With demand for food expected to double by 2050, the Asian market is a huge prize awaiting the Australia and New Zealand fresh produce industry. To seize it will require attracting foreign investment and overcoming current impediments, reports National Bank of Australia’s Patrick Vizzone. He spoke 24 June at PMA Australia-New Zealand’s Fresh Connections
2014 in Auckland.
Vizzone set the stage by forecasting future food demand expected from Asia. By 2050 China alone will comprise 40 percent of the world’s incremental food demand, he noted. And “the largest increases in global food demand should come from fruit and vegetables, about one-third of that incremental increase – a very bullish story,” he told delegates.
How to seize the Asian market prize? “The only way we will capitalize on this unbelievable opportunity is by attracting the capital investment needed to unlock the necessary productive capacity, and to create solid domestic supply chains,” Vizzone said.
Exchange rates, cost convergence at work
More favorable exchange rates and cost convergence are helping to pave the way for expanding regional exports to Asia. For example, in some cases China has gone from a cost leadership position to being one of the more or the most expensive places in the world to produce.
“This phenomenon will continue to drive trade and investment to lower-cost production areas, or value areas, or areas that have strong biosecurity,” said Vizzone, hinting at opportunity for Australia and New Zealand.
Food safety is a key consumer concern
It isn’t all about food prices, Vizzone noted; food safety is the top issue for Chinese consumers, who “are actually more afraid of eating something that will make them ill rather than some degenerative diseases like cancer,” said Vizzone. “That’s why for Australia and New Zealand, biosecurity is paramount and such an incredible comparative advantage.”
Trade agreements pave the way
Vizzone also expects that “free, or freer” trade agreements bode well for the fresh produce industry. Case in point: since New Zealand negotiated a free trade agreement with China in 2008, its trade deficit of $2 billion has become a surplus $1.3 billion.
Currently, New Zealand is negotiating bilateral agreements with India and Korea. Australia recently signed agreements with Korea and Japan; both New Zealand and Australia are participating in the multilateral Trans Pacific Partnership trade negotiations.
Foreign investment is key to future growth
“So we are well placed to satisfy Asian demand,” Vizzone told delegates. However, “creating the additional supply will require lots of capital, a known challenge for Australia and New Zealand.”
He noted both countries have relied on foreign direct investment (FDI) since their inceptions; both have thin capital markets, and FDI has historically filled the gap. While it is “still very early days for agribusiness” in Australia and New Zealand, he reported that cumulative investment in Australia is only about $1.5 billion, or 2 percent in overall investment. In New Zealand, it’s about one-third of that.
Impediments to overcome
Both countries must overcome serious impediments if they are to attract needed foreign investment, noted Vizzone. New Zealand is one of the world’s most restrictive FDI markets, based on an international scale. Meanwhile, during a recent roundtable Chinese investors to Australia universally complained about underdeveloped infrastructure, complicated approval processes and other barriers.
“One of the key challenges to increasing productive capacity in Australia and New Zealand is addressing the bargaining power imbalances that decrease farmer returns and distort pricing signals up the chain,” said Vizzone. “Industry really needs to have an unemotional, fact-based discussion about this.” In both Australia and New Zealand, consumer prices have rapidly outpaced returns to producers.
“It’s perhaps no coincidence that both these markets are amongst the world’s most concentrated retail environments,” he told delegates. “So what? The impact of this is clear: It makes the sector less investable. A strong industry will attract greater investment.”
And increased investment will promote increased concentration in the farm segment, he added.
Looking at the other side of the coin, Vizzone also noted that Australia and New Zealand can play a significant role in helping China and Asia to manage food security.
His bottom line: “Asian strategic players are very cash rich, and ready to invest. But in order to attract that investment, we need to get our domestic house in order.”
Vizzone spoke not only as a banker but also as a farmer himself. He helped build and run a farm in China 15 years prior. “The environment now is far more conducive, and the prize is much, much larger,” he noted.