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Primary industry investment in longer term research and innovation.

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

Corporate governance in agricultural co-operatives.

Executive Summary

This report investigates aspects of corporate governance as it should apply to New Zealand agricultural co-operatives. It looks at best practice corporate governance in public listed companies and identifies areas which pose challenges to agricultural co-operatives.

The author attended the 55th Advanced Course in Agricultural Business Management at the Imperial College Wye campus in Kent where he received valuable understanding of EU and UK farming policies, practises and challenges. He visited agricultural co-operatives, training organisations, co-operative associations, co-operative directors and chairmen, farms and farmers in England, Ireland, Scotland, Netherlands and the United States on his self-study tour. He met Australasian co-operative directors  at the eighth annual Monash University Agribusiness Co-operative Leadership and Governance Forum held at Hamilton Island in Australia. He met people involved in consumer co-operatives and members of the International Co-operative Alliance at the 2005 co-operative congress in Glasgow where Cooperative UK corporate governance review group presented their final report and had it ratified by the congress.

A key recommendation of this report is that New Zealand co-operatives should voluntarily comply with the corporate governance guidelines published by the New Zealand Securities Commission in 2004.

There are some areas of corporate governance where co-operatives have their own particular challenges. A democratically elected board sourced from the co-operatives members can often result in a board with a wealth of ability, but in a narrow range of skills. There is often a lack of diversity around the board table, directors can be elected without adequate experience or understanding of the role, and there is a tendency for them to stay in the job for too long. To overcome these issues it is even more important in a co-operative, than in a public company, that there is quality training available for directors and prospective directors and that the performance of the board and individual directors is evaluated so that the dead wood can be removed. There needs to be a  process to identify skills required on the board and ensure that the candidates put to a members vote have the skills and experience required for the position. If skills gaps can not be filled by training existing directors, or from the membership base then boards should look to appoint from outside the organisation.

The other major point of difference is in a cooperatives relationship with its members. Cooperatives need their members to be united by common goals, and committed to participating in the co-operative to achieve them. This is a communication issue that often receives insufficient attention. Effective communication is two-way. Newsletters are useful but only one way, hence regular meetings with members and shareholders, perhaps in small regional groups, can be very beneficial. There needs to be a culture of openness in the board’s dealings with its members, with a requirement to disclose more information to members than a public company would to its shareholders. Co-operatives need to be sure that they are meeting their member’s needs and are following a strategic direction that will continue to meet their member’s needs.

This report raises the issue of conformance versus performance. Conforming with corporate  governance principles requires a lot more commitment than just going through the motions ticking the boxes. Good corporate governance on its own cannot make a cooperative successful, it needs a balance of conformance and performance. The performance dimension focuses on strategy and value creation. The focus is on helping the board to make strategic decisions, understand its appetite for risk and its key drivers of performance, and identify its key points of decision-making. Co-operative ownership is no excuse for poor performance.

Finally there are comments made to the author by people involved with co-operatives around the world. These comments represent the wisdom gained through decades of experience serving on and chairing co-operative boards in different sectors of agriculture and in different countries. They offer a balance to the more theoretical content of the report.

Corporate Governance in Agricultural Co-operatives – Tom Mason

The importance of innovation in the New Zealand agricultural industry.

Executive Summary

The quality of our NZ economy depends on our ability to acquire, protect, translate, combine and apply knowledge.  This knowledge is required to solve today’s problems and to prepare the ground for solving tomorrow’s.  Without new knowledge, and new combinations of knowledge, there will be no innovation.  And without innovation, NZ will struggle to keep pace with our competitors.

These tenets apply to any country aspiring to maintain its place as a 1st world economy.  But they particularly apply to an agricultural sector that currently supports 17% of our economy.  The future of an untended NZ agriculture is well signposted amongst other western societies; commodity producers struggling for profitability and shrinking in importance.

