Archive for 'Thoughtpieces'

The Dairy Auction – On Its Last Legs?

Common Factors

Common Factors

The Business news on National Radio made mention of the latest global dairy trade auction. The newsworthy part for New Zealand was that the price achieved represented a 2.4% increase against the previous auction and was the first increase for a while. Given that Fonterra has been adjusting its projected farm gate payouts downwards with monotonous regularity in the last few months, the radio jocks were trying to turn this into a ‘good news’ story, come hell or high water.

Their interview partner was a Rabobank researcher who made two fascinating observations. Firstly, she felt that the volume traded was too low for anyone to misinterpret the price result into a general recovery of dairy prices. Secondly, she stated that the low volume was an indication that product was moving via other instruments as well, such as supply contracts and often to customised specification.

What a surprise! Doesn’t this sound familiar?

The same, of course, happens in the fresh produce industry, albeit that the public auction has been entirely replaced with wholesale trading floors. And similar to the produce industry, the dairy industry needs to ask itself this question:

What actually is the market price for goods?

As long as all supply meets the bundled demand in a particular place, competition for product at that time in that place will determine the price. But when product travels via various and separate channels to the consumer without congregating en masse somewhere during the journey, there will no longer be a price but lots of prices, all relevant to one particular transaction.

And if some of the product still congregates by way of auction, satisfying some demand, whilst the balance of product moves through contractual arrangements, then we need to give up the notion of being able to arrive at the price for milk powder and determine farmer payouts via that mechanism.

One of my colleagues in our office took the analysis a step further. Her view is that what the auction is really good for is to facilitate “small” volumes of whatever product reaching the next level in the supply chain. And if New Zealand is busy getting excited about percentage points at dairy auctions, it suggests that the rest of the world is moving past us, consolidating at a faster pace than us, eventually turning the country into a lifestyle block industry.

Let’s hope that the reality is not as pessimistic as her outlook  but given our reliance as a nation on the dairy trade, we ought to pay attention to what is going on here. And you never know, the fresh produce industry may well be able to learn a thing or two from the dairy industry.

On that note,
Merry Christmas & A Happy New Year

And thank you to all readers for the always constructive feedback and comments.

I Spy Something You Don’t See And It Starts With ‘C’

AFREA wordle from 7 cooperative principlesI have England on my mind.  I am all for the Europe concept but do we really need to have the Tour de France starting in the UK?  It’s a bit like Kent becoming a wine growing region. Well known paradigms are suddenly getting challenged. England gave us a lot of things and lots of them started with the letter ‘C’. Colonialism, Cricket and Coronation Street come to mind – and, of course, the Co-Operative model. Now there is something we can relate to in this industry of ours. Co-Operatives. Many of ours growers use MG Marketing, a Co-operative, to market their fruits and vegetables. Foodstuffs, the parent brand of Pak’n Save and New World supermarkets is also based on the Co-Operative Model.
Co-Operatives are not the norm these days and typically face stiff competition from their corporate counterparts. In this example that would be Turners & Growers and Freshmax in the produce industry,for example or Countdown in the case of the retail competition.
Well, here is a link to another one of those fascinating Guardian articles. It seems ye olde the Co-Operative model is under a fair bit of pressure in the UK and in need of saving, no less. And what are the champions of the co-operative model advocating? Back to the roots old chaps!  No point of trying to emulate those who are not you!  So, it would be worthwhile checking out this link, where one can find the Rochdale Principles of 1844, the mother, grandmother and greatgrandmother of co-operative movements around the world. And if the movement really needs saving, then lets put a bit of Kiwi flavour into it as well. No point of leaving it all to the Poms!

I Had A Farm In Africa

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A few years ago, I came across a stand at the US Produce Marketing Association  (PMA) Convention which had me intrigued. “Land for Sale”, it said. “In Africa”, it said. I stopped and started to ask questions. The upshot of the conversation was that I was hearing for the first time about the Chinese ambitions relating to food security.

