The growth of farm output may be slowing. Specialty cheeses show an alternative strategy of further post-farmgate processing.

Land for farming ran out in the 1950s. Farm production intensified. We shifted from more dollars of farm output by using more land to getting more dollars per unit of land. Among the challenges we had was to replace the nutrients we were depleting from the soil – notably phosphates. Fortunately the world’s reserves of cheap phosphates have not yet all gone.

Less fortunately, our water resources seem to have run out. Fresh water is limited and wastewater disposal is polluting our rivers and lakes. (Urban use is compounding the problem.) Perhaps we should replace the opening sentence with ‘water for farming ran out in the 2010s’. Unlike land and fertilisers, though, and despite the RMA’s system of resource consents, the water resource is not subject to a commercial property rights regime, so it is harder to follow exactly what is happening. Probably we are reaching the limits of total farm production although there may be some tweaking from using more water-conserving technologies and crops.

That bodes ill for the future of the New Zealand economy. Admittedly, farm production is no longer the dominant foreign-exchange earner it was in the 1960s when it supplied 95 percent of our external funds that were not borrowed. Today the ratio is less than half but it is not obvious that our other export industries can carry the deficit that a broadly stagnant farm sector would generate.

(Once upon a time we would make careful projections of our export potentials. Today we are much more casual; we borrow to make up any deficit – but that is not sustainable.)

So a challenge has to be how to earn more dollars per unit of farm land when farm output stagnates.

(One approach is to get better prices for our farm export products by reducing trade barriers. That is a major concern in our trade negotiation strategy but, except in farm newspapers, I see little reference to the gains. So, for instance, the public debate over the TPP focused on the downsides – the concessions we made – but rarely referred to the wins from better trade access for our primary products.)

One way of increasing dollars per unit of farm output is by value adding after the farm gate. Yes, we do further processing but often it is the minimum necessary to be able to export the stuff. Let me give an example with cheeses.

Historically we have exported cheddar cheese. In the early days of refrigeration we found that cheddar best survived the long sea voyages. In key markets today New Zealand cheddar has a reputation for good quality at reasonable prices. I’ll come back to the issue of market access shortly. However cheddar is an example of minimum necessary processing.

Apparently we make some world-class specialty cheeses, and export a little of them. (I am concerned here with table cheeses similar to blue, brie, camembert, feta, gouda and the like; there are also local specialty cheeses such as Kahurangi. We also export specialist cheeses for industrial processing such as mozzarella for pizzas.) They involve more post-farm-gate processing. So why do we not do it more?

In contrast we have over the last sixty years switched our wine industry from producing plonk – they had the temerity to call it ‘sherry’ – to export wines with international reputations (despite some rather unfair tariffs against them). Why not the same for specialty cheeses?

Regrettably cheese is heavily discriminated against at many countries’ borders. (Often the definition of allowable cheese imports is very prescriptive, which limits opportunities for alternatives.) When we finally persuade another country to allow us to sell them more cheese (typically by increasing the tariff-free quota) we prioritise exporting cheddar. That is perhaps understandable if farm output is unlimited, but what happens in the new era we seem to be entering?

If the wine parallel is relevant we have to be able to export the specialty cheeses into highly discriminating markets such as France. Their connoisseurs then begin to admire our cheeses, as they did our sauvignon blancs; French tourists would taste it here and buy it back home. (It would help if our restaurants charged more reasonable prices for their cheese boards.) The international reputation would flow on to other markets and, for instance, we would have increased demand and prices in China, where we already sell a little specialty cheese. (It would also help if restaurants and the like identified the sources of their cheeses; imagine serving wine without mentioning the vintner.)

Of course it is more complex than that – trade deals always are -- and it requires a lot of private initiative too. But the essential principle that we increase value adding of our exports of cheese is not. And the principle applies to other primary products, although each may differ in detail.

Otherwise with the water running out (or becoming insufferably polluted) farm production will stagnate and we will have greater difficulties generating sustainable foreign exchange. Borrowing is only a short-term measure – be it borrowing offshore or depleting the water resource.

PS. The EU and Japan have just announced a Free Trade Agreement (JEEPA), although the details are unclear. It is a strategic agreement intended to offer an alternative to Trump’s short-sightedness on trade. As well as the first mention of the Paris climate accord in an FTA, the deal includes Japan making major concessions on barriers to cheese, wine and other  agricultural products. Bother, we have been trying for a deal with Japan too (and with the EU). The TPP11 will give us better access.

