When is a commodity not a commodity?
I was at a political forum recently and heard the meat industry being slammed for sending whole carcasses to China without any addition of value. It got me thinking about how we export meat and other primary produce and what exactly does innovation mean when we are talking about the primary industry?
Complexity in degrees
Firstly I’ll start by stating that very few people understand the complexities of the meat industry (or indeed the milk industry), politicians included. The export of whole carcasses to China came about this season through a shortage of supply and increased demand. Meat companies were being offered more for whole carcasses than they were for meat processed further into specified cuts by other markets. So what should they do in this situation? The exporter’s role is to get the best return for their shareholders. The reality of this is that sometimes a low hanging fruit needs to be plucked, even when we know it is a short-term outcome. Similarly, last season Fonterra lost money on some of their value-add ventures, particularly cheese. In that environment for the short-term, they would have been better off selling more of that product as milk powder in such a high-demand season, but there will be wins in the long-term when commodity prices drop by adding value, so a balanced approach is required.
Exporting primary products is an interesting game. To give you an example, the Alliance Group exports to 65 countries globally. But on top of that, Mr Murray Brown, the General Manager of Marketing tells me they export a massive 1,800 different product specifications (which include co-products such as pelts and by-products, essentially edible offal). So in the context of that business, when is a commodity truly a commodity and what should our balance be, in terms of commodity versus added value?
The definition of a commodity (according to the great Wikipedia) is a marketable item produced to satisfy wants or needs. Products stop being a commodity when people care about where they come from. As I understand it that means if we sell milk powder as a great vat of unlabelled mixed-up product and we don’t know where it ends up, then it is a commodity. If we nicely package it into Karicare tins which people buy because they trust the brand, then it is not a commodity.
Working innovation well
So thinking about where primary industry innovation sits in this equation, I am reminded of an email sent to me by Mr Bill Henderson, an architect from Wanaka. Apparently a whole book has been written describing the complexity of the supply chain required to produce a lead pencil. Take that a step further and the complexity required to develop something as advanced as fuel cell cars is so great that even huge companies, like Toyota and Honda, need to collaborate and merge/acquire to gain the required expertise/innovation. So from this premise came Mr Henderson’s question to me: what is wrong with being an innovative commodity producer, if you are well paid?
Well, in my view, nothing is wrong with being an innovative producer, but I don’t think we want to be an innovative commodity producer for the simple reason that we want people to pay more for products knowing they come from New Zealand. I think where the gap in thinking for all of us is, is that innovation does not have to mean technical products, like a fuel cell car, it may mean something as simple as a consumer knowing where their food is from. And there is the catch, if that particular feat was so simple- a consumer knowing where their food comes from, we would all be happily gaining premiums for everything we sell, but when we are exporting multiple products – 1,800 in the case of our meat industry – to multiple markets, having a direct relationship with consumers in all those places is an enormous challenge and cost. Yes, it is a challenge we need to chip away at and most of our big exporters are, but in reality, there is a balance and there will be times when the best strategy will be shoving milk powder onto the mass market and not knowing where it ends up or selling whole carcasses to the highest bidder.
It’s about achieving balance
Like anything in life, solutions are always simple from the outside when we don’t understand the complexities involved. It is good to remind ourselves that innovation happens at many levels and is not solely within the domain of technical product companies. Innovation within the primary industry has to happen on-farm, in-market, and across disciplines and companies for us to realise the true worth of what we produce. Many of us are working to do just that but in this equation there is balance required- and short-term wins will be taken. Politicians, please note that just because we are selling the odd whole carcass to China, doesn’t mean the industry is going to hell in a hand basket.