radical is the new normal

Radical is the new normal

Rod Oram’s presentation to theIrrigation New Zealand Conference

Napier, April 8th, 2014

Securing the future

Kiwiki on Facebook / Twitter @RodOramNZ

Rod.Oram@NZ2050.com / +64 21 444 839

Agenda

• New Zealand• Dairy

• Paradox• Revolution

The world• …is doing OK, broadly speaking

• Some economic traumas…...and big changes…still to come

• But most economies are showing more stability and momentum• Europe first signs of recovery• Australia slogging• US strengthening• Asia succeeding

• …enough for us to earn a living

Our growth• …is gaining momentum

• Largely driven by Christchurch, whole milk powder, housing market, consumption• Export volumes growing only slowly…as is business investment

• Reserve Bank forecasts• Growth in year to March: 3.0% in 2014 3.5% in 2015 2.4% in 2016 2.3% in 2017

Our economy is constrained• The economy is constrained by e.g.

• Skills and capital shortages• Weak business investment• Limited government investment

• As a result “potential GDP” (the rate at which the economy can grow without causing inflation)is low

Government Strategy Mk III• “Business Growth

Agenda”• 6 ingredients of

business growth

• All driven by incremental change• Doing a bit more,

a bit better

• Some big goals• E.g. lift exports

from 30% of GDP to 40%

• Failure guaranteedif the game is more of the same

NZ’s exports remain far too small a contributor to the economy….…and have stagnated at 30% of GDP…government goal of 40% by 2025

Our exports• 2013, in value terms

• Exports to China: +45%• Exports to world: + 4.4%

• Dairy exports: +17%• All exports: + 4.4%

• Volume of dairy exports grows slowly

Agenda

• New Zealand• Dairy

• Paradox• Revolution

Opportunity• Growing world demand for dairy products• NZ response

• At home…more cows, more intensity – national herd doubled in 20 years• Overseas…some milk buying, & investment in farming

Rabobank…on NZ competitiveness• t

Holding our own

Our impressive rise in volume• But some

overseas producers growing fast

• E.g. Ireland:

• 50% more milk by 2020• +5bn litres

• 100% by 2025• +10bn litres

Our impressive rise in costs

Diagnosis - Value Creation• World Economic Forum – Global Competitiveness Report

• Competitive advantage measured on a scale of:• 1 = low cost of natural resources to 7 = unique products & processes

New Zealand scores 3.8Ranks 36th

Diagnosis - Value Capture• Value chain measured on a scale of:• 1 = role in chain mainly confined to one step, eg resource extraction• …to 7 = involved all the way down the chain, capturing extra value

New Zealand scores 3.8Ranks 58th

Value – creation and capture• $25.3bn – Shipped value of our food & beverage exports (fob)

• $140bn - $200bn – Consumer value of food & beverage products primarily of NZ origin; source – Coriolis Research

• 1 Fonterra plant in NZ makes infant formula for Pfizer

• 8% Pfizer’s Chinese market share for infant formula

• US$12bn Nestlé paid for Pfizer’s infant formula brands

• = 3 x Fonterra’s net asset value

NZ investment in value add…in NZ• Fonterra’s UHT plant at Waitoa

Chinese investment in value add…in NZ• Mengniu’s infant formula plant at Pokeno

Is US$3,500 still the long-run price?

Agenda

• New Zealand• Dairy

• Paradox• Revolution

Paradox

Abundance Scarcity

Poverty

Cows Scientists

Poverty

Tourists Engagement

Poverty

Sustainability

Weak Strong

Re-invention

Scarcity Abundance

Wealth

Lacto-pharmaceuticals Milk powder

Wealth

Travellers Tourists

Wealth

Sustainability

Strong Weak

Agenda

• New Zealand• Dairy

• Paradox• Revolution

Comvita – a 10-year transformation

Comvita’s value chain• Building it by…

• Floating on NZX to raise funds• Buying back distribution• Investing in retail• Investing in science• Investing upstream in bees

• Virtuous cycle…• …each step generated new cash flow to

take the next

Comvita: High science, high value• 250gm of honey

• Clover honey…………………………….. 1

• Comvita wound care……………………. 25x

• Comvita wound dressing………………. 55x

2010 EBITDA 2010 total environment cost as a % of EBITDA Source: Trucost 2012, KPMG

22

153

84 100

223

89 97

26

134

670

482

0

100

200

300

400

Airlines Automobiles Beverages Chemicals Electricity Food Producers

Industrial Metals

Marine Transportation

Mining Oil & Gas Producers

Telecom & Internet

US

$ in

bill

ions

800

700

600

500

52%22% 42% 43%

87% 224%

71%

59%

64%23%

2.5%

Full environmental cost of food production US$199bn

Opportunity:

• Reducing farming's environmental impacts will:• Improve nutrient and resource efficiency• Increase value, resilience and sustainability

NZ Agricultural Greenhouse Gas Research Centre• Global Research Alliance on Agricultural Greenhouse Gases• Proposed by NZ government at Copenhagen in 2009…to:

• Reduce emissions; increase food production• Help developing countries to join global climate change frameworks

• Alliance now has 36 countries + 3 observers including the EU• = 70% of global agricultural GHGs; agriculture = 15% of total GHGs

• Three main workgroups:• Livestock, led by NZ and Netherlands, 483 projects identified to-date• Croplands, led by US, 429 projects to-date• Paddy Rice, led by Japan, 60 projects to-date• Secretariat: NZ

• NZ Agricultural Greenhouse Gas Research Centre: $48.5m over 10 years• Four main workstreams: Mitigate methane; mitigate nitrous oxide;

increase soil carbon; deliver farming solutions

Our opportunity• 1 litre of milk = 940 gm of CO2 equivalent

20,000,000,000 litres = 18,800,000,000 kg of CO2 eq

• 18.8m tonnes of CO2 eq per year is not a waste product, a liability

Closing the nutrient cycle…is a brilliant business opportunity…

healthier cows and soil…= more food

Ruataniwha - a major initiative• Challenging…and on some issues pioneering

• Scale• Nutrient control• User price structure• Infrastructure proposition• Ownership structure• Government funding

Ruataniwha - a personal view, pre-draft decision• Storing water ✔ But climate change accelerating

• Environmental flows ✔ But flushing is a fix not a cure

• Farming upside ✔ But perpetuates commodities

• Nutrient management ? Controversial, unproven approach

• Ecological integrity ? Offsets aren’t integrity

• Economic viability ? Water price, contract are a big ask

• Corporate structure X Ownership complexity, conflicts

• Government funding X Debt; must be long-term equity

• Economic development X Doesn’t lift region up value chain

• Public trust X Case not yet compelling

a• a

How about creatingthe NZ-China Global Centre for Dairy Nutrigenomics

“You’ll have no future…

…if you don’t make onefor yourself”

…Johnny Rotten: