Bernard Hickey profiles an example of some New Zealand farmers who were able to break out of the commodity trap, thanks to some very special (and expensive) shoes

Bernard Hickey profiles an example of some New Zealand farmers who were able to break out of the commodity trap, thanks to some very special (and expensive) shoes

By Bernard Hickey

Farmers have dreamt for centuries of breaking out the commodity trap, and none more so than in New Zealand. We are as far away from our customers as almost anyone can possibly get and the things we produce can't be easily consumed in the form we produce them.

These fruits of the land, be they milk, meat, wool, fish or wood, have to be processed, packaged, marketed and presented to their end customers in Europe, Asia or America. In the past that almost always meant we had to sell our commodities raw, in bulk and to an intermediary or market that disconnected us from those end customers.

That meant our farmers, and therefore the nation, have had to simply grin and bear the wild swings of commodity prices and the inability to easily forecast for, or invest in, the future. We became passive price takers and hostages to the wrath of the market and weather gods. That was rammed home again in this week's Globaldairytrade auction when milk powder prices fell 8%. They have fallen 13% in the last month in US dollar terms, having bounced 78% in the two months before that. That volatility is before the overlay of a currency that even the Reserve Bank can't understand or forecast. Investing in anything other than the basics is tough with that sort of (in)visibility of revenues.

And largely, that's still the case today. Apart from a few exceptions such as wine and kiwifruit, we are still selling in bulk into a faceless and volatile market that gives us little sense of what the consumers of our wonderful food actually want or think of our products. Mostly those customers don't even know the cheese on their pizza is grass-fed or the wool under their feet came from the greenest of rolling hills under the bluest of clear skies. All of the 'story' and goodness that goes into what we produce is lost in the mush of an auction, a bunch of middle people in a long supply chain, and some one else's brand.

But there are a few examples cropping up recently of New Zealand farmers and businesses trying to 'close the gap on the map', either by creating their own brands and products, or working extremely closely with those that do, rather than simply selling to an auctioneer.

The best example in recent times is the budding relationship between New Zealand Merino Company, which is owned by high country sheep farms, Landcorp and a Danish company that makes indoor shoes out of calf skin and a special type of woollen felt.

Glerups will sell almost 200,000 pairs of these shoes globally this year for prices from NZ$189/pair and upwards. Started as a hobby business in 1993 by Nanny Glerup using wool from the her own Gotland sheep, the business prides itself on its 'passion for felt' and its strong connection 'from farm to feet'.

Glerups had been buying New Zealand wool through a British broker for years to mix with local wools, but was convinced by New Zealander Bill Carrig of Danish by Design to buy directly from farmers here. Glerups wanted a reliable source of high quality strong wool that it could be sure was sourced ethically and cared for the environment.

In March this year Glerups signed a two year deal with New Zealand Merino Company and Landcorp to buy 90 tonnes of wool a year for NZ$1.5 million. That gave Glerups the assurance of a certain quantity and quality of wool, and that the farms were environmentally sound and the farmers cared for their sheep. That's important when you're selling expensive shoes to city dwellers who want to be sure they're putting on 'ethical' slippers. Deals like this have forced New Zealand farmers to think a lot more about how they dock their lambs, how they manage their land and how they care for the wider environment.

The deal also gave Landcorp some assurance about future revenues and the confidence to keep investing in improving its sheep farms and the genetics of their sheep. It's been a long time since sheep farmers looked ahead with confidence, particularly in lowland areas where conversions to dairy have dominated land use decisions for the last decade.

The deal has been so successful and Glerups is growing so fast that it upgraded the long term contract this month when Jesper Glerup Kristensen visited several of the farms producing the wool in New Zealand. Glerups upgraded its contract to 120 tonnes for 2017 and enthused about the story behind the wool in the all-natural shoes. Creating that close connection between the farms, the wool and the stories that Glerups tells its customers helped 'close the gap on the map.'

The drive by New Zealand Merino Company's CEO John Brackenridge for longer term contracts and investing in quality and standards to break out of the tyranny of the commodity is paying off for farmers. He reported in the Company's annual report that these contracts delivered farmers NZ$9 million more in value in the last year than if they had simply sent their wool to auction.

