ANZ Agri Focus is a bi-monthly overview of developments in the rural sector, combined with research on topical issues.
Written by Con Williams, ANZ’s Rural Economist, ANZ Agri Focus typically includes feature articles on current topics, a review of the past month and the rural property market. ANZ Agri Focus also includes information on key commodities and financial market variables along with an economic backdrop and information around borrowing strategies.
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Feature article: Forestry – The case for more investment
The forestry sector is currently experiencing a period of strong returns. Many of the drivers look like they could extend for a number of years. Yet despite this positive outlook, the overall plantation area has declined 5% over the last 10 years, leading to concerns about the long-term supply of wood beyond 2030 and restricting investment further along the supply chain. Recent returns should encourage replanting. In addition to being competitive with drystock farming, forestry is a solid diversification strategy and can also help farmers meet new environmental regulations.
Feature article: Synthetic foods
Synthetic food is being marketed as more ethical, environmentally sustainable, stable, safe, healthier and diverse than the traditional products they are looking to imitate. Some have already reached the marketplace with success. Others remain in the ‘proof of concept’ stage. While many of the potential advantages make sense, it is still very early days. Many benefits are not likely to be as large as claimed and there could be unintended consequences and trade-offs that will only reveal themselves over time and with more research. Synthetic foods face four key barriers to further progress: commercial scalability; technicalities of creating equivalent imitations; regulation related to the labelling of food and its safety; and consumer response/acceptance.
Feature article: Farm-gate price outlook
We take a detailed look at the key forces shaping the price outlook for New Zealand’s major agricultural sectors. The dichotomy across key agricultural sectors is expected to continue in 2016/17. The operating environment still looks challenging for key livestock sectors despite some expected improvement for dairying. In the red meat and fibre sector knock-on impacts from the downturn in dairying will continue. Meat prices are mixed too, and a key factor supporting venison and sheepmeat is lower New Zealand supply – not the ideal driver of better prices. In contrast, the main horticultural crops are on track to post near-record export volumes and still achieve solid prices in most cases. This will support overall revenue and bottom-line returns.
Feature article: Wine industry’s full bodied growth
Will there be further upside for New Zealand wine? The answer appears to be yes. As with many goods, fashion has a role to play and Sauvignon Blanc remains ‘in’ as a wine preference in established markets and is finding favour with new consumers in developed and developing markets. Vineyard area is set to expand by a further 1,700 hectares (5%) by 2018. There is scope for more growth from consumers looking for sophisticated foods and beverages, a new generation of younger consumers coming through and a trend towards premiumisation. Health concerns around the amount of alcohol being consumed are having an impact too; however, many consumers appear to have opted for a ‘quality over quantity’ attitude. All of these trends suits New Zealand’s market positioning. Cash rates of return of 5.6% for grape growers and development returns of 120-125% of cost (bareland, development costs and ‘time’) are currently sufficient to stimulate new investment.
New Horizons: Alternative Asian Markets - From Opportunity to Connectivity
In this report we look at market opportunities across Asia for New Zealand, with a specific focus on primary sectors. The opportunities Asia provides to nations like New Zealand are widely acknowledged and the first part of this paper briefly details some of these. We believe there needs to be a shift in conversation from ‘opportunity’ to ‘alignment’. Alignment is about connectivity potential and the ability to unlock opportunity. It’s looking beyond the often-quoted metrics such as rising incomes into a much broader array of indicators to identify where countries really stand in the pecking order of where our resources should be directed to develop export markets and maximise returns. This paper provides a framework for assessing alignment and connectivity potential by looking at a variety of opportunity and constraint indicators for New Zealand’s primary sector across 29 countries in the Asia-Pacific region. It is our attempt to move the conversation away from wild extrapolations of GDP and population growth across the region to something more meaningful that can help with business decisions in developing new export markets.
Feature article: Dairy sector recalibration of cost structures
Cash flow pressures in the dairy sector are set to persist. This means farmers need to focus more than ever on what they can directly control: productivity, cost efficiencies and debt servicing metrics. Decisions on where to focus efforts need to be supported by a more formal decision making process. A big part of this is completing a business plan and budget with a multi-year time horizon. For productivity and cost efficiency changes, critical areas of focus are often pasture and crop management practices, animal health/genetics, people, optimal stocking rates, usage of cost effective supplement, avoiding feed substitution and getting good advice.
Feature Article: Update on China
With China front and centre this month’s feature article provides an on-the-ground update from our China team. China is dealing with issues such as the risk of deflation, high government and corporate debt, equity market malaise, slowing domestic demand, capital outflows, and pressure on the currency, amidst a secular shift away from investment to consumption. It’s a big list of challenges. A deleveraging process, while painful, is necessary. Even under ideal conditions, reforms will take time to implement and there will be further lags before the new policies can have a material impact on the economy. Overall we believe these issues are still manageable, but fully expect wobbles and volatility along the way.
Feature Article: Pipfruit sector in full bloom
The pipfruit sector is embarking on a new period of growth after three years of profitable returns. The sector has undergone a tremendous amount of change since deregulation. It has moved to a more consolidated vertically integrated structure, while on orchards there have been changes to design and wider adoption of best-practice management techniques. The next phase of growth is expected to push the national crop back toward the mid-600,000 tonne mark by 2020 (+25%), taking earnings to $1 billion. A high proportion of this growth will be “club” varieties that currently make up a third of New Zealand’s supply. These new “club” varieties are trademarked and have eating qualities aimed at Asian markets. This, combined with New Zealand’s focus on higher quality standards and ability to meet strict phyto-sanitary measures, has created brand presence and exclusivity, delivering significant price premiums.
