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December 2010 It seems that most years, the subject of ‘VOLATILITY’ and ‘RISK MANAGEMENT’ come up in the Christmas newsletter! We, as professionals and farmers, practice farm management. It is the art of integrating the management of risk, along with good use of our base resources into biological farming systems capable of generating a profit in an environmentally sustainable manner. In their simplest form, those resources are soil, water, fertiliser, plants, animals, and human resources. Every action we take has a reaction in some other part of the system. 2010 has once again reminded us of the power of nature, and how management of risk, whether it be climatic, market, or financial, is so critical to our wellbeing. Five things to be thankful for: 1 We have avoided the worst of the global economic crisis – while impacting on demand for our products the crisis impact on credit availability has been much less severe in New Zealand. It is fortunate timing that output is reduced at the same time as demand is reduced. 2 While our secondary finance options are severely damaged, our mainstream trading bank system has survived well. That position contrasts to countries like Ireland, where dependence on EU capital injections and very loose credit acted like a drug to the economy – giving the patient a ‘high’, but eventually forcing it on to severe withdrawal symptoms. 3 The quality of our structural engineers : I understand many overseas nations are envious of how well our buildings have withstood an earthquake of massive proportions. 4 Our temperate, maritime climate : despite us considering to be an unpredictable climate, the scale of variation pales into insignificance relative to continental climates. Our westerly trade winds generally blow, creating western rain and eastern river and subterranean flow for irrigation, environmental needs. renewable energy, recreational and 5 Our inclusive compassionate society, and ability to work with and for each other, as evidenced by disasters like the earthquake and Pike River, and in particular, the attributes shown by our young people in such circumstances. Five Challenges 1 Building our ‘farming’ brand! By that, I mean, what do people in town think of when they talk about farmers and farming? - guys in black singlets and redbands? - pigs in sow crates? - cows walking through streams? or - intelligent, degree educated young men and women applying their management skills to research based science? - naturally reared, contented animals producing safe food? or - aesthetically pleasing, safe rural environment to buffer our cities. - New Zealand is now the third most urbanised country in the world! We have to work hard at building our image and hence BRAND. 2 Building our understanding of how rural New Zealand can be multifunctional in output. - increasingly, we are seeing evidence of that in our water resources, where the need for irrigation water for food production can be integrated with renewable energy, recreation, biodiversity and other environmental outputs. - similar principles can apply in other parts of our rural economy, where renewable energy, recreation, diversity, and other uses can be integrated into our farming systems. 3 Making better use of our science resources to leverage productivity gains in food, fibre, and energy output. We are seeing early signs of such a change, promoted by the Government’s science adviser, Sir Peter Gluckman, the CRI taskforce, and backed by enhanced communication between our CRI’s and universities. 4 Ensuring our relative isolation stays a new positive economic influence through rigorous implementation of biosecurity standards. 2 Our so called, “clean, green safe” brand is at stake! Recent introductions such as the varroa mite in bees, PSA in kiwifruit, and clover root weevil, should not only underline the need for vigilance, but the potential impact of exotic disease in ruminant animals in a country whose agricultural system is based on such animals. 5 Leveraging our global trade influence in milk, lamb, venison, velvet, kiwifruit, Merino wool, apples, herbage and vegetable seed, where we supply a significant proportion of traded product. To do so, we need: - soundly based, international trade platforms. (We are fortunate New Zealand has such international influence and recognition in this area.) - a strategy for each industry to leverage its influence to extract returns for New Zealand farmers. Some of our industries listed above have more defined strategies than others! It is unclear to me, for example, whether the apple industry has one! - People and a structure capable of delivering the strategy. One type of structure does not fit all those examples, but harnessing top human capability is a common need. Looking Ahead: Five Implications and Opportunities 1 If New Zealand is a more pleasant, less climatically extreme place to live, with lower energy costs, clean, plentiful water and a safe rural environment, then it is natural to assume our population growth, mainly through immigration, will exceed global average growth rates. Our “share” of a 9 billion population in 2050 is roughly 6.25 million people. At a 2% increase, our population would approximate 10M in 2050. At 3%, it would be close to 15M. We currently produce enough food for in excess of 22M people, and are hence an export driven economy. Assuming a 2% growth in productivity (a big ask), we could feed 48M people, but roughly 1/3 of those would be in New Zealand, a position closer to other countries like Australia. 