ games.
Tens of millions of dollar there, millions here ain’t going to make much difference.
As the NZ Institute says if a goal is important, then resources should be poured in to match. “Competing small countries are committing hundreds of millions of dollars to efforts they regard as strategically important.”
The Herald’s Brian Fallow has commented on the sizeable discrepancy between what NZ will fork out for its national broadband network (calculated to be $5-8 billion) and Australia’s A$43 billion.
“Canberra’s estimate is the equivalent of $2400 per Australian, eight times the per capita outlay of public money our Government is talking about.”
Fallow was making the point that “this does not, as they used to say, compute.” Someone is going to lose – the taxpayer and/or the consumer.
BigCake’s point is the difference in ambition – geographical and population differences aside.
A couple of years ago I wrote about how the then Labour Government was, under the heading of economic transformation, going to spend $3.6 billion over four years on infrastructure skills and R&D.
At the same time Ireland’s National Development Plan projected expenditure of NZ$105 billion on infrastructure alone over six years.
Whether either happened is not really the point – it’s just the gap in ambition (and the money backing it) that hits you between the eyes.
You see the small thinking in the current Government’s tens of millions approach to agriculture R&D.
As usual the NZ Institute’s work is packed with good grunty stuff on what’s wrong with our economy and what we can do to fix it.
“A goal is not a strategy” is focused on boosting the non-commodity side of the economy – “exports of differentiated goods and services, and helping firms overcome the barriers to internationalisation.
“New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.
“New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three sectors have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.
“Other small countries are becoming prosperous by exporting differentiated goods and services and New Zealand must find a way to join them or find another strategy for success.”
A post on the performance of our ICT sector has been banging around my head for a while. The above looks like good context for a post.
So how much is where we’re from to blame for our ‘slow sell nation’?
It’s fun, if not enlightening, to check out the different immigration paths of NZ and the US.
[This post is the 2nd in a series on the 'slow sell nation' - see part 1 Good makers, poor marketers]
In his book Outliers, Malcolm Gladwell talks of the power of cultural legacies. “It is only by asking where [successful people] are from that we can unravel the logic behind who succeeds and who doesn’t.”
And that can mean going back a long way.
Gladwell looks at the success of Jewish men in the tough, anti-Semitic environment of the New York law fraternity mid last century.
These often rough hard men, the sons of poor Eastern European immigrants, ended up running the city’s leading law firms and amassing billion dollar fortunes.
Unlike the Irish and Italians immigrants, who were in the main impoverished peasants and tenant farmers in the Old World, the Jews were people of the cities.
According to Gladwell 70% of Eastern European Jews who came through Ellis Island immigration centre in the 30 years before WWI had some kind of occupational skill or owned stores.
They arrived in the US at a time of opportunity, but they had the skills, including an understanding of commerce, an ability to sell and an inclination to work like crazy to take advantage of these opportunities.
Some made it rich in their own lifetime, but many families had to wait a generation for these virtues to pay off.
They’re traits that were also on the Pilgrim’s first ship, The Mayflower. The ship’s short manifest included tailors, a merchant, a doctor, printer and people of learning.
One of the early Pilgrims wanted to create a colony “as a city upon a hill”.
New England went on to become a centre of learning, commerce and trade.
So we come to New Zealand – who are our immigrants and what’s their cultural legacy?
Famously our dream was not “a city upon a hill” but to become “Britain’s farm”.
Wave after wave of immigration to this country was to fulfil this ideal. We had nothing comparable – at least till mid last century – to the commercial heritage of a Mayflower or Jewish Diaspora.
In the 1840s NZ Company agents enticed mechanics, gardeners and agricultural labourers from southern England and Scotland by offering free passage.
According to historian Jock Phillips:
“A third of the adult men were farm labourers, and another two-fifths were ‘mechanics’ – traditional rural craft workers such as builders or blacksmiths. These skilled rural folk looked to New Zealand to fulfil dreams of independence through land ownership. There were few industrial workers or even clerks.”
And after provincial governments took over attracting immigrants in the mid 1850s, agents were still instructed to go after agricultural labourers and builders.
My recollection of NZ history is that Maori quickly and easily shifted into European mercantilist mode and may have developed into a real commercial force if it wasn’t for having the stuffing knocked out of them in the land wars.
In the 1900s farm labourers were still in demand along with businesses wanting skilled workers, and middle-class families wanting domestic servants, says Phillips.
And so it was till WWII when “about 1,100 escapees from Hitler, mostly Jews, were accepted (many fewer on a per capita basis than the numbers taken in by the United States and Britain). Of those who came, many made distinguished contributions to cultural and business life”.
