Business won’t be ‘as usual’ after Covid-19-related restrictions are lifted, Phil Edmonds reports.
As is the case for all New Zealand’s export sectors, what might constitute a new normal in a post-Covid-19 world is now top of mind for agriculture industry participants. One thing so far seems fundamentally clear – NZ food producers will have to work harder than most to get goods across borders as the world turns inward and focuses on national resilience.
How we overcome this will be subject to some debate, but the commitment to, and level of investment made in mitigating greenhouse gases is still sure to take a centre-stage position.
The primary sector has been subjected to repetitive positive praise for its unflinching ability to keep calm and carry on throughout Alert Level 4, and there’s been renewed acknowledgement of how critical it is to the economy via the export revenue it generates for NZ.
Despite the sector’s ability to continue functioning and preparing goods for export more-or-less as usual, there has been less appreciation of the market landscape in countries we rely on to import our food products. Some disturbing warnings are now being expressed about a surge in protectionism – a trend already of concern before Covid-19 but set to expand rapidly.
‘New Zealand needs to quickly work out how, as an exporting nation, it will be able to fit into a circular production system with an emphasis on ‘grow local’.’
Trade expert Charles Finny told Parliament’s Epidemic Response Committee in mid-April that while food and beverage exports were reaching China, NZ’s largest export market, our other most important markets in Europe and the United States were proving problematic, and talking about new protectionist measures.
To the same audience, government trade negotiator Vangelis Vitalis made clear the speed at which governments were raising barriers in April. He said 54 governments had placed 46 new protectionist trade measures, just on medical products.
“It is also very troubling to see the amount of protection being poured in behind the agriculture sector. As countries get more worried about their food supply, they start to build protection.”
In a recent online presentation from KPMG head of global agribusiness Ian Proudfoot titled ‘The now normal future – food and fibre in a world emerging from COVID-19’, he said “There’s no question the trend towards localisation is going to ramp up and protectionism will become more and more significant. Governments are subsidising freight movements at the moment, and exporting goods will be more expensive, and this will push the world towards a grow local model.
“New Zealand needs to quickly work out how, as an exporting nation, it will be able to fit into a circular production system with an emphasis on ‘grow local’.”
The obvious response is for NZ to double down on projecting what is unique about what we produce. Proudfoot says the government is ideally placed to do this, with the physical positions it has in markets. New Zealanders won’t be able to travel for the foreseeable future and meet customers face-to-face so the government will need to play a bigger role in telling our story. “That brings us back to how good we are on the environment. It is going to become really important in differentiating ourselves.”
The extent to which climate change pervades our collective thinking has not been dented. During the wall-to-wall coverage of Covid-19, the media’s interest in climate change has not evaporated like many other contemporary concerns. The official report on NZ’s greenhouse gas emissions in 2018, for example, generated considerate attention in April, showing a modest drop on 2017 despite an increase in economic growth. It noted agriculture accounts for 48% of NZ’s gross emissions, which were up 0.7% on 2017.
“Fundamentally, the position on greenhouse gas emissions has not changed,” Proudfoot said. “Yes, we have seen a rapid drop off in carbon in our environment over the first quarter of 2020 as a result of us not travelling so much, and people living in a different way than we have traditionally lived. But greenhouse gas is still going to be an issue we need to address.
“The track we were on towards a zero-carbon future needs to remain squarely our key focus. And the innovation and pace around that needs to continue, and if anything, accelerate. Because if we can lead in some of these technologies then it creates real opportunities for us to lead in global markets.”
Unfortunately, having aspirations to be a global leader and achieving that goal is probably going to get harder, given that environmental projects will be one of the ways governments around the world will subsidise their businesses back into action.
“We are not just going to be competing against companies, we are going to be competing against governments and maybe our government needs to think along the same lines in terms of how it supports business. This might mean more support given to a greening of the business process,” Proudfoot said.
This sentiment has been shared by the Climate Change Commission, whose chair, Rod Carr wrote to the Minister during Alert Level 4 suggesting that as the government turns its mind to the economic recovery it does so with a climate change lens across the measures it chooses to implement. The commission said “the government will achieve multiple wins if the investments it makes in the coming months can reduce necessary spending in the future while creating new jobs, reducing emissions and building an economy resilient to climate change impacts. Accelerating these essential investments will improve cumulative gains to the economy, society, and the environment.”
All this sounds as sensible as it once did – pre-Covid-19. But things have changed on the ground, and in people’s pockets, not least farmers pockets.
Federated Farmers offered a rain check on this thinking. Speaking to politicians from all parties in April, President Katie Milne warned there was potential for new regulations in the environmental space to reduce the agricultural sector’s earnings at a time when farmers could not afford it.
While it was proactive in advocating for investment in funding for environmental projects including plant and animal pest control, increased support for the protection of indigenous biodiversity on private land and additional funding for fencing and planting of riparian margins, Federated Farmers suggested the Government defer rather than proceed with new regulations that centre on the Government’s Freshwater package, Resource Management Act reform and the Emissions Trading Scheme legislation.