Comments (8)

by James Green on July 17, 2017
James Green

I think there is still a lot of room to improve farm productivity.

Organic farmers operate under a stringent set of rules in order to get certified. This has led many of them to develop creative solutions in order to keep their farm or ochard operating. Some of these solutions could make regular farms more efficient if they are scaled up and regularised.

As you say though the most obvious improvement is to introduce more steps in the supply chain from the raw material to the exported product. The more steps in the supply chain that are in NZ the more jobs and wages that are here too.

by Charlie on July 17, 2017
Charlie

Because water is 'free' to farmers it is squandered. Given the economic drivers to conserve water we could produce a heck of a lot more with less water.

On the pollution side of the balance sheet, we've barely started. There isn't much hard data (because we don't have sufficient fixed and continuous monitoring points) but it is expected that human pollution accounts for about half of river pollution. We have 30 years of catchup to make as regards wastewater treatment; some townships don't even have a treatment plant!  Similarly for farm related pollution, there is a also a lot more we can and are doing but it's going to take a decade to fully implement.

 

 

by Chris Morris on July 17, 2017
Chris Morris

Charlie

Water isn't free to farmers. if it has to be pumped, the electricity costs are massive. If it is delivered from  a  storage dam, they charge by the cubic metre.  They might not be charge a royalty but there is a real cost  involved. To change practices, the price of the output has to go up. Are consumers prepared to pay more for  their meat and dairy products? I think not. Considering the politicians who rail against the price of milk are also those who want the rivers cleaned up, there is a bit of two faced behaviour there.

"but it is expected that human pollution accounts for about half of river pollution" sounds like a supposition, not something with evidence.  Pollution is a very subjective thing. Does one septic tank outflow into Lake Taupo constitute polluted water, or does it take one thousand? I don't disagree that a lot of farmers and towns need to do a lot better, but there needs to be a sensible water quality standard involved, not just some emotive notion.

by James Green on July 18, 2017
James Green

Water rights are limited in dry areas are they not? I don't have a problem with that method but I don't think farmers, etc should be allowed to sub-rent that water out. That's rent-seeking behavour which is not very good economics.

by Brian Easton on July 21, 2017
Brian Easton

Supose, Chris, that we treated farm land the same as you want to treat water. Farmers would still not be 'free' in your sense for there would be other costs (as there is for water). Would farming be as effective as it is today, with these less less well specified property rights? In fact full property rights are slowly being extended on ater. 

by Chris Morris on July 22, 2017
Chris Morris

Brian

I haven't stated how I want to treat water. I was just pointing out that there was  Charlie's comment that water was free was not correct. And that there were consequences to instituting royalty charges.

NZ farming could be a lot more "efficient" and use less water as well as giving more protection to the environment if we adopted the US and EU practices of  having the animals permanently in barns or feedlots. Then all the paddocks could be turned into grass or feed factories. Of course family farms would go to be replaced by large industrial complexes running the enterprises.

Is this what the country wants?

by Brian Easton on July 22, 2017
Brian Easton

Chtis. I was just gently pointing out all resources involved further costs of management, whether there is a resurce rental 9or ownership). I think the latter was Charlie's point. 

by Chris Morris on July 22, 2017
Chris Morris

Brian - I don't think that was Charlie's point, but I will accept your interpretation. However, it doesn't change what I wrote. A royalty charge would increase costs with probably no economic or environmental benefit. As the third world shows, the environment suffers if there isn't wealth in the community and the dairy farms have brought a lot of wealth together with environmental damage.  When I grew up in that area, Darfield was a very poor town. I don't know about farmers'  regional council costs, but most big industrial water users have to pay  a lot for consents, both in getting them and ongoing monitoring

Royalty charging for water would cause a lot of problems - a lot more than they would solve. A simple example is hydro power stations, especially where they take water from one catchment to put in another.

 Canterbury plains water is over-committed - that is admitted by almost everyone. There are two promising solutions to increasing the water supply as opposed to cutting the demand. One is having storage lakes that take water from the big three rivers while they are in flood (which is often during dry spells). the other is upper catchment gravels recharge. Both of these would both improve water quality and low flows. But those schemes are opposed by those who want the cleanup. It seems they aren't environmentalists, just anti-dairy.  It is issues like that which made ECan disfunctional.

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