The change of focus continued with the 1947 immigrant assistance scheme which saw 100,000 come to NZ over the next 30 years, mostly city people with industrial skills.
BTW – my father, an agricultural worker, snuck in under this scheme.
The 1970s saw the start of an influx of unskilled Pacific Island immigrants. The other more recent significant shift away from serving “Britain’s farm” was the Asian immigrants of the 1990s who were, as Phillips says, educated and comparatively wealthy.
So (for the moment ignoring the recent past) that adds up to a powerful “cultural legacy” that’s not really in tune with the modern international market place that rewards commercial nous, skill in spotting business opportunities and salesmanship.
I think we are still working our way through this legacy (one of growers, not sellers), but the legacy of the more recent past offers hope.
What type of activities do we spend our research and development cash on?
This is the last question (I think) in my R&D series looking at who are NZ’s big R&D spenders (the little guys) and international comparisons (not good but with a hint of promise).
So where’s the money being spent? I can’t find any real nailed-down evidence of this, but according to a couple of people who keep their eye on this type of question, most of our R&D dollars still go on increasing agricultural production.
According to Ministry of Research Science and Technology 2007 figures, about $100 million a year was invested in food and beverage research. (That’s not all the agricuture- based research.)
The Ministry says about a third of this money is targeted at innovative food products and technology.
How appropriate is this now?
Our scientists focusing on increasing production – extracting more from a finite land resource – served us fine when we could lay claim to being one of the world’s most efficient agricultural producers and had a reasonable expectation that this would continue for sometime. Obviously we did well in part because our science was so sh!t hot at making the most of the country’s already hefty advantages in growing conditions.
But that was then, this is now and aiming to remain a low-cost commodity producer is not the best way to get the most out of our natural competitive advantages.
As BigCake has written a number of times before, we’re going to get smashed by producers from China, Russia, Chile, Brazil and Argentina if we continue to try to play the low-cost game because they can produce food more cheaply than us.
Maybe we are already getting smashed. Fed Farmers head John Nicolson says he’s only made the average wage three times in the last 30 years.
That’s not to say food commodities have no place in the export mix, but they need to have a much smaller place.
Our opportunity is at the high-value end of the market, building on our established reputation as a producer of high quality and innovative food and beverages. And on our clean green image.
There have been small steps taken on the science path to back this up, for example the Nutrigenomics project looking at diet-gene interactions in the gut.
But at the moment sales of high-value food and beverage products are tiny compared to the commodity big boys. However the high-value segment is an incredibly vibrant space with huge numbers of small innovative export-orientated companies having a go.
Bizarrely, unlike most OECD countries, these companies didn’t have access to facilities in New Zealand to help with product development and testing.
The $21 million Food Innovation Network is designed to close that gap, opening up better access to R&D services for these little guys.
Adjusting to this new world will require a shift in what we spend our R&D money on. It will also require a change of mindset away from serving the trader mentality to one where the whole food and beverage sector thinks about what the world wants and how it is going to give it to them.
NZ company spending on research and development is less than a third that of the OECD average, so who’s not pulling their weight?
Small businesses? Well yes, but they have a good excuse. Around 97% of Kiwi businesses employ fewer than 19 people. R&D wouldn’t be relevant to most of these small and medium sized businesses (SMEs) who’d mainly be trades based, retailers etc
And for those where R&D might be relevant, this activity is in all likelihood going to get squeezed by the need to manage, market, sell and engage in whatever it is that the 19 maximum people actually do for a living.
These SMEs represent just under 40% of the GDP so that’s a good chunk of the economy which just can’t or doesn’t need to do R&D.
This must be the single biggest factor behind the paltry 7% of businesses reporting R&D activity in a 2008 Statistics NZ survey.
The indications are that businesses in the next group up (20 to 50 employees) do a hell of a lot of R&D. This group, along with the SMEs (who for reasons explained above probably don’t contribute much), account for just under half of total business R&D in NZ, the highest relative R&D contribution for businesses of this size in any OECD country.
By now you can probably see where this is going.
Here’s a table showing the falling R&D expenditure of Fonterra. Picking on them because they’re by far NZ’s biggest company and hence the biggest offender.
In 2003-04 Fonterra’s R&D spend was $100 million, so they’ve basically gone backwards. And they’re a along way off what Nestle spends on R&D. I think when Fonterra was created, Nestle was held up a model of the global dairy ingredients business the country needed (as opposed to the milk trader we’ve still got).
But to be fair to the big guy, here’s the figures for the next two biggest agricultural exporters:
And to be even more fair, here’s New Zealand second largest company:
So Fonterra is actually a good R&D investor by large New Zealand company standards.
