Tim Groser: Exporting our know how will pay off

Tim Groser, Natonal Party MP. Photo / Ross Setford

Don't get me wrong: I still see the base of this great future ahead for New Zealand agriculture in our production base in New Zealand. But I remain convinced that we can supplement that by selling our intellectual property in agriculture.

There is nothing new in this. We have been doing it for decades. But the scale of the opportunity is on a different scale. There is simply no way New Zealand can meet the opportunity of the growth in emerging markets from a New Zealand production base. So either we profit from growth in agriculture production elsewhere or someone else will.

The big star in this year's OECD Ministerial Meeting was a concept called "Knowledge-Based Capital" (KBC). It turns out that for Apple, for example, the bulk of its value is knowledge-based capital, not formal IP. Design and management know-how are huge.

One practical example is Fonterra's operation in the United States. The US dairy industry is part way through a process of transition - from a deeply defensive, inward looking past to an outward-looking, export-oriented future.

The real winners from comprehensive liberalisation in the Trans-Pacific Partnership in dairy will be the US industry, not ours, simply because our dairy production base is far too small to seize the opportunities.

This is happening already. Some 60 per cent of the increase in demand for milk protein in recent years has gone to the US dairy industry, compared with 11 per cent for New Zealand. Today, some 14 per cent of all US milk is exported.

But who is the largest exporter of US milk products? Fonterra.

Why? KBC - knowledge-based capital. In this case it is the marketing and distribution channels of Fonterra, the world's largest milk exporting company, that is the real jewel in the crown.

I am not sure we have yet developed the business models to fully leverage our agriculture technology. We are certainly making efforts. This was a major theme of the Prime Minister's recent visit to Mexico, Colombia and Chile and there is no question that the agri-business delegation with the Prime Minister saw the scale of the opportunities.

And only a few weeks ago, NZTE led an agribusiness group to Russia to explore the opportunities for New Zealand agriculture technology. There is a huge hunger in Russia for New Zealand expertise, equipment and genetics. There is also a very interesting investment proposition taking shape in the Russian Far East.

The international market for agriculture technology is huge and will grow. Agriculture machinery and equipment was worth US$111 billion in 2012. We know we have real niche strengths here in areas such as electric fencing, milk meters, and livestock weighing equipment. But the market for our agriculture technology is more than just "kit". It includes soil testing, pasture species development, DNA testing, sustainable resource software that enables planning around water quality, effluent disposal, and resource management compliance. These premium exports are a product of the practices and technology designed and employed by our agriculture industries.

The bigger game of course, but fraught with risk, is for our agriculture companies to take equity positions, rather than just sell licensed technology. It is happening - particularly in China with Fonterra's ambitious plans to produce 1 billion litres of high-quality milk in China in over 30 large farms. It is happening in Chile and Brazil and will happen in Russia and India.

But this is not straightforward and my general sense is that we are out of our comfort zone and this is going to be a complicated journey. Generally, the commercial history of New Zealand companies' efforts to invest outside New Zealand is poor, though we have had a few welcome exceptions. It will take time for New Zealand agribusiness to find the right business model to do this profitably and without too much high-risk exposure.

The Government will of course continue to do whatever it can to support this, but finally it rests on commercial decisions. We just need to recognise that this country needs to lift its game on outward investment.

Some economists have argued we don't have a trade problem, we have an investment problem - and if you compare the average rates of return on our foreign direct investment (FDI) in other countries compared with the average rate of return on FDI in New Zealand made by Australia in particular, these economists have a point, except I would say the two ways of earning a living - exporting from our domestic base or investment - are not alternatives.

We need them both to participate more fully in the complex global value chains that are developing.

I am just stating the obvious when I say that though I would support any commercial enterprise in any sector with a good business plan that involves strategic investments and gives us an equity stake in far bigger economies, the one thing we know how to do well is agriculture.

Agriculture has to be the most obvious thing to focus on. Investment has to be part of the more sophisticated future ahead of us in the first quarter of this century.

• Tim Groser is Minister of Trade. This is an extract from a speech he delivered at Fieldays.