21 March 2007
Address to NZ Large Herds Association Conference

Edgar Centre, Dunedin

Thank you for inviting me to speak here this morning.

It is often said on sports talkback that when the Auckland rugby team is strong the All Blacks are strong. As an ardent Auckland and Blues supporter I think that's absolutely correct!

I also think a similar statement is just as correct – that when the primary sector is strong the New Zealand economy is strong.

So today I'd like to talk about why the primary sector remains at the heart of the New Zealand economy. That's not going to come as a big surprise those of you at this conference, but it will to many other people, including some politicians.

I want to reassure you that I understand, and National understands, the importance of the rural economy and we also understand the needs of rural communities.

In the middle of this year I am going to release a discussion paper on agriculture which my colleague David Carter is currently working on. In this paper we are going to have a lot more to say about the primary sector, and about the issues facing rural communities.

Today, though, I want to talk about one very pressing, and very topical issue facing the primary sector. That issue is climate change, and New Zealand's response to it. I am going to outline National's thoughts on climate change as it relates to agriculture in particular.

To start with though, I want to reflect on the contribution of the primary sector to the New Zealand economy.

The primary sector has always been our biggest export earner. Exports of dairy products, meat, wood and other primary produce currently make up two-thirds of New Zealand's merchandise exports.

This is despite our producers battling in international markets against competitors who are protected by trade barriers and who exist to a large extent because of public subsidies.

So when New Zealanders are sitting back in the evening watching their television imported from Japan or answering their mobile phone imported from Finland, they should send out a prayer of thanks to those farmers, orchardists, foresters and fishermen who earn foreign exchange for them.

The primary sector has a pre-eminent position in the New Zealand economy. According to the latest figures, the primary sector makes up 6.8% of New Zealand's

GDP, or around $10 billion every year. That's a measure of how much value is added on the farm, or in the orchard, or on the forestry block.

When you're thinking about the importance of the primary sector though, this is just the starting point. Farms, for example, create demand for fertiliser, for sheep trucks, and for sale yards, and provide materials for downstream manufacturing – for wool scourers, for carpet manufacturers and for freezing works.

The Meat and Wool Economic Service estimated a few years ago that under this wider definition, agriculture makes up 17% of GDP. When forestry is added to this, the contribution of the primary sector comes to about 20% of GDP. On top of this, the viability of most small towns in New Zealand depends on the primary sector.

So if conditions are good at the farm gate then this flows through into the small towns, into the provincial cities and ultimately into Auckland, Wellington and Christchurch. And it's the same when things aren't going well. To paraphrase an old saying, when the primary sector sneezes, the New Zealand economy catches a cold.

All of this should remind New Zealanders of how important the primary sector is.

Why do we need reminding? I think there are a couple of reasons.

One is that an increasing number of New Zealanders live in cities. They don't have much experience of rural life. They see the farms that border State Highway 1 and that's about it.

Mostly, however, I think it's because for years people have been forecasting the demise of agriculture in New Zealand, and the demise of the primary sector more generally. People have long considered this sector to represent a bygone age – a pre-industrial era which New Zealand would grow out of as it matured into a modern economy.

After the Second World War, the glamour sector was manufacturing, difficult as it is to believe now.

In recent years there has been a lot of interest in the "knowledge economy". With the way some people use this term you can tell they think agriculture is a primitive way of making a living, and should be replaced by high-tech information industries.

They forget that agriculture, and other primary sectors, are high tech and are becoming more and more so all the time. They overlook the fact that the primary sector is already knowledge based. After all, it takes an enormous amount of knowledge to convert soil nutrients and sunlight into an export-quality rack of lamb.

We are good at doing that. We have a genuine competitive advantage in agriculture and in other primary activities such as horticulture and forestry.

MAF's Director-General Murray Sherwin gave a speech which summed it up perfectly. "It is in agriculture," he said, "where we have something approaching global scale, where we have accumulated and effectively applied unique intellectual property, and where very strong and sustained productivity growth is being achieved of the sort that is essential to support a high growth, modern and wealthy economy."

Far from being a sunset industry, the primary sector has been one of the great success stories of the New Zealand economy.

What is more, it hasn't been a great success story because the government has been heavily involved in the industry. It has been successful in no small part because the government kept out of the way. I'm sure that's a lesson for all of us.

So what does the primary sector want from a government? At a very high level, my impression is that it wants two things.

First, it wants a government that understands how rural communities work and uses this understanding to inform its policies.

Second, it wants a government that understands business and trade, and has policies that will support private enterprise.

In terms of the first desire – a deep understanding of rural communities – there is only one party in New Zealand and that is the National Party. We have always had a strong representation of farmers and rural professionals in our caucus. In turn, rural New Zealand has always been the backbone of the Party.

That's reflected in the fact that either National's Leader or Deputy Leader has almost always been a farmer. In this regard I'm fortunate to have Bill English as my Deputy. Bill started his working career as a farmer and still owns rural land in Dipton.