Feature Article: Manuka Honey - A Growth Story
Manuka honey is unique it's scientifically proven anti-bacterial and anti-inflammatory properties that are different to other types of honey. This opens up a wide variety of end-markets and product categories. Many products exemplify "value add" and it's use for medical purposes offers significant potential. Manuka's unique properties, combined with the fact that only New Zealand and parts of Australia are able to naturally grow Manuka, create some key defensive barriers to global competition. To increase supply, land-owners will need to invest and treat Manuka honey as a genuine crop. For land-owners it represents not just an opportunity to boost economic returns on erodible pastoral land, but also provides another land use option to throw into the mix to help comply with tightening regional council regulation for sediment run-off and water quality standards. Economically we find a Manuka plantation could deliver a return on marginal capital employed ranging from 10-15% abd even more if a grant is used to reduce the establishment cost.
Feature Article: Dairy – More Politics Than Economic Logic
Stepping back from the cyclical weakness in dairy prices, we’ve lowered our expectation of where the milk price will sit in the medium term (across the cycle) by $0.25-0.50/kg MS. We expect international milk powder prices to settle in a range of USD2,800-3,400/MT (mid-point USD3,100/MT in the medium term; that’s down 10-15%. A weaker NZD across the cycle will partially counterbalance the fall in incomes, leaving incomes down 4-8%. As well as responding to cyclical weakness in prices in the near term, farmers need to think about removing $0.25-0.50/kg MS from cost structures in a sustained fashion.
Feature Article: Kiwifruit Revival
The New Zealand kiwifruit sector typifies many aspects of true ‘value-add’ leading the way in producing and selling a premium offering. Despite the challenges posed by Psa, the industry is in good heart appearing to have navigated the worst of its impacts. Confidence in the industry is reflected in current orchard prices and returns. Grower support for the single point of entry industry structure is also at historic highs. Green orchard prices have averaged $300,000-$350,000 per canopy hectare recently. With medium-term orchard-gate returns expected to be close to the $15,000-$18,000/ha mark this implies a rate of return close to 5-6.5%. The real potential is with the new Gold3 variety. Current Gold orchard prices have averaged $425,000-$500,000 per canopy hectare recently. Medium-term orchard gate returns are expected to be around $53,800/ha, which implies a rate of return of between 11.5-13.5%.
Education Corner: Food Safety Environment
This month we feature an article from Craig Armitage of PricewaterhouseCoopers on the food safety environment. It offer an insight in to why New Zealand food companies need to be global leaders in food safety and integrity. It also outlines the approaches leading food companies are adopting to improve food safety, trust and protect their brands.
Feature Article: Agricultural Price Preview 2015/16
Macro drivers such as geopolitical ructions, sluggish global growth, FX volatility/shifts and lower energy/feed prices are creating a challenging environment for many primary sectors. But exposure to these forces varies significantly, implying quite diverse outlooks for 2015/16. Key for how things evolve will be local and offshore supply dynamics, as well as NZD direction. Across some soft commodity markets, such as dairy, global prices are below the cost of production, which will help cap production and drive price tension. But this is against a softer demand backdrop.
Education Corner: Global Land Price Trends
New Zealand farmland values have caught the gold rush fever again. High long-term farmland prices risk undermining many of New Zealand’s natural and man-made competitive advantages. We find New Zealand farmland values have appreciated the most of 12 key competing and export markets since 2000, but most of the other countries analysed have experienced impressive gains too. While much of New Zealand’s “X-factor” seems to be already priced in, outperformance and total farming returns well outpacing many other asset classes tells you something. So despite near-term challenges, don’t be surprised if farmland continues to catch a bid from many quarters for the “touch and feel” aspect, food and other services investment thematics, global scarcity value of quality farmland, development opportunities, and diversification plays.
Feature Article: Key themes of 2015
We outline some key themes that will influence New Zealand's economic prospects over the coming years. They are: change - the new normal; localised focal points - a host of considerations to eye; the trend is your friend - trend growth is higher courtesy of both the appreciated and the under-appreciated; dairy - the key localised downside risk; liquidity versus fundamentals; and addressing income inequality - elongating the expansion further. New Zealand is firmly into an economic expansion. Good times are here. However, the good times mask frictions and tensions. Growth may have peaked, but the economy is moving from a high growth rate off a low base to moderate growth off a higher level. An expansion needs to be managed just as upswings need to be fostered. A common sub-theme across all thematics is the heightened importance of the microeconomic story. Leadership needs to trump populism, the policy agenda must be constructive, and firms need to maintain that harder edge. Complacency - a typical precursor to a downtown - needs to be kept at bay.
Education Corner: Debunking the myth of low wages in the primary sector
There is often a perception of low wages and limited earning potential in the primary sectors, especially on the production side of the industry. This is often cited as a key reason why it is difficult to attract quality people. We find this is an unfair perception when other additional benefits are appropriately valued. Top earners in particular have similar earning capacity to other professions.
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