Vaccinations are now inherently connected to market access

It has been an interesting few weeks in New Zealand as ‘delta’ entered our communities beyond border controls ten weeks ago this week and besides my hair beginning to fray with not being able to get a haircut, so are tempers.

It is fascinating to observe human behaviour at times like these and given we have time being in lockdown if you ever need a good book to read, read Dan Ariely’s ‘Predictably Irrational’.

Day-to-day for me is working with New Zealand’s exporters, and a quote from Dan’s book came to mind because of conversations in recent weeks ‘people are irrational, and predictably so’.?

New Zealand, like other countries, are debating a point of contention of being ‘vaccinated’ or not, one’s right or choice. I understand and respect that but what is less visible or perhaps less understood is the interconnected risk (and stresses) it presents to New Zealand’s exports. ‘NZIER’ outlined last year that the structure of the New Zealand’s economy is now based on our exports, but the stakes are high.

It is ‘high’ as vaccinations are now inherently connected to 'market access’ as a preventative measure to the potential loss of access to critical markets. It is a ‘privilege’ to have access, not a ‘right’ like we have with our own choices.

It is a critical risk that if triggered sets off a contagion of interconnected risks with consequences that reach back into communities.

In the last year or so China, a critical market for New Zealand’s exports, has banned organisations and countries they deem to be high risk because of issues related to COVID-19. These issues extend from traces found on packaging to a ‘delta’ outbreak in operations which leads to a ban or a self-imposed delisting to the market.

It is understandable as they need to protect their citizens, but the challenge for organisations is how long such a ban lasts or takes to regain access. It is a question which has been put to me a lot in recent weeks so I reached out to a processor I worked with in my industry days in Europe who had been banned, and asked what it meant, and it was pretty dire…

It led to their business going from modest profit-to-losses immediately so to illustrate the effect I’ll use ‘ranges’ to cleanse what was shared with me.

China took approx. 20-30% of their total production, it attributes to an estimated 35-50% of total revenues with bottom-line contribution at 40-50% of total profit. China is also a market that has the ability to increase the range of products an exporter would harvest in their production because of their cultural eating habits and/or diets meaning should ‘access’ be lost you have a compounding issue of what do you do with those products?

It means these products go from being an asset to a liability.

It isn’t as easy to stop production of a product range as it may seem and in this situation they continued to build inventories of these products which cost the same to produce but were no longer able to sell to China at a profit, other markets could compete, and needed to sell inventories at a loss for cashflow purposes.

It isn’t as easy as holding inventory until you regain access as they are tainted per se as they are produced in a period when the organisation was banned, meaning that period of production is unlikely to be approved to sell to China once the market reopens to the organisation. So, you either sell at a loss, find a new market hopefully at a profit, or take an impairment charge at the time of the audit in the hope ‘timing’ or supply and demand move in your favour later.

These ‘losses’ do not include the effect on throughput and productivity as it transpired, they couldn’t compete on pricing for procurement of livestock because they did not have the returns of those approved for China. So again, you are left with a decision, do I decrease production until we regain access to limit losses, how does that affect relationships with suppliers who have been with us for generations, or other considerations of potential animal welfare issues, how long will this continue, and how long can we do this?

It led to an ave. loss of €200-250,000 a week for this organisation but thankfully able to be approved in a bit over a month with total losses exceeding €1m all because they lost access.

It took diplomacy of their Government and the relationship with their counter parts in China, leveraging the relationships and reputation of in-market partners such as clearing agents and/or distribution partners to collectively provide assurances steps would be taken to mitigate the identified risks.

It could have been catastrophic and led to them to assess the potential effect it would have on their communities and families who have worked for them for decades should downsizing operations need to be considered.

It led me to reflect on New Zealand and plausible to think if this was to happen it could exacerbate already challenging conditions we have observed with COVID-19, be it, with families working in these operations going down to single incomes, with less to pay for food or other outgoings, stress it creates or back to the farm gate and the returns that our farming communities have been able to achieve.

You run the numbers on the amount of families it connects to it is alarming.

It can also lead to dampening the appetite to invest in New Zealand’s response to other challenges such as climate change or new energy sources to be competitive in the future.

Yes, people are irrational, and predictably so but question for me is if they had a deeper understanding of what is at risk, would their behaviour change?

Ngā mihi,

Andrew Watene

Director and Head of KPMG Propagate?

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