As well as Bill, we have five other farmers in our caucus – David Carter, Nathan Guy, Shane Ardern, Lockwood Smith and Colin King. These guys know more about agriculture and about rural communities than anyone else in Parliament.

That knowledge has been brought to bear on all the recent policy debates that impact on rural communities, like those on land access, tenure review, the fart tax, and dog chipping. And I promise you that our policies in the future will take into account rural issues and the concerns and expectations of rural communities.

In contrast, Labour doesn't have that fine-grained understanding. It has no farmers in its caucus and it has no farmers on its list. It did have Jim Sutton, but funnily enough he was the first to get the push.

As a consequence, Labour has trouble seeing past the 100k sign on the outskirts of town. I don't think that's good enough. I think it's a poor government that is concerned only with what goes on in the cities and ignores what happens in the country.

The second thing I think the primary sector wants is a government that understands business and trade.

Farming is a business. Horticulture is a business. Forestry is a business. Fishing is a business. These are often very large concerns. Fonterra, for example, is twice the size of any other New Zealand company.

Individual farms are often quite sizeable businesses as well. The average dairy farm has assets of $4.2 million and the average sheep and beef farm is worth $3.8 million. Larger properties have assets worth tens of million dollars.

The primary sector therefore has to deal with all the issues of compliance costs and over-regulation that other New Zealand businesses are faced with. Some of these, like ACC costs, rates increases, and effects of the Resource Management Act, have hit the primary sector particularly hard.

ACC is a good example. One of the first things Labour did when it came to power was to remove all competition from the accident insurance market, and ensure that only the state could provide this service. As if that isn't enough, this monopoly supplier is currently spending hundreds of thousands of taxpayers' dollars advertising their services. It's as if they want us to buy more accidents!

As a result of removing competition, ACC rates for self-employed farmers are now almost two-and-a-half times higher than when competition was available in this market.

I want to confirm today that National's policy is to re-establish a competitive market to provide accident insurance. This delivered more efficient accident coverage in the 1990s, and will do so again when National forms the government.

Trade is of course a paramount issue for the primary sector. Some 87% of what is produced on the land in New Zealand is sold overseas. We are the world's biggest dairy and sheep meat exporters.

National has always supported free trade in agricultural products and has pushed hard for this over many years.

Our Trade Spokesman Tim Groser was formerly New Zealand's Ambassador to the World Trade Organisation and within that organisation was Chair of Agricultural Negotiations. You don't get better credentials than that.

Under Tim's guidance we will be working tirelessly to persuade other countries to relax their export subsidies, improve our access to overseas markets, and reduce the level of domestic support offered to farmers overseas.

I now want to turn my attention to climate change and the primary sector. I want to focus on agriculture today since this sector, according to the Kyoto rules, is responsible for half of all New Zealand's greenhouse gas emissions.

I don't want to dwell too long on what Labour is doing, but I think I should first of all issue a brief warning.

Labour's stated aim is for New Zealand to be carbon neutral. In other words, Labour wants New Zealand to have no net emissions of carbon at all. Furthermore, the Prime Minister has made it quite clear that this includes carbon dioxide-equivalent gases like methane and nitrous oxide, not just CO2 proper.

It's hard to overstate just how unrealistic, and indeed unattainable, this goal is. No other country in the world has such an extreme target. In fact I don't know of any political party in any country in the world which advocates anything near this target.

So why has Labour made this its policy?

It's behind in the polls. It's looking for a new big slogan. It wants to cosy up to the Greens, on whom Labour would have to rely to form a government.

But having made such an ambitious target, the pressure is on Labour to do something big to reduce carbon emissions. When push comes to shove, the temptation will be to do this in the sector which will cost Labour the least votes, and that is agriculture.

Labour's base of support comes from the city electorates, not from the country. Its voters are in South Auckland, not South Canterbury. It can afford to annoy the farmers.

If you think that is exaggerating things, have a look at Chris Trotter's article in the Dominion on 2 March 2007. It's a good indication of what the political Left thinks of farming. He talks about the corporate greed of farmers and compares them to the crooked Enron corporation in the US. He says farmers are in a privileged position and hysterically refuse to accept even minimal environmental obligations in the fight against global warming.

So don't be surprised if you see some ad hoc agricultural climate change policy from the government between now and the next election.

National, on the other hand, thinks it's vital that any climate change policy does not contain any sudden lurches, not least because farmers have made - and will continue to make - long-term investments in land and in productive assets. I want to assure you that we aim to bring stability and certainty to the whole area of climate change and agriculture.

The food miles debate has been something of a wake-up call for New Zealand.

Long ago our shipments of frozen butter to the United Kingdom were called a home-grown technological breakthrough. Now they are being portrayed as a "crime of consumption" by UK butter firm Dairy Crest, in full-page ads in the British Sunday papers.

This experience has shown us that if we don't have a credible agricultural climate change policy, then overseas consumers – whether they are sophisticated and discerning or whether they are simply misinformed – will impose one on us.

