1. Radical is the new normal Rod Oram’s presentation to the Irrigation New Zealand Conference Napier, April 8 th, 2014 Securing the future Kiwiki on Facebook / Twitter @RodOramNZ Rod.Oram@NZ2050.com / +64 21 444 839

2. Agenda New Zealand Dairy Paradox Revolution

3. The world …is doing OK, broadly speaking Some economic traumas…...and big changes…still to come But most economies are showing more stability and momentum Europe first signs of recovery Australia slogging US strengthening Asia succeeding …enough for us to earn a living

4. Our growth …is gaining momentum Largely driven by Christchurch, whole milk powder, housing market, consumption Export volumes growing only slowly…as is business investment Reserve Bank forecasts Growth in year to March: 3.0% in 2014 3.5% in 2015 2.4% in 2016 2.3% in 2017

5. Our economy is constrained The economy is constrained by e.g. Skills and capital shortages Weak business investment Limited government investment As a result “potential GDP” (the rate at which the economy can grow without causing inflation) is low

6. Government Strategy Mk III “Business Growth Agenda” 6 ingredients of business growth All driven by incremental change Doing a bit more, a bit better Some big goals E.g. lift exports from 30% of GDP to 40% Failure guaranteed if the game is more of the same

9. NZ’s exports remain far too small a contributor to the economy…. …and have stagnated at 30% of GDP …government goal of 40% by 2025

10. Our exports 2013, in value terms Exports to China:+45% Exports to world:+ 4.4% Dairy exports:+17% All exports:+ 4.4% Volume of dairy exports grows slowly

11. Some simple maths We need to double the size of the economy in 15 years in real terms To maintain its role, the primary sector needs to double too Government wants primary sector to double…grow, say, 10% a year The primary sector can: Grow volume a bit…but real physical constraints in New Zealand Grow productivity a bit…but historic rate of NZ agricultural productivity increases about 2% a year Benefit a bit from higher world prices…but commodity prices moderated overseas competition and politics Earn a bit of a premium for NZ quality and brand…but it would need to break free from retailers’ stranglehold Stave off overseas competition a bit…but the competition gets ever better on cost, volume and quality Government’s primary sector strategy: incremental growth of current model …but the primary sector’s current commodity model fails on simple maths

12. Agenda New Zealand Dairy Paradox Revolution

13. Opportunity Growing world demand for dairy products NZ response At home…more cows, more intensity – national herd doubled in 20 years Overseas…some milk buying, & investment in farming

14. Rabobank…on NZ competitiveness t

15. Holding our own

16. Our impressive rise in volume But some overseas producers growing fast E.g. Ireland: 50% more milk by 2020 +5bn litres 100% by 2025 +10bn litres

17. Our impressive rise in costs

18. Diagnosis - Value Creation World Economic Forum – Global Competitiveness Report Competitive advantage measured on a scale of: 1 = low cost of natural resources to 7 = unique products & processes New Zealand scores 3.8 Ranks 36 th

19. Diagnosis - Value Capture Value chain measured on a scale of: 1 = role in chain mainly confined to one step, eg resource extraction …to 7 = involved all the way down the chain, capturing extra value New Zealand scores 3.8 Ranks 58 th

20. Value – creation and capture $25.3bn – Shipped value of our food & beverage exports (fob) $140bn - $200bn – Consumer value of food & beverage products primarily of NZ origin; source – Coriolis Research 1 Fonterra plant in NZ makes infant formula for Pfizer 8% Pfizer’s Chinese market share for infant formula US$12bn Nestlé paid for Pfizer’s infant formula brands = 3 x Fonterra’s net asset value

21. NZ investment in value add…in NZ Fonterra’s UHT plant at Waitoa

22. Chinese investment in value add…in NZ Mengniu’s infant formula plant at Pokeno

23. Is US$3,500 still the long-run price?

24. Agenda New Zealand Dairy Paradox Revolution

25. Paradox Abundance Scarcity

26. Poverty Cows Scientists

27. Poverty Tourists Engagement

28. Poverty Sustainability Weak Strong

29. Re-invention Scarcity Abundance

30. Wealth Lacto-pharmaceuticals Milk powder

31. Wealth Travellers Tourists

32. Wealth Sustainability Strong Weak

33. Agenda New Zealand Dairy Paradox Revolution

34. Comvita – a 10-year transformation

35. Comvita’s value chain Building it by… Floating on NZX to raise funds Buying back distribution Investing in retail Investing in science Investing upstream in bees Virtuous cycle… …each step generated new cash flow to take the next

36. …Comvita today

37. Deals and relationships In 2010, Comvita licensed professional wound care to Derma Sciences, US In 2013, Derma Sciences took 7.3% stake in Comvita to help fund upstream investment in manuka honey production

38. Comvita: High science, high value 250gm of honey Clover honey…………………………….. 1 Comvita wound care……………………. 25x Comvita wound dressing………………. 55x

39. 2010 EBITDA 2010 total environment cost as a % of EBITDA Source: Trucost 2012, KPMG 22 153 84 100 223 89 97 26 134 670 482 0 100 200 300 400 AirlinesAutomobilesBeveragesChemicalsElectricityFood Producers Industrial Metals Marine Transportation Mining Oil & Gas Producers Telecom & Internet US$ in billions 800 700 600 500 52% 22% 42 % 43 % 87 % 224 % 71% 59% 64% 23 % 2.5 % Full environmental cost of food production US$199bn Opportunity: Reducing farming's environmental impacts will: Improve nutrient and resource efficiency Increase value, resilience and sustainability

40. NZ Agricultural Greenhouse Gas Research Centre Global Research Alliance on Agricultural Greenhouse Gases Proposed by NZ government at Copenhagen in 2009…to: Reduce emissions; increase food production Help developing countries to join global climate change frameworks Alliance now has 36 countries + 3 observers including the EU = 70% of global agricultural GHGs; agriculture = 15% of total GHGs Three main workgroups: Livestock, led by NZ and Netherlands, 483 projects identified to-date Croplands, led by US, 429 projects to-date Paddy Rice, led by Japan, 60 projects to-date Secretariat: NZ NZ Agricultural Greenhouse Gas Research Centre: $48.5m over 10 years Four main workstreams: Mitigate methane; mitigate nitrous oxide; increase soil carbon; deliver farming solutions

41. Our opportunity 1 litre of milk = 940 gm of CO 2 equivalent 20,000,000,000 litres = 18,800,000,000 kg of CO 2 eq 18.8m tonnes of CO 2 eq per year is not a waste product, a liability Closing the nutrient cycle… is a brilliant business opportunity… healthier cows and soil… = more food

42. Ruataniwha - a major initiative Challenging…and on some issues pioneering Scale Nutrient control User price structure Infrastructure proposition Ownership structure Government funding

43. Ruataniwha - a personal view, pre-draft decision Storing water ✔ But climate change accelerating Environmental flows ✔ But flushing is a fix not a cure Farming upside ✔ But perpetuates commodities Nutrient management?Controversial, unproven approach Ecological integrity?Offsets aren’t integrity Economic viability?Water price, contract are a big ask Corporate structureXOwnership complexity, conflicts Government fundingXDebt; must be long-term equity Economic developmentXDoesn’t lift region up value chain Public trustXCase not yet compelling

44. a a How about creating the NZ-China Global Centre for Dairy Nutrigenomics

45. “You’ll have no future… …if you don’t make one for yourself” …Johnny Rotten: