WEDNESDAY 14 NOVEMBER 2007

Mr Murray Sherwin

  Q300  Earl of Arran: Ours is getting better, I think. My other question was on your attitude toward co-financing and the CAP; it is a little bit ambivalent. Are you able at all to elaborate on what you regard as the inherent risks of renationalising agricultural policy?

  Mr Sherwin: I think our concerns in that area are largely focused on the potential to lose transparency about the nature of the support and the complexity. For those of us sitting on the outside and trying to understand what is going on, it just becomes much more difficult to keep a track of the nature of the support and the extent of the support.

  Q301  Earl of Dundee: What do you consider to be the current obstacles following the Doha Round?

  Mr Sherwin: There are 190 member countries. There are clearly some difficult balancing acts being worked through in Geneva right now between trying to achieve the sort of levels of ambition that were originally laid down in the Doha mandate versus the concerns that many countries have to protect their own particular interests. There are no doubt trade diplomats who could talk for a very long time about exactly those issues. It seems that the key issues at present relate to access to developing country markets and also the treatment of sensitive products into developed country markets. I think the EU, the US and perhaps India and Brazil are the key partners to try to come to a conclusion on this. Our sense is that the agricultural negotiations have been moving reasonably well, but the non-agricultural market access issues and one or two of the other areas are perhaps moving a little less well, and they all have to land at the same time.

  Q302  Earl of Dundee: Following these aspects which you identify, what further concessions therefore do you think may be required of either the European Union itself or of any other parties?

  Mr Sherwin: I am reluctant to start trying to put issues on the table in this area but, as I said, I think it is still further movements on access to developed country markets and on the sensitive product areas in the more developed countries. I would be reluctant to go beyond that. There are sensitive enough discussions going on in Geneva that they do not need me muddying them.

  Q303  Earl of Dundee: You note that the policy agendas of the European Union and of New Zealand have much in common: both of those emphasise climate change, market forces, food safety, biodiversity and so on. How will those types of issues affect future international trade negotiations?

  Mr Sherwin: I think they enter the complexity of them and finding ways in which we are actually liberalizing trade yet allowing members to achieve the outcomes that they need in areas of climate change, and a number of other matters as well, is quite a balance. We strike this regularly in our negotiations with free trade arrangements in a bilateral sense. I think what we have reckoned with always is a tendency towards much greater complexity in some of these deals and the more complex they are, the harder they are to agree, but, with the right attitudes and the right will, one can bring those forward into agreements.

  Q304  Earl of Dundee: So far with these trade agreements and your own negotiations, where do you reckon you have had your greatest success?

  Mr Sherwin: The greatest success for us is typically managing to achieve greater access to markets because the key agricultural exports in New Zealand, and primary industries account for about two-thirds of our total physical exports, are very heavily protected just about everywhere, so we are trying to jump over barriers almost everywhere. In terms of free trade agreements, the best one we have by far is with Australia, and we have had that for some time. We are in the middle of attempting to bring to closure what will be the first free trade arrangement with China at present. Again, for us it is maintaining access to markets and being able to maintain also the degrees and standards that we require on bio-security in particular. Some interesting tensions in that area emerge in some countries. Just about any one of these agreements that provides us with some reduction in the trade barriers we face is a strong positive for us. We have a very strong vested interest in that.

  Q305  Baroness Jones of Whitchurch: If I could just follow that up, it could be argued that the only reason that you are here and putting such a strong gloss on how easy it has been in New Zealand, if you like, is all just part of a strategy to do away with the CAP and open up another market for yourself. I am just pushing you a little bit. I am using the word "gloss". I am sure you would not say anything that was inaccurate.

  Mr Sherwin: I hope I did not leave any impression that all that this was easy because it certainly was not. We are asked a lot to talk about the New Zealand experience because I think many countries are facing the prospect of having to do something with their own agricultural sectors and looking at what different models exist. I am usually very careful to try to say, as I think I have been saying, that the context is important and one cannot pick up one model and place it down somewhere else and expect it all to be the same. As I said earlier in response to the last question, our agricultural sector is our major industry. As we have gone through the deregulation process, it has constantly reasserted itself in terms of competitive and comparative advantage and we face extraordinary trade barriers almost everywhere with these products. Yes, we would like to talk about the fact that they are alternatives to heavily protected and subsidised models around the world. There is no doubt in our minds that for us to be successful in persuading a few others, it is likely to be helpful to us. I think it is also likely to be helpful to a lot of other countries, including those most prone to high degrees of protection. You could even argue in some cases that to the extent that removing the subsidies and protection would make some of those economies and the agricultural sectors in those economies more competitive, we are setting ourselves up for a bigger battle, but that is the nature of the world.