Increasingly, new technology is making it easier for New Zealand farmers to close the gap on the map. Mobile phones, for example, are the type of asymmetric power tool that allows small businesses to connect to many customers in ways they couldn't in the past. Previously, farmers could never hope to reach the likes of Glerups or their customers directly or be able to tell a differentiated story.

On his visit Jesper Glerup Kristensen took video and photos of the farms where the wool in his eponymous shoes was grown to show his customers, who often buy online and read and watch those stories in the moments before they add the shoes to their virtual shopping carts.

It's time New Zealand's farmers took these sorts of opportunities to break out of the commodity trap and to realise that authentically connecting New Zealand's 100% pure reputation with our products can generate more money in the long run. The flip side is that if we don't tell those stories and create those brands, then others might do it in ways we don't want. All it would take is a PETA campaign or a BBC documentary on our river quality to turn those asymmetric power tools against us.

Meanwhile, it's probably best we put our best foot forward into a pure woollen shoe. 

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A version of this article first appeared in the Herald on Sunday. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Marketing wool as ethical is easy, where you have to get creative is when you explain how ethically the shoes have been made from 4 day old calf skin ;)

Is the food chain ethical? If you were stranded on a desert island for a year would you kill an animal to eat it or skin it to make clothing? We forget that we are part of nature, we are using our environment to survive like all the other creatures, the only difference is that "we" have deveoped concepts and ideas like ethics, no other living ceature would understand or care about such concepts.

Ethics is what helps us form and keep a complex society going IMHO. We are not just part of nature but have a huge influence on it. For instance since the 1970s fish stocks have halved, more species are going extinct due to us than nature. ie the population of preditors as the top of the food chain follows the population of its food. Once that food source collapses so does the preditors numbers, they starve to death. So sure when desperate we'll kill, the point is we should and do have the intelligence to avoid such occurrences otherwise we are just another stupid preditor and we'll go extinct.

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The dairy industry needs to stop using palm kernel as feedstock prompto. The story of 'grass fed' dairy doesn't particularly fit well with images of burning rainforests in indonesia.

You obviously have no idea what palm kernel or palm oil is, which is why you are blaming the one group not responsible for its production. If you want to see the reason the rainforests are burning, look in a mirror.

..i think you miss the point. A 'pure' sustainable high quality, desirable, value added, premium dairy product should have absolutely nil association with the indonesian palm industry. Brand destruction by association....mirror or no mirror. But if we just wanna be that low cost, homebrand bulk producer of undifferentiated product, keep up the palm by all means. Choke out our remaining clean waterways while we are at it too I guess....as long as it's okay to wade in, all is great in world Key.

Fine, make them stop using it then, seeing as it is the only thing prevent them from producing A 'pure' sustainable high quality, desirable, value added, premium dairy product In addition to the fact that this will stop the rainforest fires in Indonesia. If only all our problems were as simple to solve, we could just stand around all day pointing the finger at scapegoats instead of making any change at all to our own lifestyles!

..point missed again. You sound like a mounthpiece for Key and co. His view is well known...that as as we are so small, we only contribute a minor amount of environmental damage in a global context.... so why bother trying. Pathetic attitude.

/sigh
The PKE argument is one of the dumbest things I've ever heard, because nobody is growing the stuff to feed cows, they grow it for making everything from palm olive shampoo, to two minute noodles, and even for bloody bio-diesel. So some idiot claims that farmers are the criminals here is absurd, PKE is the waste product from the processing after all.

Curious if you spend extra to buy anything that doesn't contain palm oil? Would you even know? Is anyone at all doing this? Can farmers expect to get paid extra for not feeding it?
http://www.worldwildlife.org/pages/which-everyday-products-contain-palm-oil

I'm surprised I sound like Key, I hardly pay that much attention to what he says. Have the same people who think NZ can make a difference even though we are small, already made the necessary changes to their own lifestyle? In terms of globally I don't think it matters because the world is full of people who don't care, which is after all how we got to this point in the first place, and saying that now is different seems naïve to me. For myself and my family though, we try and drive as little as possible, and stop wasting money on crap, including tech gadgets, eating more of our home grown food, and we make a bit of money by producing some of the tastiest, 'real free range' pork and eggs. Per hectare the returns are infinitely higher than dairy ;)

baby formula is still a massive seller in china for online traders.
how have Fonterra and synlait not been able to join in?
http://www.smh.com.au/national/health/chinas-singles-day-to-blame-for-th...

