James Allen
Agriculture New Zealand

The Future For Rural New Zealand

Plagiarism can be regarded as the ultimate form of compliment, so I make no apologies about modifying the format of your conference with some knowledge based number eight wire to structure my presentation. To outline my views on the rural sector I will:

Firstly - Look In - a brief overview of the current situation of agriculture;

Secondly - Look Out- Look at some of the main external factors which are affecting the rural sector; and

Thirdly - Look Forward - where to now for agriculture, and some of the likely implications for the public sector.

Looking In

Broadly speaking, the rural sector is not in great shape, and has not been so for many years. Some of the causes of this situation have been our own doing, while other factors have been outside our immediate control. Initially, to set the scene, I want to outline some of the trends in agriculture.

1. Real Returns On Commodity Products.
   Over the long term, agricultural commodity prices have been declining by approximately 2% per annum. This graph shows the historical real returns for lamb, beef and dairy products, all on a steady decline.

   
   Figure 1: Real Price Trends - Source: MAF

   This commodity price slide has contributed to a corresponding drop in profitability. For example the rate of return on capital for a typical South Auckland sheep and beef property has declined from 3.7% in 1989 to less than 1% in 1998. The average rate of return on capital over these ten years has been just 1.4%

   
   Figure 2: Rate of Return on Capital - North/South Auckland Sheep and Beef - Source: MWBES

   Prospects for the main primary products in the medium term are at best average. Although the average price per head for lamb is predicted to increase from $39 in 1997/1998 to almost $46 by 2002, wool is predicted to decline by 7% in the same period. Farmers need to think again if they are counting on a rise in commodity prices to lift their profitability.

2. Larger Farms
   

   To compensate for this decline in commodity prices, farmers have had to work harder and smarter. Farm size and productivity have both increased across all types of farm in recent years. The average dairy farm has increased in size from 116 cows in 1977 to 208 cows in 1997. In most cases this has not resulted in an increase in labour usage, and it is now commonplace for single person or a family unit to milk up to 250 cows on their own.

   
   Figure 3: Effective Hectares/Total Milksolids - Source: LIC

3. Aging Farming Population
   This increase in farm size has resulted in an increasing investment in land by the farm owner. The flow on effect is that it is becoming much harder to realise the dream of farm ownership. Thirty years ago the average age of a dairy farm sharemilker in the Waikato was 28, compared to an average age of 33 in 1996. A small survey conducted in 1996 showed the average age of dairy farm owners to be 58, theoretically only seven years away from retirement.

   If it becomes impossible to realise the dream of farm ownership, we lose good people from the industry. It is a proven fact that the younger generation of farmer is more innovative, progressive and productive than the older farmer. Like any industry, agriculture needs to encourage a younger generation of workers, managers and leaders for the industry to progress.

4. Off farm work
   The ongoing squeeze on farm profitability has led to a rise in the number of farming operations who now include off farm revenue as part of their basic income. A MAF survey for the 1992/93 year revealed over fifty percent of all farming families now have some form of off farm income. In many years this is the only thing which keeps these farms afloat. This also puts considerable stress on relationships, as both parties are working long hours, and having to cope with continual financial pressure.

Looking Out

Looking out, I wish to highlight some of the main factors which will influence agriculture and the rural sector in the years to come, some of which will have direct impacts on the public sector.

1. GMO - Genetically Modified Organisms
   To me there is largely an issue of the head versus the heart, with much of the problem arising from the fact that the head, i.e. the science behind it all, is moving ahead much faster than emotions from the heart will allow. On the one hand, we must let our international customers dictate how fast we progress with the commercial use of biotechnology, but on the other hand we must not be left behind in the development of such technology, for once the world is ready to accept it the gains will be immeasurable.

2. Multinational Supermarket Chains
   Marks & Spencer, Tescos, Sainsbury and Walmart. Each of these companies have higher turnovers than New Zealand's total GDP. These companies expect the highest quality produce with the best quality assurance track record at the lowest possible cost. The point is these companies have immense power, and will do their utmost to ensure their returns are maximised by minimising the cost of the goods they procure, once again putting pressure on our export returns.

