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Innovation in NZ agriculture and the potential for seafood (the text of speech given by Paul Tocker to the SeaFIC conference)
The full text of a Speech to the SEAFIC Conference
27 May 2004
by Richard Bentley and Paul Tocker
Richard Bentley (Chairman)
High quality version of this image (TIFF - 2.7MB)
Paul Tocker (CEO)
High quality version of this image (TIFF - 2.6MB)
For over a century NZ's economic prosperity has been driven by innovation in the pastoral agriculture, seafood and forestry sector. Today, as a result, this sector contributes well over 50% of total exports and over 25% of NZ's gross domestic product. Productivity growth in agriculture remains at high levels and is currently assessed at around 3% per year. This far exceeds productivity growth in the NZ manufacturing sector, for example, which is currently near zero.
Those who work in the sector are aware that the success of NZ agriculture is due to the sustained successful commercialisation of new science and technologies over many decades, both at a macro industry level, and at the level of the individual producer.
Perhaps the two most obvious examples of successful innovation on a larger scale in NZ agriculture, outside the seafood sector, are the development of the dairy and kiwifruit sector.
At one time the dairy sector comprised hundreds of small companies, and even 20 years ago there were still some 80 manufacturing co-operatives. The consolidation of the dairy sector was driven by the benefits of cooperative marketing through the NZ Dairy Board. The industry also saw the advantages of cooperative research and the Dairy Research Institute played a critical role in this process. In the late 70's and early 80's, the government exited direct involvement with research in the manufacturing sector, and there was a reasonable level of industry accord over integrated marketing of the very wide range of products then being manufactured, and the management of tariff and quota issues in the many markets supplied by the Dairy Board.
But whilst this structure undoubtedly created value, it was still prone to mixed and conflicting signals, and consequential actions by the independent players. By the early 2000's there was industry agreement to create Fonterra and to go for whole industry - vertical integration in one entity. This structure should allow for the pursuit of additional market-driven added value yet allow for ongoing land based productivity gains to improve quality and grow the raw material base.
The dairy sector has increased production substantially in recent years through a big jump in the dairy herd and significant increases in cow productivity. Can this growth be maintained? The new biotechnologies provide opportunities as do the lessening of market barriers, but increasing fuel and environmental management costs are likely, and competition for land from a highly profitable sheep sector and other added-value agriculture will increase.
The kiwifruit story is well known with the development in NZ in the 1940's of the modern kiwifruit and the subsequent uncontrolled release of both what should have been a brand, and the technology. The outcome is that kiwifruit is grown in both hemispheres and is a widely traded international commodity. The highly controlled release of gold kiwifruit in the 1990's by Zespri, the new grower-owned single desk seller, has been successful and there is now a pipeline of new related products for future commercialisation. NZ grown kiwifruit now obtains the best prices and has secured access to the quality niche markets. Success is founded on smart packaging and a strong focus on quality in every aspect of the supply chain.
There are many other examples of successful innovation in the major NZ agriculture and food industries, such as the development of the carpet industry and the wine industry. The meat export industry introduced aging and conditioning of lamb in the 1960's, and more recently meat chilling technology, advances in lamb processing, and increasingly sophisticated meat products for export.
One of the interesting aspects of the vertically controlled dairy and kiwifruit industries is that there is integrated management of the whole value chain from production, through technology and intellectual property, right through to the market place.
Similarly, the seafood industry has extremely good integration. However, the individual ownership structures of the companies can lead to intensive competition in the market place. The meat industry is notable for the dislocation between processor and farmer. The vegetable and arable sectors also have challenges through the value chain with the vegetable sector having multi-suppliers and a non-integrated market approach. The arable sector value chain effectively terminates in the NZ market and virtually does not enter the international market at all.
The concern is that the more fragmented sectors will find it difficult to respond to market dynamics or to industry biosecurity issues, or to coordinate product innovation or quality programmes, or to deal with supply problems such as quota reductions. We will return to this aspect later.
In addition to the basic business of food production for export, there are a very significant and a growing range of industries that process the by-products from food production. Examples of these include the skins and tanning industry; and a variety of dairy initiatives such as the utilization of whey - a one time waste product with the potential to damage the environment - and the manufacture of high added-value products such as soluble whey proteins, lactoferrin, lactose, alcohol and specialized calcium products.
Others, through supplying technology to the sector, have become substantial export businesses in their own right, such as Gallaghers, with their electric fencing and related businesses, and companies in the wider dairy engineering sector.