Among at least one of these companies there are some very antediluvian management attitudes to R&D. Overall, business leadership seems to be missing here and until the private sector steps up it’s hard to see how we’re going to reverse our economic decline.
Dunno if this was meant to be a used as a target for a minimum R&D spend – perhaps for hi-tech companies – but companies wanting a government R&D technology development grant must spend at least 5% of revenue on R&D over a three-year period.
Whatever, you can see how far out of the ball park NZ’s biggest companies are.
So with these miserable R&D contributions by the big companies, you can see why NZ only spends about 1.2% of gdp on research and development, half by the public sector, half by private industries.
The PM’s science adviser Sir Peter Gluckman gives Israel, as an “extreme example”, saying it spends 4.9%, excluding defence, of gdp on research and development.
Interestingly, a big hunk of NZ’s public sector R&D spend goes on the primary industries, so you wonder if the big agricultural companies made a conscious decision to live off a form of R&D welfare. A more generous appraisal could be that the government R&D spend in the primary industries is crowding out the private stuff.
In the Budget the Government announced $321 million over four years in investment in new R&D initiatives, including a $234 million increase in support for business R&D.
Will this get the big R&D slugs moving? It’s a carrot, but sometimes you feel a stick would be handy, if only to make you feel better.
Dutch financial services company ING has very very big wraps on sustainability and let’s hope for New Zealand’s sake they are right.
In a report on the global consumer products industry, it calls sustainability the “third industrial revolution”.
Even if ING is half right, this represents a massive opportunity for our food and beverage export businesses.
The third industrial revolution it appears will be driven by scarcity. Number 1 was driven by steam and number 2 by computers, all creating a path for entirely new business models.
ING identifies eight interdependent crises that are powering our way towards this third revolution:
• demography
• ethics
• social-economic
• food
• water
• climate
• energy and
• political.
What do they all have in common? They’re areas where New Zealand has competitive advantages over nearly every other country in the world.
Even climate change on balance represents a plus for New Zealand.
BigCake can’t think of another country that can match our strengths across the board. Australia, no water; Asia has demographic, climate and political problems; Europe demographic, energy and food issues; South America, nah; Africa forget it.
Maybe North America comes close, in particular Canada.
We’ve been told about these opportunities before, but elements of the farming sector see threats where others see opportunity. The reaction to last month’s KPMG report, saying much the same thing as ING, was a classic.
And given farmers control most of what is produced, what it is turned into and how it is marketed, nothing will change until they get their sh!t together, bar a few honourable exceptions who are already on to it.
As ING says “Companies can reap profits from consumers’ social and environmental concerns.
“In our view, the third industrial revolution will on the one hand save the planet and, on the other, accommodate the consumer explosion we expect in the coming decade.”
Not sure if this term is new (it is ugly), but ING says it’ll be multi-committed companies (MCCs) that’ll reap hard business benefits from the 3rd industrial revolution.
“In the short term, the winners in FMCG (the fast moving consumer goods category which includes food) will be those companies that are able to mitigate the impact of food and energy price volatility and to accommodate the impact of demographic growth and Consumer Reset.”
But ING says a revolution in marketing and sales is coming.
“Brands have a responsibility to act. Against the background of demographic growth in developing areas and economic/social crises in the West, we are at a crossroads where consumption growth will have to be decoupled from impacting society.
“An increasing minority of consumers are choosing a sustainable positive lifestyle and are no longer willing to compromise on responsible behaviour from companies.”
Companies will also have to get used to resource scarcity (such as food, energy, water) and responsible sourcing, as this will be critical for their costs, margins and brand equity.
Doesn’t yet sound like the basis of a movement around. Let’s get moving – revolutions don’t wait.
Back in 1980, New Zealand and another agriculturally focused economy Denmark spent roughly equal amounts on research and development – today if we spent at the same rate as the Danes we would’ve invested around $44 billion more in science than we have.
That money would make a sh!tload of difference to our economy given the strong relationship between R&D and national prosperity.
The Government’s Chief Science Advisor Peter Gluckman went on the attack yesterday, getting stuck into Kiwi attitudes to R&D.
“We spend only 1.2% of GDP on research…[Similar] small but progressive nations spend somewhere between 2 and 3 times that amount,” he said in a speech
In 2008 our total R&D spend was miserly $2.1 billion.
Yesterday it was also revealed CRI AgResearch would be laying off around 35 scientists, engineers and technicians, many who work in the wool area after our sheep farmers decided to stop paying for wool research, a decision memorably described in a Dominion Post headline as a “raw brainless decision”.