The alternate and more attractive, yet ‘difficult-to-achieve’, approach is for NZ Agriculture to embrace innovation to reduce our costs of production, to improve the efficiencies of processing, and to add value and profit to our products.  It is this latter point; applying innovation management to add value to food products that was the focus of this study.

Innovation management is about combining the concepts of innovation (creativity, speed and change) and management (planning, organising, monitoring and control).  In the context of this report, it is about the question “can we improve the conversion of R&D spend into profitable products?”

The method used to answer this question involved case study visits to world class food companies in Europe, the UK, the United States and Japan.  It also included visits to universities and learning institutions to understand their role in promoting innovation.  Finding small and medium food enterprises proved to be problematic; start-up and small innovative companies from a range of sectors were utilised.

Each of these case studies provided the following insights regarding the key factors for successful innovation management:

⇒ To innovate requires investment and by most measures NZ under-invests.  Successful FMCG[1] companies such as Nestlé and Kraft are spending approximately 1.2 – 1.4% of sales on R&D, ingredient companies typically spend 0.7 – 0.9% of sales on R&D.  By comparison, Fonterra (NZ’s largest private investor in R&D) spends 0.8% of sales on innovation.  Nationally, our R&D spend is approximately half of the OECD average and government research expenditure in the agricultural sector has fallen since the early 1990’s.

⇒ Successful innovation needs to be targeted by a clear vision and business strategy. New Zealand is competing against world-class food conglomerates so our vision and strategy must focus the scope of our aspirations and must match our key competencies with market requirements.  Bernard Matthews, a vertically integrated meat company now ‘owns’ the UK frozen lamb category through an absolute alignment of the company activities with the market.

⇒ Successful innovation requires a constancy of purpose. Danone, a French Company, has set out to dominate the fresh dairy category through focusing on active health, nutrition, customer preference and technology.  After more than 20 years of resolute effort, they have overtaken the giant, Nestlé, as the category leader in most of their markets.

⇒ There must be a supporting innovation culture, such as that displayed within Kerry Group’s strategic business units.  Staff must be encouraged to innovate; rewarding success must be balanced by understanding failure, and both internal and external networks must be fostered.

⇒ Whilst business structure doesn’t appear to be critical, most successful food businesses have a centralised Research facility with supporting in-market product development centres.  Although NZ is a good location for Research, our development activities may be better placed off-shore.  The lack of NZ development activity for lamb in the UK market was noticeable.

Intelligence – including the orderly gathering, processing and use of information is critical to determine the most profitable areas of development.  Bernard Matthews uses store sales and market research to drive product development.

Strong links into the market.  There are real tensions between technology push and market pull – and in NZ we are dominated by ‘push’.  Innovation that isn’t linked to real market requirements will fail.  Unilever, a multinational food and consumer products company displays excellence in this regard.

Innovation tools that result in a superior conversion of R&D spend into profitable process improvements, products or services.  The best companies have clear criteria for saying ‘No’ to projects at all stages of their development.  By cutting failing projects we have more resources available for the projects that are most likely to succeed.

 Managing the skill base – addressing issues such as the recruitment and retention of people with the needed conceptual and scientific or technical skills, or of accessing those skills externally.  Most of the companies studied, as leaders in their field, had strong resource recruitment and retention capabilities.

In addition to the large company case studies, innovation in a small and medium sized firm (SME) context was studied.  SMEs suffer from a lack of finance, capability and capacity in applying the innovation process.  Successful SMEs have a clear and limited vision, a good understanding of the path to commercialisation, can access good business acumen and can secure funding from a range of angel or venture capital sources.

Whilst the detail of this report was focused on innovation, the Nuffield experience allows scholars to consider a wide range of issues relevant to NZ agriculture.  The state of our competitors, the potential for product substitutes, the attitude of the urban public to agriculture and environmental issues were all additional subjects of interest.  A series of farming magazine articles written during the course of my studies are appended to this report

The Importance of Innovation in the New Zealand Agricultural Industry – Andrew Watters