  Q306  Baroness Jones of Whitchurch: Are you going to visit France and Italy too?

  Mr Sherwin: I have just had a holiday with my wife in the south of France. It was the first time in a few years that I had been there. You cannot help but be impressed with the extraordinary opportunities that exist there in agriculture: the soils, the land, the space, the climate. But, added to that, and this is what really matters in all this, the brands that exist and can be exploited. They are all in there, and so the opportunities are immense.

  Q307  Chairman: I am going to come in behind Baroness Jones on this because you evidence has been very strong on general direction and strategy, the importance of transparency, and obviously as a producing nation you would want that. You have been pretty cautious, though, on offering any specific policy proposals. I am really going to tempt you and ask: what are the three big things that you think CAP reform ought to attend to?

  Mr Sherwin: I am reluctant to go there because, as I said at the outset, I do not hold myself out as an expert on CAP reform at all or on the particular setting in which people are trying to make their decisions. What I will say is: do not underestimate the adaptability of farm systems. I think almost inevitably when people are looking at reform propositions, they get very focused on down-sides and the up-side is completely invisible. There is huge opportunity to innovate and to change. There is a real danger that the regulatory regimes try to lock the sector into a particular point in history in terms of what it looks like and how it works and all the rest of it. Innovation is the heart of any industry. Secondly, we are all members of agencies like the WTO, IMF and OECD whose starting principles are around the benefits of trade liberalization and free trade. There are not many things that economists agree on but I think there is stronger consensus around that than just about anything else. I sometimes look around and wonder: how come these organisations have so many members because they patently do not seem to believe the principles that they a have signed up for. There really are gains to be had for welfare. Yes, there are some awkward distributional issues in those at times, but some real gains both for developed and even more particularly developing countries.

  Q308  Baroness Sharp of Guildford: Inevitably, once you move towards open competition, prices are going to be far more volatile than under a regime of support. How far have your farmers coped with such price fluctuations? Do you think there are lessons there to be learnt by the farmers in Europe?

  Mr Sherwin: They have coped. They have to cope because there is nothing else to step in. Again, we are a very small economy with an exchange rate that moves through quite a wide range. The exchange rate today NZ$ against the US$ for instance is at about 77/78 cents. It is not that many years ago that it was 40, so it is a big swing. When you are exporting overwhelmingly, and the dairy industry exports about 95% of its production, there are big impacts going through from that. The industry does cope; it copes by the way it structures its balance sheets, understanding that it is a cyclical industry, that there will be good times when you lower the debt ratios and catch up on maintenance and do some investment, and other times when you simply tighten your belts. Again, farmers are an astonishingly resilient breed. When they need to put the chequebooks away, they certainly do so. That is important. They have opportunities to hedge their risks in various ways, and I think they are becoming more sophisticated in that in terms of balance sheet hedging and exchange rate management and other risk as well. My personal view, which I am not sure that everyone shares around my organisation, is that one of the reasons why we have very strong co-operatives in our primary industry relates to the capacity to distribute risk in a way that a more conventional limited liability company does not and that we end up with these large producer-owned co-operatives in our primary sector because of the nature of the risks and volatility that they are faced with. That is more of a hypothesis at this stage. It is something we would like to do a little bit more work on.

  Q309  Baroness Sharp of Guildford: It is an interesting issue, is it not, of the co-operatives? The milk in particular was one that hit me when we were visiting New Zealand. We visited a dairy farm and they talked to us about the way in which they sold to the co-operative. In this country, the co-operatives have largely disappeared, have they not? Perhaps there is in that a lesson to be learnt in Europe.

  Mr Sherwin: We have experiments of course running as we speak in New Zealand with non-co-operatives, conventionally structured companies, emerging in the dairy sector. It will be interesting to see how they manage through these large price cycles.

  Q310  Baroness Jones of Whitchurch: Moving on to climate change, we are interested about the emissions trading scheme that you have. You have described in your evidence the elements of it. It seems to me quite a large concentration of that is about reforestation or capitalising on the forests. Would you like to tell us a little more about that? Do you think the forests are crucial to it?