The food miles debate also reinforces the point that our efforts in the area of climate change aren't just about a being a good international citizen and doing our bit for the planet.

Climate change, and the perceptions people have around it, affects the brand image of New Zealand and therefore affects the demand for our primary produce.

Our reputation for having a clean, green, healthy environment is a natural advantage for us, but we need to nurture this into the future. Overseas consumers are only going to become more concerned about where their food comes from and what has gone into making it.

This is not the usual kind of threat to our exports. We have become used to government-mandated restrictions and subsidies. This new risk comes from consumers themselves.

So there are challenges ahead for the agricultural sector. But if you think about the history of agriculture in New Zealand there have always been challenges. They have typically been met by relying on a good scientific base, the use of new technologies, and the ability of farmers to change their products and change their processes to meet new consumer demands.

Agriculture has continually proved itself to be dynamic and innovative; it is not stuck in a time warp. Farmers are resilient folk.

I am therefore confident that the agricultural sector can adapt to the challenges that climate change poses. I believe we can achieve higher environmental standards and develop a low-emissions agriculture brand that will keep our products competitive in overseas shops.

This is going to take good, sensible policy settings from the government, as well as actions on the part of individual farmers.

So what would a National government do? I want to outline some of the principles on which our policies will be based.

First of all, we think that no one sector should be the fall guy in terms of climate change. In particular, we are not going to put at risk the agricultural sector which is at the very heart of the New Zealand economy.

There is no point risking the competitiveness of our key export earner in the short term, when we are confident that technology and innovation will address these issues in the long term. Economic growth and improving the environment can and must go hand in hand.

The fact that farm animals cause half New Zealand's emissions doesn't mean farmers should have to, or could even possibly bear half the cost of emissions reductions.

The overriding question is who can reduce emissions at least cost to society and to the economy.

Don't get me wrong. Each of the four main emitting sectors – energy, transport, industry and agriculture – is going to have to play its part in reducing New Zealand's emissions. But there are good reasons for treating one emission source differently than another.

We want people to use less energy. We don't want them to eat less beef.

There are alternatives to generating electricity from coal and gas. There are no other ways I know of to create a sirloin steak.

So there is a big difference in the way we should and must treat emissions from the energy sector, or the transport sector, as compared to the agricultural sector.

We do want sectors to take what cost-effective actions they can to reduce their emissions. But in doing that we will have a "horses for courses" approach. This will seek to reduce the cost of climate change to businesses, to consumers, to taxpayers, and to the environment.

Technology, based on good science, will be the key to reducing our agricultural emissions. Think of the history of farming in New Zealand. The big challenges have always been met using world-leading agriscience and technology – shipping frozen meat halfway round the world, for example, or topdressing with super phosphate.

In the case of climate change, we have to find ways to make the digestion of cows and sheep more efficient, to develop new forage varieties and to use nitrates in a better way.

Arguably, no country is in a better position to find solutions than New Zealand. These solutions will also be extremely valuable on the world market.

Farmers already contribute to funding research through the Pastoral Greenhouse Gas Research Consortium, matched by the government. But more research funding will undoubtedly be needed.

National believes the government should put more money towards funding research into emissions-reducing technology. One of the reasons we put forward the idea of a $1 billion sustainability fund is that the cost of the transition to greater sustainability in agriculture cannot be borne by the primary sector alone.

Labour is keen to regulate and penalise emitters. But National's policies will offer encouragement and incentives to farmers, not just punitive measures. We are also going to trust farmers and work with them on developing policies. We have to. After all, we don't have the knowledge farmers do.

Helen Clark's latest catch-phrase is "sustainability". She mentioned it 33 times in her first speech of the year, and says that's what New Zealand should be all about. But I say to her, who knows more about sustainability than farmers? Their livelihood and all their wealth is tied up in one asset – the land. They are custodians of the land, and look after it for theirs, and for future generations.

The Dairying and Clean Streams Accord is an example of farmers' interest in, and commitment to, good environmental outcomes.

I think farmers will work with any sensible environmental policy if they're treated with respect. It's when farmers are pushed around by the Government or a local body that they resist.

That is why National produced a discussion paper last October on climate change and the environment. There has been an overwhelming response to the publication of this document. The positive reaction we have received from farmers shows they are not opposed to environmental measures, they just want a set of policies that enable New Zealand to be both rich and clean.

Over the next months my environment team will be sitting down with a lot of sector groups, including agricultural groups like Federated Farmers and Irrigation New Zealand, to discuss these issues. We will be looking to finalise National's policies over the next few months.

I want to finish by wishing you all the best for your conference. The primary sector benefits from conferences of this type, and the opportunity to discuss issues with your peers.

That's important because the future of our primary sector matters so much for the future of New Zealand.

Thank you.

21 March 2007
John Key on KiwiFM - 21 March 2007

21 March 2007 - National Party Leader John Key's weekly interview on the Kiwi Fm Wallace Chapman Breakfast programme. Broadcast Wednesdays at 8:40am. [8:05]