3. Quality Assurance Requirements
   As I have just mentioned, these multinational companies have immense power. But at the end of the day they are ruled by their customers. And at the moment, especially since the recent BSE scare, their customers want evidence of quality assurance programs right throughout the processing chain. It is apparent that this will quickly become an additional cost of processing, although not necessarily delivering greater returns. The farmers will wear the cost of these requirements.

4. Environmental Sustainability
   The pressure exerted from internal and overseas organisations to lift the level of sustainable management is only going to increase. Unfortunately such organisations often do not have much consideration for the financial sustainability of the farmer, which leads to conflicts of interest. However these issues are not going to go away and must be settled in a rational manner.

5. A Level Playing Field
   Farmers were initially expecting great benefits to occur from the Uruguay round of GATT talks. Unfortunately it has become all too apparent, especially in recent months, that any benefits will be slow in coming, and often at a cost. The reality is that New Zealand does not have much clout internationally, and any reduction in tariffs or other restrictions should be regarded as a bonus rather than an expectation.

Looking Forward

The final task is to look forward - where to now for agriculture, and some of the likely implications for the public sector./P>

1. Larger Farms
   The average New Zealand farm, whether dairy or drystock, will continue to increase in size, as farmers try to retain viability for their family unit. Less fulltime labour will be used, and the use of casual labour or contractors for busy periods will increase. This may contribute to a decline in the rural population, and an increase in the use of transient workers from local towns and cities.

2. Rural Population
   As the use of technology continues to increase, and farmers switch to using contractors and casual labour, I believe it is highly likely that the rural population will continue to decline in number. The decline in provision of public services such as hospitals and schools in the rural sector also contributes to this decline.

   In the more desirable areas, where there is high demand for lifestyle living, concepts such as the knowledge economy could actually benefit the community. If the advances in communication technology really transform our lives as we are led to believe it will, there will be less need to live in the main centers, as work can be done from the home in the rural areas.

3. Technology
   Farmers are becoming avid users of technology. This is illustrated by a recent survey conducted by Lincoln University which showed that 43 percent of all farmers now own a computer compared to only 24% in 1993. I can see the potential of the internet to in some way compensate for the continual and inevitable decline in services to the rural communities. Critics scorned the doctor who is now offering advice over the internet, but this may a feasible solution for patients in isolated areas. If I was involved in the public sector I would be looking at all possible ways to use this technology to reduce the impacts of isolation.

4. The Knowledge Report
   I believe the findings of the knowledge report are equally applicable to agriculture. It is true that agriculture and horticulture alone will not be able to meet the growth needed for our future wellbeing. However these sectors can still have a vitally important part to play. To encourage growth we need to:
   • Encourage and assist research and development in rural sectors, in order to create a higher proportion of added value and high technology exports
   • Encourage and promote graduates into agriculture and horticulture, to stimulate this growth, innovation and development
   • Ensure our youth have every opportunity to become IT literate, as this will be just as important in the rural sectors as the urban.

5. Off farm work to Increase
   I believe off farm income will continue to increase in importance in maintaining the farming family. This in itself is not necessarily a bad thing, as it creates a diversification of income which is often not present in a farming enterprise. However, due to the high time cost, it does add considerable stress to relationships, which can lead to a breakdown in family structure. I am not sure that this is very different to those in urban situations, but it is necessary to recognise and cater for such issues.

6. Sustainable management
   When times are tough sustainable management of the environment can become a discretionary activity. I believe the majority of farmers are very worthy custodians of their land, but sustaining their family is priority number one, and until that is satisfied environmental sustainability will not receive utmost attention.

   With regard to the public sector, I believe it essential we all do what we can to minimise the cost of compliance. Last year I had a farmer client who spent twenty thousand to put a concrete bridge across a small stream, and seven thousand dollars on compliance costs. This should not be happening.

Conclusion

I have painted a somewhat somber picture for the future of agriculture and the rural community. But it should not come as a surprise as the writing has been on the wall for a number of years. However this does not mean it is time to hang up the gumboots. It is a time to work harder and think smarter. Being average is not good enough, and hasn't been for many decades.

Provided the issues of concern are addressed, and we embrace the enormous potential of new technology, there can be a bright future. Our base products are great, we have a worldwide reputation for being clean and green, and kiwis have the endurance and tenacity to pull through the tough times. I am committed to the rural sector because I know it has a future I would like to be a part of.