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Good messages, Bernard. A small agriculturally-dependent nation, far from major markets, needs focus on value not volume.

However, industry and political leadership in our major agricultural sectors has this imperative in reverse. Instead of focus on value, we have industry structures that are focused on volume, that are set up to encourage and handle volume. Their outputs, being largely commodities, have little or no differentiated or persuasive value in contemporary, discretionary markets - those that are increasingly focused on premium products and are willing and able to pay for them.

When it comes to premium value in agricultural products, there is no bigger story than environmental consideration and ecological provenance. Yet these qualities are under extreme, and still fast growing, pressure in New Zealand.

It is often argued, on this site and elsewhere, that Chinese consumers care little for these environmental and ecological qualities - that their overriding or central care is for food safety. This may be the case now, and among large numbers of Chinese consumers.

But we can be very sure that this situation will change, and will change radically among the more educated, the richer, the more valuable consumer sectors. What consumers do we want? Those we can satisfy with commodities, at the expense of our own environment and economy? Or those that enable us to protect our environment and grow our own control and value in our economy?

The trend to premium products is well understood globally. As people gain more spending power, as they become more aware of differing product values, they seek out the brands and products that stimulate and satisfy their discretionary demands.

So, New Zealand's agricultural thinking is not merely pea-brained when it comes to volume over value. It is also irrationally focused on the short-term. This short-term focus - which accepts accelerating environmental degradation as some necessary cost of production - is fast cancelling New Zealand's ability to capture emerging premium consumer markets.

In these circumstances, the certain risk is that your comment regarding 'all of the 'story' and goodness that goes into what we produce' will be valueless, even deluded, unless there is radical change in our dominant agricultural sectors. The 'story' is coming to an end, and the 'goodness' is being destroyed. When premium consumers in China or anywhere else are looking for 'the story' and 'the goodness', New Zealand will have nothing to say, nothing to offer.

Well said. The damage key is doing will unfold over time - unfortunately when the penny drops with main stream media, it will be too late. He is a disaster.

That is a great comment but you have to ask why it hasn't happened. You can bet that the industry players are well aware of that strategy but the opportunities must not be as clear. Commodities are expected to be cheap and turning any amount of volume into high value is easier said than done. Its certainly not the Producers job to do it, so then, the Businesses to do this are missing... Why?

Caleb, yes, the issue is that the businesses to do this [create value-add products] are largely missing from the agriculture picture. These businesses are, or would be, the intermediaries between producers and customers.

The dominant sector, dairying, sets the scene for most political and industry thinking. And, bar a few other players, it's structured around a single, large-scale intermediary, Fonterra. Then, because Fonterra is focused on receiving volume (it has no choice in this whatever its competencies or lack of them), it processes volume into commodities.

It is as if, instead of a wine industry, we had one dominant player turning out volumes of bog-standard grape juice for commodity markets. Little other choice is available in the current model - either for producers or the potential ultimate consumers. Staying with the wine industry analogy, some producers may want to be in the grape-juice game; others may want to be in vinegar; others in specific varietal or organic wines etc. There are markets for all of these.

But dairying, via its one major, flat-footed intermediary, Fonterra, goes on grinding its ever increasing volumes into its ever more-ordinary commodities. The result is that the industry together with the country stands still or goes backwards. Added value in such a model is 100% pure fantasy.

An interesting observation, especially the contrast between the wine industry and dairy.

But the small players in both seem to prove the exception and not the rule when it comes to 'volume'. Yes Tatua can be consistent in producing better returns by fine specialisation. But most of the other 'specialists' are not doing any better than 'generalist' Fonterra.

And it is the same in the NZ wine industry. Deloitte monitors industry results comprehensively for NZWinegrowers and that clearly shows returns only get reasonable the more volume you produce. Apart from a tiny few small players, the smaller you are the worse your returns. There may be "markets for all of these" but there is no evidence that small NZ producers' revenues exceed costs (apart from a few exceptions).