A further component of the agriculture sector is an increasing number of biotechnology based companies manufacturing and trading all sorts of products including seeds, bioactives and other complex chemicals, and cosmetics, pharmaceuticals, and biomaterials, all of which connect in some way with the primary food sector. This list also includes a number of Canesis generated initiatives that Wool Equities is involved in, such as the Keratec 'wool to cosmetics' project and the smart textile project called 'Softswitch'. These sectoral services and added value initiatives have the capability to substantially add to the NZ economy.
These last two components of the agriculture sector have shown a willingness and capability for extensive innovation and there are a number who have become world leaders in their particular area. Canesis for example is a world leader in fibre engineering and technology and in protein science. Canesis was one of the earliest pioneers in smart textiles, likely to be one of the significant new technologies of this century. Canesis scientists also evolved the Keratec proposition, which is destined to become a substantial and significant idea in world cosmetics. Seafood needs to build off its diverse and unique raw material base to create a similar strategy.
The new biotechnologies provide significant new opportunities for innovation in NZ primary sectors including agriculture and seafood.
Firstly looking at food and health, functional foods are well established in Europe and Japan and growing rapidly in the US, and all are experiencing substantial growth on the back of ageing wealthy populations.
Functional foods deliver physiological benefits in addition to their conventional and nutritional attributues. But the market is maturing here. It is not good enough to infer the benefits - they need to be proved in clinical trials. A good well-tested example is Yakult which provides probiotic strengths through the addition of freeze dried microbiological cultures to a special formulation. Other functional foods include sports foods, which claim to increase performance, and other foods promoting a healthy balanced state. We believe that this is a strong opportunity for NZ as functional foods will become an increasing part of the everyday diet. NZ needs to be there.
As an operating example, the Vital Vegetables project, partnered by Crop & Food Research and our Australian counterparts, seeks to use modern biotechnologies to identify and select vegetable species that exhibit enhanced functionality. This programme is a mixture of science push and market pull driven by $200,000 of consumer market research. The first target in this $30M project is broccoli which contains compounds which are well known for their anti cancer properties. The approach here is to isolate from the hundreds of different broccoli varieties available those that deliver the best functionality and to bring these to market. The ultimate objective is that a new range of 'Vital Vegetables' will become established, giving Australian and New Zealand vegetable growers a new and branded edge in Asian markets. We must use a combination of quality raw materials and quality science to differentiate our raw materials from those that will be created by mega producers such as China.
Market research demonstrates that sophisticated customers are amenable to the idea of more closely tying food and health outcomes. On top of this, they will expect their foods to be safe and healthy as a matter of course.
Several research projects in this exciting new food area are being led by Crop& Food Research and have recently received significant additional Crown funding.
Two particularly large projects have gained funding of around $20M each. The programme, 'Nutrigenomics: Tailoring NZ Foods to Match People's Genes' is a four-way partnership with AgResearch, HortResearch and the University of Auckland with the overall goal of creating foods that minimize the risk of genetically determined disease, especially common diseases of the intestine such as Crohn's disease, but also gut health generally, obesity, cardiovascular diseases and cancer. A second project is 'Lifestyle Foods for Energy Balance - The Carbohydrate Story'. This latter project is about managing the energy balance of foods and the rate at which carbohydrates are converted into blood sugar. The research is expected to lead to a new generation of carbohydrate foods. Both projects will draw on the best international expertise in the subject and will quickly take NZ into a leadership position in their areas.
Nutrigenomics will underpin the development of the next generation of functional foods, which are expected to become increasingly sophisticated in terms of their manufacture, presentation and quality control, and which are expected to be based on common mainstream foods such as cereals, seafoods and protein based products.
Another example of a biotech project underway at Crop & Food Research, which typifies the sort of developments that we are referring to is the 'Gracelinc' project to commercialise a new and patented process technology to extract valuable beta-glucans from barley. Beta-glucan concentrates have been extracted from a wide range of sources for the last two decades and are well accepted in reducing cholesterol, improving nutritional performance and gut activity.
We have been focusing on food, but modern biotechnologies can also provide new opportunities in breeding, for example, the success of new breeding programmes in the sheep sector may offer a clue to what is possible in the mussel business.
In the sheep sector the drive to higher lambing ratios and improved sheep performance generally has lead to a proliferation of organizations and genetic companies offering new crossbred rams, and some offering in addition a maternal line as well with radically enhanced lambing capabilities.
These developments are starting to change the economics of sheep farming and are in addition providing new justifications for farmers and processes to tackle the issues of broadening the supply season, and providing new opportunities for a fresh look at the quality and management of pasture, and the potential of new forage crops for sheep.