Yeah, I’m still on the farmers’ backs.
As usual I’m also trying to be fair. Gluckman points out that some of the research the CRIs were/are doing is crap (well, actually he said “not delivering optimally”) and the sheep farmers and their precious dollars have probably been victims of that.
So there’s definitely a good money after bad argument to be made.
But talk about throwing the sheep out with the drench water.
Gluckman argues that our attitude to R&D has a lot to do with decisions like those of the sheep farmers.
“Is it that our current spending pattern was established in the post-war period of protectionism and farming for Britain at a time when commodity was king and in that time we built up an almost untouchable pattern of high social spending so that shifting expenditure towards productive areas with long delays before return, such as RS&T, is difficult especially when such strategic investment needs to be bipartisan and is hard when electoral cycles are short.
“At the heart of it I think we have a set of really deep cultural issues. We have been seduced by our national mythology – “number 8 fencing wire”, “punching above our weight”, “we think we are innovative”.
And as Gluckman says these are myths. Actually, the number 8 mentality unfortunately is not.
Has our strong egalitarianism , he asks led us as a country to avoid a focus on intellectual activity which is seen as elitist.
And why’s our private sector investment in R&D so low?
He makes some suggestions:
• Bad government example thanks to “chronically low “ and misplaced public sector investment
• The short-term focus of businesses
• Investment money heading into speculative ventures
But there is hope and it comes in the form of ‘Johnny on the spot’ Key.
Gluckman says there is now a more intense focus on the role of science in New Zealand’s development than there has been for two decades. “The Prime Minister sees science as being central to the nation’s advancement…”
This will lead to the “most substantive changes that the science system has seen in more than 20 years”.
Like the sheep farmers and the AgResearch scientists they sent down the road, BigCake can’t wait.
Among the first words of KPMG’s Agribusiness Agenda report are “opportunities and challenges”, as in the ones facing the world’s food producers.
Guess what Federated Farmers focus on? Yeah, okay it was the challenges and how, as a result of all the problems they face, farmers needed a hand to cut costs. So out came the old complaints about the Emissions Trading Scheme, ACC, the Resource Management Act…which look like excuses to not change and follow the opportunities.
Geoff Ross of 42Below, and now Ecoya, fame once wrote: “To only look at cost is a trait of a business whose products are in decline and they have no other option in getting a margin than to focus on cost. Surely this isn’t us!”
Ummm.
Farmers are probably not going to take much notice of a fragrant candle maker, but the knee jerk response to KPMG’s report does highlight a cost mindset among some farming leaders.
Dunno if this is what KPMG had in mind when it says that, following conversations with farm leaders, “we are concerned that there are critical issues in the sector that remain either unsatisfactorily addressed or need attention…”
To be fair to farmers, some of the rules and regulations they face are unnecessary and times are tough down on the farm. Many farms are losing money and owners only hang in there because they are treating the farm as some form of a retirement scheme they can cash up when they’ve had enough. Costs they can control, the other stuff is pie in the sky.
But really that’s not good enough. Remember farmers are also the owners of the co-ops that sell and market their produce.
Like BigCake, KPMG sees farming as our great hope for future prosperity.
What the KPMG report appears to be saying is that the farming sector knows what it should do, but needs to get its sh!t together. “There is universal belief that the global environment creates significant opportunities for the industry if there is a collective will to do some things differently.
“As a protein rich country with secure and reliable sources of fresh water and a history of agricultural innovation New Zealand has strategic advantages that, if managed appropriately, will assist the economy to grow, both directly and indirectly, and enhance the wealth of all New Zealanders.”
What the KPMG report makes clear is that we’ll be not able to do this by continuing to try to be the lowest cost place to grow food in the world.
South America, Africa, Asia and Eastern Europe, where land, labour and compliance costs are significantly lower than those in New Zealand, are going to kill us at that game.
KPMG says a common theme from its chats was that farmers know this and agreed New Zealand needed to adopt a universal focus on “efficient and sustainable production models which are resilient to market volatility and shocks”.
What we need to be in food is like Germany in the automotive industry, not Korea.
This will take investment and recent history there has not been all that great.
This focus on costs, understandable as it may be, is neglecting what Ross says is the more powerful part of doing business – “growing demand, growing sales and growing margin”.
New Zealand and Argentina are a lot like twins, not so much separated at birth but who grew apart.
For a long while both did their colonial parents proud, thriving in agricultural paradise at a time when world markets (umm that’d be Great Britain) had both the means and desire to enjoy their produce.
