Keith Woodford discusses why China must stay front of mind when considering agrifood developments

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The current plan for China’s 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 one such 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.


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His articles are archived at http://keithwoodford.wordpress.com. You can contact him directly here.

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