Perhaps the most significant influence of these new breeding organisations is that they are working at scale and with increasing investment in DNA data banks. This will allow them to quickly adapt their core flocks to incorporate the genetic markers that will lead to significant improvements in their progeny's health, in much the same way as is occurring in the dairy sector with the recent identification of the genes that increase milk fat and protein production. The technology now exists to identify meat performance genetic markers in sheep, and possibly other markers associated with wool quality.
Is there, in the same way, a potential opportunity to further refine the genetics of the mussel to produce mussels with traits that consumers want, or to further increase disease resistance, or to improve the organisms farmed performance? It is also important to understand the farming and the feeding regime to enable the optimization of the selection process. The mussel breeding cycle is so short that real progress in these areas using modern genetics could be made very quickly.
The seafood industry could also be increasingly involved in such technologies as cryopreservation to preserve gametes and embryos, stem cell and tissue culture for more effective and targeted seed production, and in adapting bioreactor engineering principles as used in microorganism production for the more complex organisms of aquaculture. We can also expect aquaculture to produce unique bioactives and functional foods for the production of pharmaceuticals and nutraceuticals.
And it is now possible to conceive of a marine-based genetic company owning and developing this genetic material, much in the same way as we now see in the dairy and sheep industries in New Zealand.
Inter-disciplinary interfaces are increasingly bridging previously disconnected biological based companies and providing new insights and opportunities. A current example is the overlap between the wool protein cosmetic product called Keratec and the food based protein products being developed by Crop & Food Research. Another example is the high performance patented emulsifier called Emulate developed by Crop & Food Research. Emulate is a combination of dairy protein and arable carbohydrate.
In fact, modern biotechnologies are tending to unify the businesses of food, medicine, health, and cosmetics. The same technologies that underpin research into nutrigenomics will be relevant to the development of cosmetics that are consumed not applied, and to food preparations that will act as preventative medicines.
This is an extraordinary opportunity for NZ - arising as it does from the increasing pace of change in biotechnology, our skilled scientists, and our drive to smarter foods as a sophisticated food exporting nation. We are a small enough community to ensure that the new collaborations that these projects will need will actually occur. It is within our grasp for NZ to become a true world leader in the application of modern biotechnologies and the Crown is supporting these directions with new and redirected funding.
Turning to market trends it is significant that the NZ food sector by and large sells into the most sophisticated markets, for example dairy, lamb, and kiwifruit, and is already working closely with international food distributors and retailers. This is a well established and effective vehicle that provides a route to consumers. From this, our high-quality raw materials base can increasingly be used to produce smarter and more sophisticated foods. This strategy reflects our export area orientation, and picks up the small scale of our production relative to world food trade. Adding value in this way overcomes the tyranny of distance to markets. The endless tariff and non-tariff barriers that exist in world trade will have a smaller significance with this higher value trading. If we can build on our raw material base and our technology base, through a relentless push for innovation and development, there is the opportunity to carve an improved niche for ourselves in the international market.
The catch in all of this is that sophisticated consumers are likely to want innovative foods second and food quality assurances first. An example of this is traceability warrants - where has the food come from and what has happened to it on its journey? The cost and complexity of this requirement is obvious but NZ food producers need to remember that European consumers have choices, so we need to provide both safe and special foods.
A vertically integrated sector can more quickly coordinate extensive research and development in response to this kind of threat or opportunity. On the other hand, a more fragmented sector, such as the sheep, fish or vegetable sector, may find it difficult to respond quickly, and these sectors may need to be more careful to ensure they don't miss opportunities and fall behind their competitors.
This highlights some of the problems the NZ food industries are running into. In the international arena we are seeing the increasing amalgamation of agri-food, agri-chemical, and pharmaceutical companies. NZ needs to be able to either compete with them, or cooperate, or play in niche market places.
With our high proportion of exported foods, it is unrealistic to expect that we will not want to retain control of our destiny and to compete in the world theatre for primary agriculture exports - and to do this we will need to ensure our structure is robust and optimal.
Where we elect to play in the niche field, and indeed we should do this as well, we will be able to run with smaller companies, but it would be really useful if they had access to the market place through cooperation with our larger exporting companies.
Indeed, commercialisation of R&D and its adoption in NZ agriculture seems to be particularly successful when vertical integration allows coordinated management of the process. This is clearly manifested in the dairy and kiwifruit industries where R&D has been undertaken with the benefits inherent in having a completely integrated approach to production, processing and marketing, and in addition having economies of scale. Surely the success of these sectors is not just an accident.