  Mr Sherwin: Forests are certainly important to it, but I think reducing emissions is also important, perhaps more so. This is all very new for all of us to try to work out how to respond effectively to climate change. What has been announced in New Zealand is the intention to go to a comprehensive emissions trading regime, which is all greenhouse gases in all sectors. The application of that to the agricultural sector in particular will be very interesting to work through. We have a little bit of time to do that, but not much. I think it is going to involve a great deal of work around how we can reduce greenhouse gas emissions from agriculture. The most promising prospects on the agenda at this stage are new products such as nitrogen emitters applied to the soil, which hold the nitrogen in the soil longer and make the nitrogen more available for pasture growth and so forth. The other area of work in agriculture is a very substantial research agenda around basically a better understanding of the physiology of the moon and how you can work with that to both improve the efficiency of conversion of feed to protein, if you like, and reduce methane emissions in particular. That science is going to be more difficult but there is a lot of collaborative work internationally with the New Zealand science institutes and counterparts offshore, including the UK. That will be the focus of a great deal of attention. Forestry is important and some complexities there relate to the way the Kyoto rules are written and the way our forestry industry is structured. It is quite tempting simply to plant trees and solve your Kyoto obligations that way. I do not think it is going to work quite like that. Tree planting will be important. Part of that will be additional plantations of our existing Pinus radiata species, but I think a significant part of that is likely to be regeneration of indigenous forests in areas that should never have been cleared. One of the things that we are attempting to do in the ministry is to join the dots between sustainable land use, water quality issues and climate change so that we can encourage the reforestation agenda, but on land that is otherwise erosion prone, and that is likely to help manage some of our flood risks and other risks as well. Joining those dots is going to be very important to us. We do not want just to agree a climate change policy that runs independently of the other objectives that we have in mind.

  Q311  Baroness Jones of Whitchurch: Would you say that you were at the leading edge in terms of that sort of understanding of agricultural emissions and what needs to be done about it?

  Mr Sherwin: I think we are a lot more focused on it. Whether we are at the leading edge, I am not sure. The fact is that when you look at the Kyoto accounting, 50% of our emissions are livestock derived, so it is hard for us to deal with Kyoto without paying some real attention to the livestock sector, but it will not be easy. We are under no illusions about that.

  Q312  Chairman: How do you marry that approach, which is actually going to require intervention and regulation, with a liberal market?

  Mr Sherwin: That is where the emissions trading regime comes in. Basically it is a cap in trade regime, which is again all sectors and all gases. The adjustment process will be a long one. We would expect the agriculture sector for instance to start off with an allocation of essentially free units, which will be scaled down over a time period. A lot of technical detail goes into that. As an administrator, if you like, I get nervous about how much detail we may have to plug into that and how heavily involved we may need to be. One of the joys of my particular ministry at this stage is that we do not do a lot of regulatory work. We just are not equipped for that sort of thing. That is a new initiative for us and one that will be quite difficult.

  Q313  Viscount Brookeborough: You live a long way from your markets, perhaps not in the middle of nowhere. How much bearing do you think in the future food miles or wine miles are going to have, accepting that there are some murmurs of people saying that over the last 40 years they have been used to having food from anywhere in the world; we have strawberries at any time; we get something whenever we like it, and perhaps we should be thinking more about eating seasonal foods.

  Mr Sherwin: It is certainly something we have been focused on for a period of time. Food miles is a catchy phrase and easily catches the eye. The work that we have been doing is really trying to build the scientific base to add to the understanding of that and to ensure that this is not just about food miles but a broader greenhouse gas foot printing approach, which is much more on the full life cycle. I think people typically do not understand just how efficient modern container shipping is, certainly relative to other modes of transport. What is important to us has always been low cost production and low cost distribution. That is the hallmark of the business. The way I look at this is that if you can take a product unsubsidised and deliver it into a market at a competitive price, you are unlikely to be embodying a lot more energy than the price that you are competing against; you simply cannot afford that. We will do the number work or metrics around that. We have to be alert to it and it is one of the reasons why we spend a lot of time looking at consumer trends and what is influencing them and where the opportunities and risks are for us.

  Q314  Lord Cameron of Dillington: You say "we". Is that the New Zealand Government that is doing that market research?

  Mr Sherwin: In conjunction with our industries, yes.

  Q315  Lord Palmer: Before I ask my two further questions on climate change, did I hear you correctly when you said that 50% of your emissions are of animal origin?

  Mr Sherwin: Yes.

  Q316  Lord Palmer: Could you comment on the regulatory framework through which New Zealand aims to secure environmental protection and its perceived effectiveness in doing so?

  Mr Sherwin: Environmental protection is a big term. There is a core piece of legislation in New Zealand, administered by the Ministry for the Environment under the Resource Management Act. That is an effects based or outcome based piece of legislation that allows for local communities to be heavily involved in developments in their local communities and provides also, though, for overarching guidance in terms of national policy statements on things like water quality, air quality and so forth. I am sure there are learned people who could give long lectures on that. We could certainly provide you with briefing on that Act and the way it works and the way we apply that. The other and related area of work is something that we are engaging in directly with industry groups around responses to climate change, water quality and water allocation. If you wish to follow up on that, we can provide more material on it.