If the Government does heed these calls, it would inevitably dent rather than boost NZ response to climate change, and associated reputation – at least in the short term.
Proudfoot is not dismissive of farmers’ concerns. Despite his strident view that there is basically no alternative for the primary sector if our products are to remain internationally competitive, he accepts there is a ‘BUT’, which is the fundamental point made by Feds, around our reduced ability to fund climate change mitigation.
“We have to be realistic. The pace at which we expect change to be made will have to be matched to people’s ability to pay. To continue to push at the pace we would have pushed at three months ago will not be sustainable. Making sure we get that balance right is important… Balancing the economic recovery with protecting the environment is a big challenge.
Nevertheless, he said the message he’s getting from the primary sector is that we cannot back off on the commitment we have made to the environment.
“The commitments are an important part of our story and they are going to be even more important as we try and continue selling at a premium in global markets.”
So, let’s say the Government doesn’t flinch on its GHG strategy, and broadly walks the line advocated to deliver the primary sector this ‘get out of jail card’. How can the momentum already established, with the kind of proposed investment programme envisaged continue unimpeded in an environment where there will be far less money to go around and more focus on short-term, rather than long-term remediation?
One leading US-based Agritech investment fund, Finistere Ventures, with NZ connections offers some optimism that private capital will still have its ears open to GHG innovations.
Finistere Ventures co-founder and partner Arama Kukutai made a presentation to AgritechNZ’s recent webinar insight series and noted NZ is one of the leaders in the world at grappling with the very hard questions of balancing the economic impact of farming and land use with the environmental one, and international investors recognise that.
“We’ve spent time thinking about what the opportunities are, and we are working with NZ organisations that are testing and driving technology with an environmental focus. We’re interested in GHG impact.”
Finistere Ventures has a partnership with Palmerston North-based Sprout Agritech, whose chief executive Dean Tilyard understandably backs up this sentiment, reiterating NZ’s strong international reputation among investors.
“New Zealand’s expertise in agricultural technology is something they intuitively understand. Environmental tech around GHG and nutrient management loom really large in our area of interest for obvious reasons – it’s a key challenge facing agriculture. They’re also complex challenges so there are multiple solutions being developed. This is a trend and so our corporate partners are interested, as of course is the consumer.”
Kukutai did acknowledge that in the very short term, little is going to happen. “Fundraisers are going to be few and far between in the coming months. Neither we nor the firms we are talking to will be making investments for the next 60 days.”
But as we come out of the freeze, NZ agritech companies focused on solving environmental issues might become more attractive than others to international investors. “Companies with more of a life science, R&D focus, which are not actually taking revenue hits or require revenue to fund their programme probably have a bit more flexibility and they’re a bit more attractive,” Kukutai said.
With the benefit of a local perspective, Dean Tilyard agrees.
“If you are focused on a science platform you might not be yet into customer interface. If you’re in labs and workshops people will be back into that shortly. They’ll be impacted less than those whose revenue is directly affected.”
Sprout has added cause for optimism for maintaining its pace of investment, having secured a partnership with the government’s Callaghan Innovation at the end of last year. The partnership means every time Sprout and its partners invest $250,000 into an agritech start-up Callaghan will also provide the start-up with a repayable loan of $750,000 supplying the start-up with $1 million.
Those advocating for a ramping up of work into addressing NZ’s methane emissions should be encouraged, but also by the international investor community’s apparent preference for this when considering funding environmental initiatives.
Kututai said the reason Finistere Ventures is focused on methane is that it’s seeing a bigger cohort of start-up companies specifically addressing that issue. There’s a plethora of environmental projects looking for money, “but we have to look at those that fit the venture model, which needs to see a return in a five-seven-year cycle, certainly within the 10-12-year cycle of the fund.”
Sprout Agritech’s Dean Tilyard agrees. “We’re involved in investment right across the value chain – inputs, onfarm, downstream, new consumer food formats. But the environment area features very prominently. We are looking at investments in GHGs right now.”
All this should be reassuring for those driving NZ goal of tackling the GHG/methane battle, and in doing so ultimately safeguarding our primary sector export demand in a changed world.
As could be expected though doubts about this long-term strategy will remain. As noted above, Federated Farmers has queried the plan in a pragmatic, short-term context but others will be questioning whether the now generally accepted notion that value trumps volume will continue to meet the mark in a world with fewer consumers with disposable cash burning holes in their pockets.
Indeed, as much as the Covid-19 crisis has led to thinking about ramping up NZ’s environmental commitment, equally it has offered those believers in a simpler strategy a platform as well – which includes a stripped back focus on commodities.
Proudfoot is not, however, persuaded by this possibility.
“We have got to the point where we have realised we cannot create enough value to support the use of our natural capital by producing commodity products. We need to deliver a higher return, and this is even more important now that international tourism is off the table for the next two years.”
We might have to wait for a bit of dust to settle to see how much money is in the pot to invest in keeping our trade of primary sector goods going. And by then we should get a better steer from the Government on the extent it believes a full-steam ahead approach to climate change mitigation will be in the best interests of the sector.