Fonterra calls on Government to improve business environment

5.00pm - By KENT ATKINSON

The Government should be doing more to underpin New Zealand's biggest exporter, Fonterra Co-operative Group chief executive Andrew Ferrier said today.

Mr Ferrier told the American Chamber of Commerce in Auckland that though the regulatory environment for New Zealand business was "pretty good" with transparency and efficiency, "there are many areas where we can and should do better".

He said specific areas in which the Government should lift its game included:

* Energy pricing, especially the dry-year price spikes when hydro dams were short of water.

* Transport, particularly road user charges which represented a $28 million cost for Fonterra's tanker fleet.

* Labour costs stemming from the new Employment Relations Bill and the introduction of four week holidays.

* The Kyoto Protocol and plans for a carbon tax from 2008.

* Research and development, a sector in which New Zealand had no tax incentives for the private sector, though in Australia every dollar spent on research attracted 11c in tax relief and in Canada it was 17c.

"These issues impact directly on our core base costs, and our capacity to add value within New Zealand," Mr Ferrier said in notes for his speech.

The rising dollar was clipping returns and concerns at the farm gate were being echoed in every export sector.

"Economic growth has to be sustained if New Zealand is to provide quality of life for all New Zealanders," he said.

"I don't think I am talking out of turn by saying we could use a little help here," he said.

"I am not talking subsidies or handouts.

"I am talking about having the best possible regulatory environment at home in New Zealand to support our competitiveness abroad."

Business people should urge the Government to provide an environment that helped, rather than hindered, export efforts, and encourage it to go further and faster in its efforts to expand opportunities for trade.

"I invite you to make your voice heard," he said.

Mr Ferrier will tomorrow afternoon stage a media briefing to announce Fonterra's payout forecast for the next dairy season, for the year to May 2005, and told the chamber he had 13,000 shareholders looking to him to improve their earnings.

This was relevant to other businesses because Fonterra generated 20 per cent of New Zealand's export receipts and 7 per cent of gross domestic product.

"Whatever I can do to increase earnings for my shareholders will also make a valuable contribution to the New Zealand economy," he said.

Fonterra is widely expected to announce a drop in payout as bank economists have predicted, on the basis of exchange rates, a drop from the forecast for this year's payout at May 31, of $4.15/kg milksolids, to between $3 and $3.80 next year, and $2.50/kg in the following season, 2005-2006.

Fonterra chairman Henry van der Heyden has rejected the $2.50/kg prediction by BNZ chief economist Tony Alexander and promised that payouts will not drop below $3/kg for milksolids, despite the high exchange rate.

Mr van der Heyden, who will also participate in tomorrow's payout forecast, has argued it is too early to say what the payout for 2005-2006 might be, but he has come under pressure this week from farm lobbyists to offer a range of prices for that season to reassure farmers.

Tomorrow will be the first time Fonterra has made public an estimate of the impact from the high exchange rate for the New Zealand dollar, now fluctuating near its seven-year high of US71c.

But a senior academic, Massey University's professor of agribusiness Bill Bailey, has predicted that in addition to currency and marketing issues, Fonterra's profitability may also be affected by "domestic challenges".

Production problems stemming from bad weather, such as last month's North Island floods, and a three-month delay in the start-up of the co-operative's huge information management system could make it difficult for Fonterra to "guarantee" a payout at a specific level.

Mr Ferrier said today the company was working on the "big drivers": cutting costs, pushing for operational excellence, and investing in increasing value-added earnings.

"We're implementing a lean structure that matches our manufacturing capabilities to our customer requirements and streamlines the delivery of commodity ingredients products into our global markets," he said.

"A lot of economic hope is being pinned on exporters like us," he told the chamber.

The Agriculture and Forestry Ministry had forecast a $3.5 billion increase in agriculture and forestry exports over the next four years, with the contribution dairy made to agriculture's share of GDP expected to rise by 20 per cent over the same period.

"Everyone in exporting is trying to grow their markets and their returns to their shareholders, by driving down costs, driving up productivity and driving up their value-added earnings -- all this while we stare down the barrel of a shotgun named currency," he said.

At the same time Fonterra most wanted to see the Government intensify its efforts to hammer away at international barriers to trade.

Developed countries paid their farmers US$350 billion a year in subsidies and New Zealand's politicians, diplomats and trade negotiators should be encouraged in their efforts to advance the trade agenda.

"We must remain like stuck records on the need to pursue the bigger prize of multilateral agreements," he said.

Mr Ferrier also said New Zealand's international trade interests are being disadvantaged because the World Trade Organisation (WTO) is "currently stuck in the mud".

He said New Zealand's natural advantage lay in big multilateral settings.

WTO talks that began in 2001 collapsed last September in arguments at the Cancun ministerial conference over farm export subsidies issues and economic rules. Now the talks to build global free trade and drive development are unlikely to wrap up as scheduled this year.

Mr Ferrier said the global conference of trade ministers at Cancun missed the opportunity to agree a framework for the nuts and bolts of the negotiations, and left the future of many issues, including agriculture, unclear.

"While the target date for completion remains January 1, 2005, realistically that target has slipped into 2006 at the earliest," he said. That meant any real changes to tariffs, quotas and trade rules would not kick in until several years after that.

"That sounds like a long way away for farmers focused on their balance sheets and investment decisions over the next couple of years," Mr Ferrier said.

The full impact of the current high exchange rate for the NZ dollar is expected to hit Fonterra's dairy farmers in the 2005-2006 season, when existing forex hedging contracts expire.

Mr Ferrier said there had been encouraging signs recently: US trade representative, Robert Zoellick had argued that WTO members cannot afford for 2004 to be a "lost" year. Also, recent assurances from the United States and Europe that they want to eliminate farm export subsidies, and try to reduce domestic farm subsidies, have drawn nations back to negotiation, and the Cairns Group agricultural lobby re-activated two weeks ago in Costa Rica.

"But overall the prospects of achieving any substantial progress this year are not good," Mr Ferrier said.

"New Zealand faces a tough international trade environment, and there are few signs of it getting any easier very quickly."

- NZPA