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: 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.
Feature Article: The secrets of top-performing red meat farms
The first part of the Red Meat Profit Partnership investment involves gaining a better understanding of what top performance looks like and its key drivers. In-depth interviews of top farmers found a range of key attributes, with the main ones including: vision and drive; having the right skill set; above-average execution of key farm management practices and mitigation of risks; and passion and confidence in the sector, which drives investment and effort. We also analyse benchmarking data to help draw out which areas of the more measurable aspects of a farm are more or less important determinants of profit. The more important benchmarks connect the dots to the "softer" skillsets and farm management practices that drive financial performance.
Education corner: Managing the topsy turvy Dairy market
The long-term outlook for dairying remains solid, but there are downside risks for incomes over the next two years. While cash flow isn't as bad as the headline payout figure for this season, it is set to tighten over the coming 12+ months. There is a wide range of business models and leverage (debt loadings) within the dairy sector. This means the scale of adjustment required between different businesses will vary greatly across the sector. At the moment it requires careful management, but still looks manageable for most.
Feature Article: Breaking the mould – new innovations
There have been numerous innovations throughout history that have changed businesses and industries. We take a look at four innovation themes that we believe are set to – or already are – rapidly changing business practices in the food supply chain. These are: 3D printing, or additive manufacturing; precision agriculture; robotics and automation; and genetic modification. Their applicability to the New Zealand situation is growing as they are adapted to our situation, technological advances, costs decline, societal acceptance increases, and better service support becomes available.
Education corner: All you need to know about the US dairy industry
We detail insights from a recent trip into the heart of the US dairy sector – Wisconsin. On-farm we found the use of scale, state-of-the art technology, access to cheap labour, feed efficiency and the attention to milk quality as well as animal health all combine to make a high-octane model for producing milk. The other striking aspect was that the amount of capital required to set up a dairy farm was less than half that in New Zealand (on a per kg MS basis). This is largely due to substantially lower land values. These are some of the core strengths of the US dairy sector that will make them a force to be reckoned with in the future.
Feature Article: Agricultural Price Preview 2014/15
The outlook for farm-gate prices for the majority of primary sectors looks solid as we head into the 2014/15 season, with further incremental gains in prospect. This follows decent lifts in 2013/14 for many. The notable exceptions are forestry and dairy, where international prices have fallen further than initially expected, prompting recent downgrades to our forecasts for 2014/15. The NZD looks to have passed cycle highs and is an additional factor that could be supportive of farm-gate prices as the season progresses (i.e. NZD/USD is forecast to remain strong in the near term, but soften in the second half of the season).
Education corner: India in focus
While there might be some new niche opportunities in India, it ranked down our list as a longer-term opportunity compared with many other Asian markets. Two key impediments that need to be overcome are limited market access and a fragmented, underdeveloped cool chain. Indians also have strong food preferences, which limits opportunities for some products (i.e. beef), but creates them for others (i.e. dairy, and fruit and vegetables). Some of these dynamics are changing, but it is off a low base.
Feature Article: Alternate Asian markets - A big picture view
China represents a huge opportunity for the New Zealand economy. Yet with opportunity comes vulnerability. So we decided to assess the attractiveness of the opportunities other nations across the wider Asia region offered using a range of indicators. The top 5 (of 28) ranked countries were Singapore, Hong Kong, Japan, Korea and China. Not surprisingly, these are already well-established export markets for many sectors. The up-and-comers throw up a mix of a few less well-known nations and some more familiar names. They include Malaysia, Brunei Darussalam, Kazakhstan, Azerbaijan, Thailand, Armenia, Indonesia and Vietnam. Each have their own pros and cons. Some are growing rapidly on a number of metrics, highlighting that new opportunities will rapidly emerge. Other markets are more mature, but offer growth opportunities if market penetration and share can be increased.
Education Corner: China's great beef challenge
China’s beef consumption looks set to grow rapidly, driven by the same dynamics that are boosting general protein consumption, but also supported by disease issues in China’s domestic pork and poultry production. New Zealand is in a prime position to participate in the lift in imports. We have many competitive advantages over other larger global players including an exclusive FTA, geographic location, a good food safety reputation, and established relationships with many multinational foodservice chains that have expanded rapidly throughout China.
Feature Article: Equity Partnerships – A look under the bonnet
One of the most popular farm structures in recent years has been equity partnerships. Critical success factors in an equity partnership are several: having a robust, achievable strategy for value creation; ensuring all the appropriate due diligence has been completed; having good relationships, common objectives and motivations between shareholders; having an appropriate business structure; ensuring there are robust business processes and systems in place; clear communication with regular meetings; and agreed procedures for entry/exit of shareholders, as well as for resolving any disputes.
Education Corner: Chinese infant formula market and the wave of regulatory reform
Infant formula can be characterised as a value-add product due to its defensible characteristics. Markets tend to be highly consolidated for such products. Much of NZ’s recent investment into infant formula has been based around the Chinese market, which is more fragmented than others due to rapid growth and less regulation. But repeated food safety incidents have triggered a wave of regulatory reform. While the direct impact of the reforms remain highly uncertain and dependent on their offi cial interpretation by Chinese authorities, they are likely to have wider implications beyond the infant formula category.
Feature Article: Big themes of 2014
Summary: We outline some of the key themes that will play an influential role in determining New Zealand’s economic prospects over the year ahead. They are: Managing Friction; Appreciating the unappreciated; The Sacrificial Pawn; Tapering Tantrums, Sovereign Risk, and Inflation Watch. The bottom line: New Zealand is firmly into an economic expansion.
Education Corner: New Zealand's changing trade patterns
New Zealand’s main export markets have changed rapidly in the last six years. The change has been mainly driven by the rise of China, which overtook Australia as our largest export destination in November 2013. Additionally there has also been strong growth in exports to ASEAN and wealthier Middle East countries. Our more traditional markets such as Australia, the US and Europe remain important for specific sectors and higher grade/quality products though.
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