Wednesday, July 6, 2022

Volatility, uncertainty ‘the new normal’

Currency debasement, connecting to Asia, a city rebuild and New Zealand’s balance sheet repair form the big-picture challenges for farming businesses over the next five years.

That was the message from ANZ Bank rural economist Con Williams at the Leading Thinking in Agricultural seminar hosted by PGG Wrightson in Ashburton.

Interest rates were staying lower for longer, with the NZ dollar remaining elevated among trading peers, Williams told the farmers and industry stakeholders.

Debt levels were too high in 2003-09 and some of that must be paid back.

Despite the sovereign risk that had positioned Europe like NZ before 1984, investors, as in foreign buyers with better financial balance sheets, would be the likely rescuers in the debt payback.

Markets going to Asia from the traditional European and United Kingdom markets were challenges highlighted, with the $40 billion Christchurch rebuild relevant to agricultural business in terms of sourcing labour, particularly for the dairy industry.

“Add to that the drought and the compass really starts to spin,” Williams said as he warned this year’s drought was shaping up to have a much greater impact on agricultural business and the NZ economy than the drought of 2007-08.

“Volatility and uncertainty are the new normal.”

With China shifting from a net exporter to a net importer over the past five years it was critical that the NZ farming industry responded, he said.

“How much do we know, how are we responding, how are farmers investing to supply product to this new market? We don’t really understand the Chinese market need that well.”

For the meat industry organised retail, such as McDonald’s, would be the fastest-growing meat sale channel to urban customers. The big implications for the industry came in how to penetrate that market.

“It is becoming more and more important to know the market you are targeting. We need to choose how we play in that market. It’s no point selling product that needs refrigeration to places where there is no fridge in the home, as is the case in much of China,” Williams said.

“I could ask any number of farmers to name me six provinces in China and very few could answer that. Knowing your consumer and their needs is key to producing what they want to buy.”

Competition was rising but other, non-traditional Asian markets were also offering opportunities.

The NZ dollar remained a “tallest pygmy”, lacking fundamental underpinnings at current levels, with a large current account deficit, low productivity growth, high net external debt and not allowing the economy to rebalance away from consumption towards producing and exporting, he said.

However, it was being supported by a host of short-term factors, specifically the United States dollar remaining structurally weak.

“Structurally weak competing with structurally flawed in the form of Euro. Monetary and currency union requires fiscal and banking equivalent. This faces massive political issues to conquer,” he said.

The NZ dollar also looked good on other measures, such as the highest-expected returns of the major bond markets and implicit exposure to the soft commodity story, which was where the Asia growth story was morphing.

Economic growth was mediocre, but still stronger than a host of peers. The NZ dollar would eventually converge on fair value, but Williams was not picking that to happen until 2014-15.

In a tentative 2013-14 outlook, dairy prices would be in the mid $6s, he said. Lamb would enjoy some seasonal up-tick as drought pressure eased, with next year hopefully slightly better because of lower frozen stock. Beef was looking stronger heading into 2013-14, while wool remained flat but might drift slightly higher with occasional spikes from Chinese buying. Venison was looking to be one of the more stable industries.

Domestic grain was showing positive signs towards an upward spiral, caused by dry weather conditions. Kiwifruit prices were predicted to be up but not necessarily leading to profit, and the same was true for wine and grapes. Apples, depending on variety, were looking better and other horticulture would be weather dependent.

The clearest trend was the lack of one, Williams said as he told industry to focus on creating positive jaws between revenue and cost.

Budgeting provided agility and allowed informed decisions to be made when something changed.

Benchmarking physical and financial performance and being proactive and creating solutions on things like too much debt, low productivity and cost efficiencies should be critical business focus.

Consolidation would continue and it was likely there would be big industry shakeouts for those who didn’t respond, Williams said.

“Micro versus macro performance matters the most. That is, focus on what you can control.”

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