9 Jul 2014
Capital, smarter land use and technology vital for NZ agri business to grow
Profitability with sustainability
Profitability is vital to a healthy industry but, as we all understand, agri businesses have to be sustainable as well as profitable.
There must be ongoing investment in dairy’s productive base and why investment decisions need to be motivated by generating good returns to the business rather than capital gains.
New Zealand has the potential to capture an additional $NZ0.5 – 1.3 trillion in agricultural exports between now and 2050, according to the ANZ Greener Pastures report.
Capturing this opportunity will not happen of its own accord. Significant barriers exist that will have to be overcome.
We see three main barriers as:
- Adopting new technology and extending the use of best farm management practices
- Resolving land and water use conflicts and
- Sourcing capital to fund growth and support farm turnover
Investment will be key
Investment will be key. New Zealand needs to find innovative ways to attract domestic and foreign investment between now and 2050.
There is good debt and bad debt - debt incurred in investments which generate increased profit versus weakening the balance sheet without productive gain.
Agri-business is New Zealand’s most productive and successful business sector yet it struggles to attract investor capital.
That seems counter-intuitive, particularly with all the talk of food bowls for Asia: a sector which represents more than 25 per cent of New Zealand’s economy is widely perceived as difficult and inaccessible for investment – whether those investors are retail, large fund managers or overseas looking to invest in New Zealand’s agricultural success story.
Few successful agriculture-based businesses are listed on the NZX, especially when you consider how significant a contributor agriculture is to the economy.
Many successful agri-businesses are co-operatives or highly successful, family-based operations and therefore not readily available to outside investors.
But even our most successful agri-businesses find it difficult to shore up capital positions and ensure access to funds for future business development.
Making these businesses more investible will mean significant changes to how farms manage succession.
That means families leaving their capital in high performing businesses rather than withdrawing capital and weakening the businesses to achieve generational change and perhaps passing control of business to a new generation of high performing managers.
Owners need to recognise the opportunities that new managers can bring and be prepared to share the returns to bring them on board.
Those that are doing this effectively are generating a substantial return on assets and in doing so become businesses anyone – bankers or shareholders – would be delighted to be involved with.
They can retain earnings and attract capital to expand in land holdings and reinvest.
In dairy the average return is around 7 per cent and the best more than 10 per cent. But in this competition we see businesses that are exceeding this.
The next consideration: water use sustainability
Another important consideration for NZ agriculture is dealing effectively with land and water use sustainability.
Far from being held up as the heroes of the New Zealand economy, dairy farmers are increasingly vilified as polluters of waterways and destroyers of the environment.
There are the talkers and the doers and farmers sit in the later category. Thewinners of last year’s Investing in the Environment award had invested heavily in their businesses to generate both profit and environmental results and we are pretty sure that will be the case this year.
We at ANZ undertake New Zealand’s largest annual survey of business issues and opinion. The Privately Owned Business Barometer gives insights into what business owners are thinking and doing.
The Barometer indicates 26 per cent of farms are considering herd housing and standoff - this is where a big part of the industry is going.
Already a significant number of New Zealand dairy farms are quietly moving towards a progressive dairy model where there is careful control over inputs and outputs.
These are the sorts of businesses of which we need more.
I spend time on farms like these and see the level of investment taking place on them in training, and environment sustainability.
The Dairy Business of the Year competition scores environmental sustainability and successful contestants provide a stark message to confront some of the messages from politicians, industry experts, regulators and commentators.
The power of ongoing analysis and planning
We find in too many agri businesses the biggest decisions are made instinctively without evaluation of the current position or options.
Good information and planning provide a basis for good investment and ongoing management decisions.
On dairy farms this has become more significant with more extensive use of brought-in feed. Successful farmers have had to move to much more sophisticated analysis and this has widened the range of profit performance.
There is much better information, planning tools and advice available to farmers than commercial businesses.
Agri has developed excellent information and planning resources (think DairyBase, Red Sky, Udder, Farmax etc) but they are often not used to their maximum benefit.
Those who can do the numbers make the money.
Long term planning
Farmers need to take a longer view (governance) and then manage their business to achieve a long-term strategy – and generally farmers are getting better at this.
This means building the basic skills of developing a business plan, managing cash and prioritising surplus expenditure between capital investment debt reduction and withdrawals.
We have made a significant investment in encouraging this as we see it as a key to the sector’s long-term success.
The power of technology
Technology will increasingly be there to measure, analyse and manage farm inputs and outputs.
Technology:
- Is advancing rapidly
- Will be able to measure more and more on-farm factors
- Will be increasingly accurate
- Will get cheaper
This will give farmers an accurate, real-time understanding of factors such as soil chemistry and grass growth, enabling them to be more precise in application of resources such as fertilisers and irrigation.
Advanced systems, such as ReGen, are already available to monitor and manage disposal of dairy effluent. Robust scientific approaches are being developed out of Massey University research.
New technology approaches will require some changes in the way people farm.
But it means they can more closely and accurately manage environmental impacts. Technology also helps make farms more productive - inputs and costs are matched more closely to needs, avoiding wastage or inappropriate application of resources.
Farmers who adopt it will have a competitive advantage - others will follow.
In addition to harnessing new technologies, investments in environmental sustainability should be subject to the same analytical rigour as any other farm investment and, again, be designed to deliver good returns to the business over the long term, and increase competitiveness.
This is an edited version of a speech by Graham Turley at the NZ Dairy Business of the Year Award – Investing in the Environment.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.