This week I came across two articles from different parts of the world which were touching upon the very topic. The first one, from the Bloomberg scribes, specifically discussed the Chinese strategy of acquiring land all over the globe and shipping the harvest or yield back to China. The most poignant statement in the article, “China has 21% of the world’s population, but just 9% of the arable land.” Clearly a call for action.

The second article, written by Professor Richard Archer from Massey University here in New Zealand is entitled ‘Predicting the food of the future’. It identifies population growth as the “biggest single driver” which will force humanity to change its attitude and processes related to food production – and not just in China. Archer’s focus is clearly on the opportunities this situation will create for the New Zealand food export industry, predicting that more food will be sold processed in future, albeit that “processing will be gentler with fewer ingredients” and that “more plant protein will be used to stimulate the meats we love but with meat used to round out nutrition and provide flavour.”

And last week, the New Zealand Parliament finally passed the proposed Food Bill, which aims to provide a regulatory Food Safety related framework for the wider industry.

Should we have food on our minds then? Sure should.

For me, the issue is greater than food though. Economics come into it big way. I have the Fresh Facts brochure for 2013 on my desk, where the New Zealand horticultural industry annually publishes its vital statistics. In his introduction, Plant & Food Research CEO Peter Landon-Lane writes, “The horticulture industry continues to play a vital role in New Zealand’s economic growth. Total horticultural produce value is now appr. $6.7 billion and horticultural exports account now for 8% of total merchandise exports.”

Landon-Lane goes on to say, “Asia is a key player in this growing market, taking 32% of exports…”

I paused to think about what I had read at this stage. And as is so often the case with me, I then came up with some questions rather than answers. Questions like:

  1. If China, or India for that matter,  go around buying agricultural production capacity all over the world to feed their people, who will feed the people in the countries whose land those two nations  are growing their food in?
  2. Whose economic growth is it if China buys dairy farms here, uses Chinese owned dairy factories to turn the milk into milk powder and ships the finished product to Chinese retailers?
  3. Can we actually believe GDP data and the like produced by the Reserve Bank and others because ‘our’ economic output is no longer purely ‘ours’?
  4. What is the future meaning of ‘our’?

Please do not get me wrong. This is not about China. New Zealand is a nation dependent upon migration of both people and investment.  I am an immigrant myself  and Chinese people and Chinese money are, from my perspective, very welcome here.

But if the ‘new normal’ is that people rich, land poor and liquid countries wander off and buy production in other sovereign nations at the rate China currently does, we will surely have to revisit how we measure our economic performance as a country. The sales dollars generated through the product being ‘pulled’ from our lands by specific markets through a wholly owned supply chain that operates parallel to our national and natural efforts to export similar products can no longer be considered to be the ‘fruits of our labour’.  Rather, they are the fruits of someone else’s labour, using New Zealand land as a platform for success.

And no – I do not want to get involved in land ownership rights or disputes either. It seems to me though that in our age of globalisation, digitalisation and sustainability, where just about everything and everyone is open to challenge, we may need to consider how we measure economic success, progress and prosperity in future, as the days when there was a simple solution for every issue seem to be long gone.

A whole new challenge for supply and value chain management and comprehension  as we know it. Time to re-jig how we measure things and one more reason not to believe every data set produced by Treasury me thinks.

There Are Two Sides To Every Story

Similar but not identical produce crates from a bygone era

Similar but not identical produce crates from a bygone era

Australia and New Zealand share a lot of common history, have strong bonds as ‘brothers in adversity’, are closely cooperating members of the Commonwealth, often take a joint approach when it comes to tackling injustices in their common neighbourhood, such as the support for Timor Leste and getting the Japanese to stop whaling under scientific pretences in the Southern Ocean.

Then there are the sporting rivalries. Cricket, rugby, rugby league, netball, basket ball – the sport where our Australian cousins don’t claim to be superior beings has yet to be invented. Phar Lap, Pavlova as well as Russell Crowe, by the way, do have their origin in New Zealand, not across the ditch.

In the greater scheme of things though, we do get on. The similarities are obvious in many areas of society and in the economy. This includes horticulture and the produce industries of our respective countries.

