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Primary industry investment in longer term research and innovation.

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Executive Summary

New Zealand primary producers have been facing a gradual decline in real commodity prices for decades, costs of production are increasing and more recently land values have in many places exceeded the level where an acceptable return on capital is possible.

I hypothesised that our commodity producers could overcome these problems, on an industry wide basis, by investing in longer term research and innovation, with the aim of removing this emphasis on commodity production.

I used my Nuffield Scholarship opportunity to go in search of good models of industries where this approach was successful.  My study tour included parts of North America, but primarily United Kingdom and Europe.

The first discovery was that many primary producers were in fact exploiting opportunities that enabled them to continue in business whilst facing the issues highlighted.

New Zealand agriculture has historically concentrated on exploiting its comparative advantage in the production of commodities, relying on favourable soil and climate conditions.  Marketing has also been supply driven.  This approach is not sustainable as other nations discover similar comparative advantages.

Successful commodity production appeared to be sustainable only where competitive advantage is gained, offering consumers greater value through lower prices or greater benefits that justify greater prices, i.e. lowest cost or differentiated product.  Lowest cost can be gained through production techniques, superior processes and infrastructure, and unique skills.

The major shift is from a production driven supply chain to consumer driven value chain, and the aim is to gain a bigger share of existing value of a commodity.

However the focus of my study was enhancing the total available value of a commodity in a value chain, or value adding, as a mechanism of removing emphasis on commodity production.

I investigated various industry and value chain participants who were investing in fundamental research, research with less well defined return on investment than applied research, but with more commercial application than blue skies research.  Investors came under the categories of Government, Cooperative, Levy Body, Private Company, and Individual.

Through this process I saw a number of interesting initiatives that provided a two way transfer of information and knowledge between primary producers and researchers, or provided new investors with support with the development of new products and processes.  A number of these could provide benefits to New Zealand primary producers.

Following this extensive consultation I made the following conclusions and recommendations for the consideration of New Zealand primary industries.

  • Investing in value adding and innovation is a useful mechanism of improving overall business return.
  • Value adding and innovation can be achieved at many levels.
  • At the very least, New Zealand’s agricultural industries should invest in gaining competitive advantage, and I recommended that farmers continually analyse the long term potential of their industry and their personal position within it to assess whether a change of business strategy or focus is required.
  • Not everyone wants to invest in value adding and innovation.
  • Industry wide investment in value adding and innovation should be well targeted.
  • Best individual results could be achieved by private investment model.
  • The critical point for industry wide investors to consider their investment position is the presence of intellectual property. I recommended that holders of Levy Orders under the Commodity Levies Act 1990 ensure they have a clear mechanism for assessing the value of investing in intellectual property, and a clear process of controlling how far down that ‘path’ they do invest.
  • Industry wide investment is important to underpin future applied research.
  • Government investment is critical in the areas of research capability, ‘blue skies’ research and the majority of fundamental research. I made the recommendation that Government ensures that sufficient resources are invested in ‘blue skies’ research and scientific capability to allow for future national growth and works more closely with levy bodies to assist in achieving industry fundamental research goals.
  • Farmers need to be made aware of potential value adding and innovation opportunities, and I recommended that Government and levy bodies encourage farmer investment in value adding and innovation by ensuring opportunities are highlighted and that engagement processes are transparent and competitive.
  • Government should support farm based businesses in exploring value adding and innovation opportunities. I made two recommendations. Firstly, Government and levy bodies ensure that there is a clear pathway for sourcing information on the establishment and running of farmer controlled value adding businesses, and secondly that Crown Research Institutes and Universities consider how pilot processing plant could be made available to aspiring processors, with Government support.

Industries collecting commodity levies should better cooperate in coordinating generic applied research activities.  I recommended that holders of Levy Orders of the Commodity Levies Act 1990 ensure there is a forum where generic research cooperation is fully discussed

Primary Industry Investment in Longer Term Research and Innovation – John Wright