Then their paths split, Argentina heading down the fast route to more straightened economic circumstances; New Zealand taking the more winding route.
According to Nationmaster, New Zealand had the 29th highest gdp per capita in the world in 2006; Argentina the 83rd. Back in 1900, New Zealand was number 1, Argentina 12th.
BigCake has written before about the scary analogies for New Zealand of Argentina’s fall from economic grace.
He’s just found research by Andre Schlueter which looks in depth at why the two countries went their separate ways, though their paths often crossed .
In a paper submitted to Auckland University of Technology in partial fulfilment of the requirements for a Masters of Business, Schlueter looks at the arguments of the cultural heritage and institutional camps.
In the end he decides the answer is a bit of both.
First he looks at the similarities between the two countries. Both:
• Have peripheral positions on the world map
• Are land-abundant, but capital and labour scarce
• Are young settler nations with temperate climates
• Had spectacular export-led growth between 1870 and 1913 by shipping large quantities of frozen meat, wool and diary products mainly to the United Kingdom
• Received large-scale British investment until 1913
• Suffered when rising real incomes in OECD countries led to a significant decline in the share of food in overall consumption, resulting in falling export prices
• Implemented import substitution policies and import controls to fight the involuntary balance of trade deficits
• Experienced increases in foreign debt, inflation, current account and fiscal budget deficits within a decade after the oil crisis
• Opted for comprehensive policy reforms after 1983 to counter the crises
• Experienced flat or negative economic growth rates until the early 1990s
• Saw “staggering” development during the 1990s.
The big differences are around culture – Argentina’s ‘bad’ Spanish Model and New Zealand’s ‘good’ British one.
But Schlueter says both economies share more similarities than suggested by the institutional v cultural arguments. “New Zealand’s economic development after the reforms exhibits periods of slow growth, like they are characteristic of the Spanish model. On the other hand, Argentina may award itself a ‘New Zealand-ish’ or ‘British’ touch for its periods of high economic growth rates.”
Later this week I’ll post on what Schlueter thinks we should do about this.
A hell of a lot of our economy is in the hands of cooperatives.
For example:
• They comprise 22% of gdp
• Fonterra is twice the size (by revenue) of our next largest company and accounts for more than a quarter of our export earnings
• Overall co-ops have 95% of the dairy market
• Nearly a quarter of the revenue by our top 200 companies is earned by cooperatives
• Five of our top 15 companies are co-ops.
Internationally this is unusual; in the export sector the preponderance of co-ops is possibly unique.
The scary thing about this is the question: What if cooperatives are commercial under performers compared with say, the good ol’ limited liability company?
If the answer is yes, the cooperatives (and by association New Zealand Inc) would be running up hill compared with competitors, right?
BigCake’s Econ 101 background (even doing it twice) can’t help him with this one, so over the last year or so he’s accumulated the thoughts of better qualified people.
• Exhibit 1 – “The inability of cooperatives such as Fonterra to retain earnings [only $14 million against revenues of $20 billion] has proved to be a significant constraint on investment and expenditure on research and development.” (Treasury paper)
• Exhibit 2 – “The Fonterra model has under-delivered on the aspirations [expressed at the time of its creation] for innovation and globalisation.” (Another Treasury paper which was looking at Fonterra as a template for the meat industry ) [Nooooo!]
• Exhibit 3 – “…a cooperative organisational structure will almost certainly limit the ability for innovation in these sectors.” Paul McCann’s economic geography paper. McCann points out that labour productivity in NZ’s agriculture sector is only 16th in the world and below that of other rich nations.
• Exhibit 4 “You can’t point to any one of those [co-operative structures such as Fonterra's, and assets owned by central and local government] and say they’re not doing their job properly, but they are examples of a whole lot of structures that are not set up to profit-maximise.” Former All Black captain and former CEO of Fairfax Media David Kirk in the NZ Herald.
• Exhibit 5 – “…co-operatives, with redeemable shares, are producer orientated whereas companies with permanent capital are much more likely to be customer orientated.” Brian Gaynor in the NZ Herald.
A bit of a dump I know, but you get the picture.
Of course another question is: Are these co-op failings any worse than those of any other Kiwi companies?
Anyway, last year the Government got so hacked off with the mismatch between the initial promises made by Fonterra’s backers and its actual performance it called on the co-op to get its act together for the good of the country.
You can see that Fonterra is trying and this time may make some significant progress towards a more balanced ownership structure.
Other co-ops have figured out a way to get to where Fonterra I think ultimately needs to go. The meat co-op Silver Fern Farms is on the Unlisted share market and kiwifruit and avocado co-op Satara is on the NZAX.