United Fresh, the pan industry body of the New Zealand horticulture and produce industries, was very supportive when the Australian produce sector decided to re-establish an industry association under the PMA banner and suggested it became known as PMA Australia and New Zealand. That was because we recognised the similarities and trade connections that existed between our respective produce industries.

However, the terms ‘similar’ and ‘identical’ are not synonymous. Differences do exist and as a result of those inherent differences, industry structures present differently as well. I was therefore surprised to note the tone of an article about the Australian and New Zealand produce industries and their structures in the Autumn 2014 edition of Produce Plus Magazine. The article, entitled “Collaboration or Competition”, included this sentence:

“But there appear to be many opportunities for collaboration that are not being pursued, either for a lack of will or because existing competitive positions amongst stakeholders are too deeply entrenched.”

This statement is in my view either outright mischievous or an indication of a lack of knowledge about how different the two industries are – despite all the obvious similarities.

Here then are some key differences which will continue to play their role in ensuring that the Australian and New Zealand produce industries will never be collaborating to the extent that national identities are lost.

  1. Australia is a tropical fruit producer; New Zealand’s climate does not cater for these crops.
  2. Australia is self sufficient as a banana producer and bans banana imports to protect its local industry. New Zealand imports all its bananas, predominantly from the Philippines and Ecuador.
  3. New Zealand’s fresh produce industry is export focused, with the Zespri and Enza brands standing out as prime examples of what the New Zealand industry can achieve in global markets. Australia has an interstate focus, with exports coming a distant second.
  4. Australia’s capital cities operate municipal produce wholesale markets. No such markets exist in New Zealand cities. Here, commercial companies operate wholesale trading floors where retailers who do not receive direct supplies from growers can purchase their produce.
  5. New Zealand’s geography and topography differ to that of Australia. We might drive produce overnight from Auckland to Wellington. In Australia, produce is trucked by road train from Brisbane to Cairns, a journey that takes several days.
  6. New Zealand ranks joint first (with Denmark) in the global Corruption Perceptions Index 2013 of the world’s least corrupt nations. Australia ranks joint ninth (with Canada).
  7. New Zealand looks at Australian produce from the perspective that if it makes commercial sense to import the produce, then we will need to find a way to make it happen. Australia’s position is that New Zealand produce belongs anywhere but Australia.
  8. New Zealand has had very stable and effective grower and produce industry associations in Horticulture New Zealand and its predecessors, its affiliated product groups and United Fresh. PMA Australia (without the New Zealand bit) is the latest attempt to get an effective and sustainable produce industry organisation up and running in Australia.
  9. Australia’s federal political structure provides the Australian horticulture industry with plenty of challenges which we, on this side of the Tasman, are not experiencing. One central government and a multitude of local government agencies keep us on our toes enough as it is. This makes us very nimble, lean and ensures our effectiveness as in industry – something we are not keen to compromise.

Collaboration is a two way highway, not a one way street or cul de sac. I am sure that there is always more room for collaboration – just as we will never be able to collaborate on all facets of our respective produce industries.

One area the Australian and New Zealand produce industries have been collaborating on is this year’s industry conference, PMA Australia and New Zealand Fresh Connections. The event is co-hosted this year by PMA, Horticulture New Zealand, The Australian Chamber and United Fresh. An example for a plausible and achievable bit of collaboration, is it not?

Disclosure Note

The writer is a member of the United Fresh Executive Committee and a Trustee of the 5+ A Day Charitable Trust.  The opinions expressed here are his personal ones.

A Few Comments On The Latest Round Of Progressive Bashing

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It must be election year. And – the Aussie/Kiwi relationship has had some bad press in recent weeks in relation to New Zealanders living in Australia not being able to access certain state services. Then we allegedly had Coles and Woolworths discriminating against non-Australian FMCG products as part of their “Buy Australia” campaigns.

