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It’s difficult to believe a sector which represents a very significant part of the New Zealand economy often struggles to secure the investment it needs to fund new innovation, growth, intergenerational succession, productivity gains and be compliant.
Even our most-successful agribusinesses find it hard to attract funding to meet all their needs. Few successful agribusinesses are listed on the NZX. Many are co-operatives or family-owned operations where current funding options are rather narrow.
"It all adds up to a new landscape for access to capital in the agriculture sector.”
Investment right across all the businesses involved in agriculture is required to supercharge high-growth areas such as a range of horticultural crop or forestry expansion.
It could also be used to speed up product transformation and further ‘value-add’ activities; improve the performance of supply chains; increase capacity in certain areas and market integration.
It can help serve larger markets 365 days of the year; fund more research and development, create new on-farm productivity innovations, facilitate intergenerational succession and provide more investment to solve environmental and social challenges associated with different land uses.
At the same time, traditional sources of funding have been reduced due to changing political and economic factors.
In 2017 the coalition government announced stricter economic tests for foreigners when investing in farmland.
Bank credit has tightened due to reduced risk appetite, banking regulatory changes and a number of concerns around what compliance and regulatory changes will mean for earnings and costs.
It all adds up to a new landscape for access to capital in the agriculture sector which will require new innovations in funding as well as adaptable business ownership and management structures.
Requirements
The ANZ Greener Pastures report looked at different export growth scenarios until 2050 and the sector’s capital requirements to achieve this using current asset valuations and retained earnings at the time.
ANZ estimates a capital gap of $NZ340 billion out until 2050. To achieve real asset growth of 2.1 per cent a year until 2050, $NZ210 billion of capital would be required to grow production/value and $NZ130 billion for intergenerational succession/farm turnover – a total of $NZ340 billion.
Some of this is expected to be funded via debt and retained earnings but a capital gap of $NZ110 billion - $NZ2.8 billion a year - was identified.
The analysis was completed in 2011 but remains just as relevant today with real export value having run above this at 2.4 per cent a year since then.
There is a clear need to increase the diversity of the investor base into the sector, but this will require a change in emphasis on farm returns. Relying on capital gain to create wealth is a thing of the past as investors will be focusing on yield.
So where might the investment come from?
Areas
Four potential sources of investment in NZ agriculture
Equity partnerships
In essence, equity partnerships bring external investment funds, sometimes pooled, sometimes from single entities or investors, into a sector which has historically – and riskily – relied more on debt.
They aren’t new and were started in the 1970s and early 1980s to develop kiwifruit, sheep and beef farms.
Traditionally, equity partnerships have enabled specialised skillsets to generate greater efficiencies and higher farm production. What we’re seeing now is greater interest in partnerships along the product development and distribution parts of the supply chain.
Creating products targeted to the preferences of groups of consumers is vital to adding value, but it requires in depth knowledge of the target market and how to access it.
Iwi/Māori investment
Māori entities are already major stakeholders in New Zealand agriculture and through both investment and acquisition we are seeing Māori establish increasing leadership roles in these industries.
ANZ research has highlighted low levels of debt and large liquid holdings of cash and managed funds as key levers iwi/Māori investors have as they look to build scale, productivity and innovation to further develop their resources on a sustainable basis.
For New Zealand farm owners looking for someone to continue the legacy they started, Māori with their long-term outlook and strong values can be a good option.
The large-scale kiwifruit purchase by Tauranga Moana-based Māori Trust, Ngāi Tukairangi, is a great example of this, and also ensured a key NZ agricultural asset was retained in New Zealand ownership.
Superannuation funds
Political preferences for ethical onshore investments which grow jobs may see interest in agriculture investment from superannuation and KiwiSaver funds.
The NZ Super Fund has an explicit mandate to invest in New Zealand and is too big to do it solely on the listed market. It has already bought 21 New Zealand dairy farms and has indicated investment into other types of rural land, such as cropping, are on its radar.
It currently has a $NZ150 million portfolio of New Zealand rural land managed by FarmRight. ANZ expects Kiwisaver funds will show increasing interest in agriculture but many pastures have to be crossed.
This is especially the case in terms of how such an investment vehicle would be structured, who would be responsible for it and whether any of the KiwiSaver providers are big enough to put together a dedicated agribusiness fund.
In Australia, superannuation funds have banded together to form standalone unlisted investment vehicles they can all access, but they have much larger assets under management than in NZ.
Green finance
Green finance uses instruments or investments (equity or debt) to finance or re-finance projects with a positive impact on the environment.
Green bonds are one of the most developed financing instruments within the green finance world and they’re being used to fund climate-friendly projects globally.
They are growing market and so far mostly applied in the property, transport, renewable energy and energy efficiency sectors (in global terms) but with real potential for application in the agriculture sector for sustainable land use practises, water efficiency, water and waste management, and energy efficiency.
Green bonds haven’t yet been used to help fund agriculture ventures in New Zealand, but we see the potential.
To attract new investors the sector will have to present itself differently and be open to different thinking, experiences and access to new technology and techniques.
Mark Hiddleston is managing director for Commercial & Agri at ANZ NZ
A version of this story originally appeared on nzherald.co.nz
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
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The new capital landscape for NZ agri
2018-05-28
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