  Q317  Lord Palmer: That would be helpful. You probably see almost every day there is something about biofuels in the papers. Even day OPEC are saying how ineffectual biofuels are going to be. Some countries have been subsidising their biofuel production, a trend which some people say actually impacts on commodity prices. Is this likely to become a new source of trade distortion? In New Zealand in particular, what role do you think that biofuels might play in your own long-term agricultural strategy and indeed perhaps energy security?

  Mr Sherwin: There was a very nice article in the Financial Times I think last week by Martin Wolf on biofuels, which I would recommend to anybody on the economics of biofuels. He made a point which I agree with strongly that there are very few biofuel opportunities or options out there right now which are both economically and environmentally positive and that the tendency towards subsidising production of biofuels can have negative consequences both for the environment and for the consumer. Biofuels I think are certainly already influencing agriculture commodity markets. We have seen it in the dairy sector and in other sectors as well with pork and chicken, neither of which are major industries in New Zealand but we are certainly seeing those impacts on prices. For us there is a fairly modest biofuels target that has just been established by the government. My guess is that a sizeable portion of that will be met from imports. We have some obvious sources of biofuels: one is away from milk, which has already been signed up by one of the local distributors; the other is tallow for biodiesels. Both of those products have very high value alternative uses and putting them into biofuels by themselves is not necessarily economic.

  Q318  Lord Palmer: What type of uses spring to mind?

  Mr Sherwin: Food ingredient uses, a whole raft of other industrial outcomes and so forth but typically biofuels would struggle to compete with them unless support prices continue to spiral, in which case all bets are off and a lot of us will be doing lots of different things because they will become economically viable Our sense is that the first generation biofuels will not make a huge difference for us, simply because we are unlikely to have competitive production possibilities in New Zeeland relative to existing land uses. Second generation with lignose digestion, or whatever the term is, looks more promising. We certainly have opportunities there. Some are looking at waste product from the forestry sector, although I think if you want to do that sort of second generation biofuel, you would not necessarily start with Pinus radiata as your choice of feedstock. There is other work going on, whether it is algae on sewage ponds producing biodiesels and so forth, and that is all very interesting, and may well prove to be viable, but our sense is that we may well be better off to import biofuels at this stage and continue to produce our products and, to the extent that our product markets are influenced by biofuel enthusiasms elsewhere, that is fine; we will have some price advantages from it.

  Q319  Chairman: Just to finish off, unless my colleagues have any other questions, there is the problem with mindsets. When we did our recent report on the European wine regime, which is a dreadful construction across the regime, what struck us was that at least amongst some producers there was a degree of entrepreneurialism and innovation that was almost being repressed because of the nature of the regime itself. The greatest conservatism and protectionism was amongst agricultural politicians who tended to be very defensive and who basically came up with slogans which were really blaming the consumer rather than the producer, those sorts of silly things. How do you get that chain? Did you have a problem in New Zealand with your politicians? That is a risky question, is it not? Was there a protectionist element that really misread the situation?

  Mr Sherwin: I think, if you look at our political and economic history, it was that 1984 transition which was so spectacular. We skipped a whole generation in our politicians. We moved on from a set of politicians under Sir Robert Muldoon as Prime Minister. These were largely men whose formative years had been through the depression and the Second World War. They had a very deep commitment to protecting the ordinary bloke from all these nasty trends going on and had a genuinely felt need to protect what was dear and valued in New Zealand society, and eventually it became unsustainable. There were major balance of payments problems, inflation problems, fiscal deficits and all the rest of it, for the reasons we have talked about. In the incoming 1984 government the average age of the cabinet from recollection was only in its mid-thirties. We skipped a generation and went to a sort of Vietnam era generation of politicians, many of them successful professionals in their own right with no particular hankering to be long-term politicians, much more interested in the decisions and stimulated by the decisions than wanting to submit themselves for a career as politicians, and many of whom have subsequently moved back to very successful careers outside of politics. That was a strongly reforming government. I always remember the Harvard Business Review article on management reform, which was first: if you have not got a crisis, create one so that you can engender the energy and the drive for change. We had our own crisis and they were determined to take advantage of it in terms of moving the agenda forward. I think there are many people who look back now who were very anxious about that process and who would now concede at least that it set the platform for a much more successful economy subsequently over the past 20 years.