A good time then for Labour’s Shane Jones to kick off a debate on supermarket business practices – particularly that supermarket chain that happens to be owned by one of those Australian behemoths.  And which incidentally, used to be owned by the other one of those two in the late eighties and early nineties. In the interval between Coles selling Progressive and Woolworths buying it, a third Australian group, FAL,  owned Progressive. As a nation, we are therefore used to having about 50% of our grocery retail capacity owned by the cuzzy bros from across the ditch. That lengthy period of general acquaintance and the fact that I spent some ten years working for Progressive leads me to adding my tuppence worth to the discussion in progress.

So here are a few facts from my perspective:

  1. Supermarkets are a social phenomenon. Once mankind decided to congregate in towns and cities, we stopped hunting and gathering in the forests and on the prairies, shifting our attention to merchants, markets, stores, supermarkets and now, the worldwide web.
  2. Like it or not, supermarkets have for decades been the gatekeeper to the consumer for anyone who is commercially marketing food products beyond a minimum volume level.
  3. Supermarket operators are not stupid. Of course they are interested in increasing market share, income and profits. In that they do not differ from any other business.
  4. Supermarket net margins are slim in percentage terms. It costs a lot of money to acquire land, build stores and maintain them.
  5. Demand outstrips supply in terms of shelf space availability in-store and new products  promoted by manufacturers are competing vigorously  for that shelf space.
  6. It therefore makes perfect business sense for supermarkets to sit their prospective and current suppliers down to ask them three questions;
    • How are you going to support your products through consumer marketing campaigns, so that we gain some comfort in justifying the shelf space we are about to make available to you?
    • What is your specific marketing strategy in relation to selling your product through our stores network?
    • What trading terms do you offer us?
  7. Yes, we no longer seem to have this neat separation between manufacturer and retailer with each focusing on their core competency and letting the other one getting on with his business without interference…but hey, we also have machines in our offices that combine in one device functions previously carried out by four separate devices, i.e.; photocopier, scanner, fax and email programme. In other words, business evolves. It is not static. Things change. The traditional supermarket business model is being challenged from all directions. In the US,  Amazon is becoming a fresh food fulfillment centre… Here in New Zealand, Nappies Direct turned itself into Supermarket Online
  8. Supermarkets and their operators typically know they are under  the constant spotlight in terms of compliance with the regulators whilst consumers are scarce with their praise and brutal with their criticism. And politicians are prone to comment prematurely on anything without having all the facts…
  9. Let’s not muddle up all the issues involved here as that only skews matters further. Each of the following has its own dynamics:
    • supplier negotiations between buyers and sellers. Market forces will prevail and in a market economy there is no room for political interference.
    • marketing strategies built around “Buy Australia/New Zealand/Upper Volta” campaigns. Every country has these. They are economically flawed, don’t fit into today’s WTO based thinking, are ultimately not sustainable but have good resonance with consumers.
    • supermarket private label or own brand philosophies which are a reflection of the fact that the skill sets bundled within the global supermarket operators are such these days that these companies have an obligation to their shareholders to optimise their revenue opportunities beyond the traditional grocery model.
  10. We could, of course, nationalize the entire food supply chain and subsidize food prices for the entire population.  If that approach had been a workable proposition, the Soviet Union would still be alive and well today.

My closing comment is this:

Dave Chambers, the Managing Director of Progressive/Countdown, is an ethical operator. He learned the grocery trade from the bottom up, having gone through the old Foodtown Management Trainee programme. I first came across him when he was store manager of Foodtown Kelston in West Auckland in the early nineties. He was a smart cookie then, a very personable guy and a rational thinker –  and he retained and built upon all these qualities.  With all due respect, the same qualities did not apply to many of his then store manager colleagues – which explains how Dave managed to rise to the top of the pile. Dave stayed his entire career in the store operations area – in other words he was never a buyer or category manager negotiating with suppliers but always focused on serving the customer.  Yes, he reports to Australia, but Dave Chambers comes with a high level of personal integrity and a reputation he has built over decades. So when Dave  says that the recently made allegations about retrospective supplier payments are incorrect, I am inclined to accept this.