3 Such population dynamics have huge implications for how we sell our food, who to, our town-country relationships, our infrastructure and supply chains. 2 New Zealand competitive advantages: - production of protein. Our major proteins have been on a major price uptrend for 20 years, (see table 1.) Table 1 Major Protein Price Trends Nz Cents per Kg Venison 900 800 700 600 500 400 300 200 100 0 Dairy Lamb Wool Beef 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011e Year As the wealth of a nation increases, its protein consumption increases at a faster rate than carbohydrate. Hence we see milk protein rise in price first, followed by plant protein, followed by meat protein. I remain very confident of all those markets, but remind those who have lost confidence in meat, that we are at the front end of a global constriction in traded red meat. In other words, we might have to sell less for more! 3 A nursery for the world! Our position at 40o south, with a maritime climate, positions us perfectly for production of herbage and vegetable seeds. We already produce a major proportion of the worlds ryegrass, clover, carrot, radish, red beet seeds, with potential to grow. 4 Canterbury, with its ability to control soil moisture, ideal soils, infrastructure, and human capability, is ideally suited to the role. We have the opportunity to continue to collaborate with other nurseries such as Denmark and Oregon/Washington State. We are out of season for them, and have a different risk profile. 4 Fresh vegetables Technology gains around transport of fresh foods, and the large growth in south east Asia puts us firmly in a position to grow a greater proportion of fresh rather than processed food. Such crops will be integrated into our arable rotations, with possibilities even for integration into dairy farm systems! Most New Zealand land that has a controlled water application system and is near transport, could see that opportunity develop over the next 40 years. 5 Information technology and its application to precision agriculture and water As our knowledge of IT platforms (watch out for “Ruralzone”, the Gen –I initiative) and IT systems explodes, their application to the way we farm, integrate production, transport, process and market will also explode. Transparency of communication with regulators and consumers will also improve considerably. That transparency will make it hard to hide!, but much easier to shorten the value chain – something we should aspire to! The developing platforms and IT systems have particular application to management of water, the environment and efficient resource use. With such potential, we need smart young brains to apply it! 5 CONCLUSIONS: 1 The opportunities outweigh the threats! 2 The threats can be turned into potential opportunities for New Zealand. 3 Human capability is a critical component to application of the opportunities – hence quality of education and research is increasingly important. 4 No market trends travel in a straight line, but are buffeted by short term external factors. When making strategic decisions with intergenerational consequences, do your homework rigorously, think carefully, and do your best to think of the 35 year trends. I know of very few agricultural investments with high short term returns. 5 Some of those perceived big short term gains evaporate when the risk factor is profiled! 6 Those succeeding in all parts of the supply chain show similar characteristics - discipline in work ethic and decision making - ability to manage risk - ability to maintain positive cashflow - good communication skills - ability to see other perspectives - ability to mould a team around them The Basics Never Change! 6 Thank you for allowing us to be part of your families and your business’ in 2010. We look forward to being of assistance to you in 2011. Andy Macfarlane - Strategy, governance, water, farming systems & economics Jeremy Savage - Dairy farm systems and benchmarking Nicky Hyslop - Sheep, beef & deer, farming monitoring, irrigation governance Hugh Eaton - Valuer, supervision, sheep & beef, farming systems & monitoring Peter Bradley - Sheep, beef and deer farming systems & large scale farming operations Anton Nicholls - Mixed arable farm systems & agronomy Julian Gaffaney - Mixed arable benchmarking Mark Everest - Water engineering and waste management systems, sheep, beef & deer systems Christine Bellringer & Diane Lobb - Farm accounts administration Tricia Macfarlane, Kathryn Lilley, Barb MacGregor - Office and adviser support & dairy farm systems, systems, 7