In more fragmented industries, successful formal collaboration between companies will be desirable to facilitate cooperation and genuine innovation. But it takes strong leadership for organizations to enter into genuinely collaborative research - for these projects by definition cross boundaries and cultures, involve complex management processes, require delegation of research funds, introduce difficult intellectual capital rights, and can have quite unexpected outcomes. The soft options - of industry clusters or memoranda of understanding - are often an easier way to start, but many have failed due to a lack of agreement on the purpose and disparity between the size of the entities within the clusters.
In our view, the level of cooperation and alignment required up and down the supply chain for sustained innovation requires either integrated ownership structures, or very well structured supply agreements, or very strong collaboration between industry participants, and possibly all three. There are examples of these arrangements throughout the seafood, meat, and vegetable and horticulture sectors - but are they enough?
NZ clusters, unlike their UK counterparts, do not enjoy the benefits of having three to five and preferably eight like sized companies - all of them at critical mass, all moving in the same direction. Maybe the seafood industry is ready for this, certainly it is in research. Note the Seafood Cluster and the Seafood Consortia - where many seafood companies have combined to match Crown funding in basic knowledge-deficit research. This will give rise to a substantial improvement in the intellectual capital in the seafood raw material base and the ability to create additional added-value products.
This process effectively mirrors that being trialed at Medialab South Pacific, a society which facilitates collaborative research and innovation in ICT. Here, an aggressive collaborative model is being adopted for projects involving early closure through commercial joint venture arrangements with well defined management processes and funding and IP rights. An embryonic example of this in action concerns the deployment of rural broadband with partners Fonterra, Telecom, Wool Equities, and Massey University, with Medialab as the paid manager. The difficulty with this business model for innovation is getting early commitment to a collaborative process. For many companies, hassled managers will prefer traditional, in-house organic R&D, will sidestep the opportunities offered by genuine collaboration.
Crop & Food Research believes that the innovation process tends to be successful where the discovery and innovation process has the discipline imposed by good management and a constantly updated commercialisation sanity check. The three processes, i.e. discovery, management, and commercialisation, need to be integrated with continuous feedback loops. Historically, many efforts to place innovation into purpose created commercialisation entities have failed, because the feedback loops do not work. The adoption of this approach has significant implications for the way Crop & Food Research organises itself internally to manage innovation and commercialisation, the way it interacts with industry and the universities, and the likely speed to market of the new technologies.
We return to our basic theme: firstly that NZ agriculture shows the way for NZ in terms of commercialising science and technology, and, secondly that the new biotechnologies offer a wide range of new opportunities and threats for the sector. The opportunities involve improving traditional processes and technologies, and in innovating and developing radically new technologies as befits one of the smartest food producing nations. The threats are that industry structures are too underdeveloped for all these opportunities to be grasped.
The third theme is that it is particularly important that the government funded science system recognizes both the importance of supporting traditional agriculture and related food sectors, as well as the innovative and new. Crown funded research and development support has been crucial in keeping the discovery pipeline full in the past and this needs to continue. After all, as we have discussed today, this is the best investment NZ Inc can make in R&D.
So finally - what does all this mean to seafood? The Seafood Industry has a turnover of about $1.3B - a little over 60% by volume is processed into low value or marginal value materials, or thrown away. It seems unrealistic that we would expect to see major growth in the sustainable wild catch; however, as deer farming has provided growth in that industry surely marine aquaculture should surely give rise to another 200,000 or 300,000 tonnes of fin fish supply product. The issue in aquaculture is that currently, it seems to use more raw materials from the sea than it grows. Surely there is a better way to do aquaculture, drawing on examples from land-based activities, arable and sustainable as we know them today.
What are the attributes that we need to have in feeds to optimise fish performance? What is the genetic disposition of those fish? Is there an opportunity to farm some of those wild species in a more sustainable manner? Is it sustainable to just feed the fish on what goes past? Should we be supplementing that better, and is it acceptable to have the tail from the aquaculture farm being untreated as it moves into the external environment?
These are all questions that need to be asked, and there are more to be addressed with regard to the value-add from the current catch. After all, we can only improve our performance with increasing revenue, increasing volumes, increasing our yields, increasing our grade or performance value add and decreasing our losses. We should not be focusing on costs as a primary driver, only as an important driver. Driving the top line will be critical.
In our view, the way forward is to sensibly and ruthlessly use access to research and development, placing strong expectations on research providers, to create what the industry needs and create value from that. Use that to build a stronger position for our industry - global - based off our sustainable base and enhanced utilization of that base, higher value products from base, best possible industry structure to access the market and damned good management and communication.
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