And the problem with the exceptions is that they can't scale. And what makes them seem successful, can't be duplicated.

For all its flaws, we do actually have a range of 'volume', dominant success stories. Zespri is one. ENZA another. Perhaps using Fonterra as a foil is the wrong approach (although you can get the answer you want easily doing that). My sense (and I have no inside information) is that the shocks Fonterra has received recently have it galvinised into more assertive market actions. They are going to get no regulator sympathy at home from their dominant position, so they are going to have to succeed out in the international marketplace with their branding strategies. Lower volumes this year with a wider range of processing options, which they started building 5 years ago, should help them achieve better results.

True, David, the comparison between wine and dairy isn't entirely fair. My point is that generalist and dominant intermediaries tend not to do any one thing well, and tend, least of all, to be innovative or successful managers in premium markets. In agricultural sectors, which are crucially important to our well-being, this is partly a result of producer risk-aversion. And in these sectors, via their ownership structures, producer representatives have considerable influence if not control. It would be fair to say that boards tend to be weak. These factors, however, are the responsibilities of those in these sectors.

What dismays me is our nation watching the fluctuations of commodity prices from a position close to business - and thus economic - helplessness. And this while the quality of our agricultural environment, on which we all depend, slides further and faster into degradation.

The problem of effectiveness in premium product sectors is not, of course, limited to agriculture. Even Ford recognises that putting a blue badge on a vehicle - no matter how good its design and engineering - constrains any premium value. Either you specialise in premium sectors or organise a larger business appropriately to meet and protect premium needs or you do not. These are questions, not merely for Fonterra, but for many of our agricultural intermediaries and brand-owners.

We need, across the board, more effective answers. Perhaps, as you say, Fonterra is close to getting a grip on these issues. We do not have limitless time.

David, in a further response, I want to challenge your satisfaction with Zespri and ENZA as successful volume producers. Both of these organisations capture the bare minimum of value available in raw produce. If this is the goal, then, yes, they're successful. (Zespri, of course, seeks added value in its proprietary varietals.) However, the most significant rewards in produce lie further along the value chain. The ability of Heinz, for example, to add value to raw produce is well recognised. Premium products do just this - they capture as much product and market value as possible from any production process. We, generally, fail to do this. Fonterra, Zespri and ENZA are very few steps, if any, above the old NZ lamb marketing board.

And this is the point. If New Zealand doesn't add the value someone else will - with the result that New Zealand is trapped further in its (chosen?) position of commodity supply and cost constraint. Perhaps it's because New Zealand doesn't have a taste for the business commitment involved - it's much easier to produce, and be paid for, a tray of something than commit to business development. But one of the results, surely, is that high numbers of our brightest take their skills overseas, while both sectors - agriculture and horticulture - have more use and need for vast numbers of minimum-waged labour.

The question is whether we really want a first-world economy or not. If we do, Zespri and ENZA, like Fonterra, are limited models for what's needed.

Workingman... Do u remember Cedenco..??? It was a company created in the mid 1980s'.
When I knew it, it is processed tomatoes... http://www.cedenco.co.nz/

Its' life story ...is what seems to happen to NZ food businesses...??????

It is now owned by a Japanese company...
Japanese company outbid everyone because its' cost structure was so much lower than any NZ company.... and maybe it has different , or more National, views/values on food supply..??
ie. just the tax laws for foreign investment meant it could pay 3 % more than a NZ company , for the same ROI..... its' cost of Capital is so much lower..

I actually think Zespiri is a great success story... and is an example of value added... it is a strong brand...
You don't need to be some kind of vertically integrated company to have " value added"...

For me.... the conundrum is to have value added......AND.... have the primary producer , the farmer, take his fair share of the profits...

Heinz is not a great example of that... It is a conglomerate that probably uses its power to pay as little as possible to the primary producer....

I think Zespri is a great success story.... and has added value and maximised incomes for the farmers...
This is in contrast to what Fonterra is doing..... in my view..

No, Roelof, I don't know about Cedenco. You're right about the conundrum - sharing profit to producers though the value chain. Each participant in any chain, though, has different capital, risk and commitment profiles. So the conundrum's never easily solved. (But if we only look for the easy things to solve, we're never going to look too far.) Anyway, this is, I hazard, the same conundrum that exists between labour and capital in any free-market industrial sector.

My comments on Zespri weren't as nuanced as they might be. It does a great job with raw produce: via its brand, its varietals and its marketing arms. But it does remain raw produce.

Regarding Heinz, if you're looking for food for convenience, or in regions without the food safety and security we take for granted, something in a jar won't be a bad choice - if, of course, you can afford it. Heinz will, like any added value producer (or intermediary, such as a supermarket), endeavour to restrain or reduce its input costs. But, as an added value producer, it also has the opportunity to maximise customer revenue. We're too often stuck on the lower end of the see-saw.

Apparently Fonterror import a 3rd of all Palm kernel created so far. Never mind Palm Oil.

And that was before all these burnings to produce more are factored in to the equation of where the new product will be on-sold to.

Clean green New Zealand.. with even bigger cattle lots. How dumb is that.

People are choking on the smog. But do we care...??

If any one gives a jot, Greenpeace has a campaign going to help Indonesia with giving up smoking.... A simple Student is leading the Indonesian campaign....not the simple minded Indonesian Government.

Here is the students plea.

For 18 years smoke from annual forest and peatland fires have smothered entire cities in Indonesia, Malaysia, Thailand and Singapore. This year, with the El Niño it is almost unbearable.

This wouldn’t be happening if companies didn’t continue to destroy forests for palm oil plantations, threatening the survival of orangutans and tigers. Help me stop this, join my call for companies and authorities to: reflood peatlands; stop destroying forests; and close the market to companies causing deforestation.

Help Indonesians protect our health and save our forests! Please sign my petition: http://bit.ly/1OGhJYy

Rahmi Carolina
Indonesian student

I can only echo their plea...here, now and forever.

The 'story' is coming to an end, and the 'goodness' is being destroyed.

Really liked everything you said, workingman, but the above line deserves real attention.

I watched this 2014 NZ documentary online last night;

http://www.hotairfilm.co.nz/

All I could think was that the type of New Zealanders who won this battle - who forced politicians into paralysis - who smeared and lied and bought their way to further wealth - aren't the kind of New Zealanders any of us like to think we collectively as a society are.

The people pulling the strings couldn't give a damn about 100% Pure - except to use it as a slogan to hide the truth lurking behind.

Thanks for the link, Kate. We'll watch it with interest.

Great, let me know what you think!

It was a bit of an eye opener for me, and it's a subject I thought I knew a lot about - yet really had no idea.

Exxon is in deep doo doo, sure they have lied, just like the tobacco industry before them and we will be getting to see this as the investigation unfolds.

Interesting to see behind the sound bites we get in the media news, the hints at the type of lobbying the minister put up with.
Hard to argue with your conclusions Kate. Easy to see we get the future that we deserve by allowing these bastards the power they have. Im a climate denier, I don't believe we will destroy our world with excess carbon just excess poisons in general.

Bernard,as usual,understands the issues and addresses them clearly.

The average farmer is not a particularly impressive figure.They are price takers,not price makers and many have no great business skills.For most,the income stream is grossly inadequate to provide a decent return on capital and they must rely on tax-free capital gains to make the business work.If,as will eventually happen,they had to share the cost of their 'externalities';such as effluent and nitrate leaching,how many would survive?

My calculations are that the per kilo value of this wool $16.66 per kilo. Is this correct and were are the
figures to back it up. The same with the 9 million dollar saving claim easy to say but does he have the proof.

No farmer would knock creative opportunities that earn more for their base product, but down on the farm Merino NZ should ask why the volume of fine wool the farmers are producing is reducing. Many high country farmers have converted from merino wool to crossbred sheep and increased their cattle numbers as a direct result of not earning sufficent from fine wool production. The top end of the flock may earn good money but the average $ return per animal from merino wool does earn not enough for many of the high country farmers I speak to.

Interesting, thanks.