2014 going to be a cracker

December 15, 2013

Brian Gaynor thinks next year will be a cracker for the economy:

There are strong indications that it will be a once-in-a-generation year, as were 1951 and 1974 when the New Zealand economy grew by 15.6 per cent and 7.2 per cent respectively.

Economic growth is unlikely to be quite as strong as 1951 or 1974 but we now have some similar characteristics, particularly a soft commodities boom and a huge increase in the country’s terms of trade index, which made these standout years. . . .

New Zealand’s economic performance has been disappointing since the mid-1970s, particularly compared with Australia. There have been occasional bursts of heightened economic activity, mainly driven by increases in consumer debt caused by rising house prices, but there has been limited investment in the country’s productive sector.

The economy has been characterised by large net migration outflows as New Zealanders have been attracted by high-paying jobs across the Tasman.

But the economic momentum has swung dramatically over the past twelve months and transtasman migration flows could reverse as Australians are attracted by greater job opportunities in New Zealand, particularly in relation to the Christchurch rebuild. . . .

He lists several reasons the outlook is more like the boom years than those of the past 40 years:

Terms of trade: The country’s terms of trade index rose 7.5 per cent, to 1356, in September, the highest level since December 1973. Australia’s terms of trade have fallen 18 per cent this year.

Dairy: GlobalDairyTrade auction prices have appreciated 52 per cent over the past twelve months and dairy exports surged 49.1 per cent in the three months ended October 31 compared with the same three months in the previous year. Recent surveys show that farmers have significant investment intentions, an important feature of New Zealand’s strong economic performance in the 1950s.

China: It is now New Zealand’s largest export market and is expected to continue to grow by more than 7 per cent a year.

Christchurch rebuild: The inner-city rebuild programme should gather momentum when construction begins on the justice and emergency services precinct from March next year, to be followed by the health precinct in the June or September quarter. These projects, which are mainly funded by the Crown and city, should encourage private sector investment in the inner city.

Migration: The country has had strong net migration inflows in recent months and had total net migration of 17,490 for the 12 months ended October.

This figure is expected to increase steadily over the next few months, and Statistics New Zealand figures show more than 90 per cent of new arrivals settle in Auckland.

Housing: The strong migration inflow should continue to boost the housing market and housing construction, particularly in Auckland.

Government finances: The Crown’s financial deficit is falling and the Key Administration may announce tax cuts in May’s budget. However, large expenditures on the Christchurch rebuild may restrict this option.

Confidence: Business, consumer and farming confidence are all at, or near, all-time highs.

Companies: Most domestic companies have strong balance sheets and plenty of capacity to expand and invest. Rod Drury and Xero have lifted the ambitions of New Zealand companies and we now have a large number of young entrepreneurs with aggressive global aspirations.

KiwiSaver: Last but not least is KiwiSaver, which is giving us a pool of private permanent funds that can be partially invested in the domestic productive sector. KiwiSaver ought to have the same positive effect on the domestic economy as Australia’s compulsory superannuation has had on its economy.

In view of these factors the outlook for the New Zealand economy is exciting, the best it has been since the early 1970s.

The present export- and investment-led upturn could be maintained for several years – as long as dairy prices don’t collapse, the Chinese economy doesn’t go into an unexpected downturn and there isn’t an external shock like that of the mid-1970s. . .

Another threat would be a change of government.

Labour left office in 2008 forecasting a decade of deficits. National has turned that around in spite of the global financial crisis and the Christchurch earthquakes.

Policies espoused by Labour and other opposition parties show they have learned nothing from the mistakes which put New Zealand into recession before the rest of the world.

Gaynor isn’t the only one with a  positive view of the economy:

. . . Harbour Asset Management’s managing director Andrew Bascand says this year’s been a banner year for economic growth but next year’s likely to be even better.

“The outlook for 2014 is for better global economic growth – modestly better – and certainly for even stronger New Zealand economic growth,” Mr Bascand says.

“If there’s one key risk, it’s how households and businesses think of the rising interest rates environment, and a second risk is concerns around uncertainty with an election”. . . .

Reserve bank governor Graeme Wheeler has clearly signalled a rise in the official cash rate next year which will push up interest rates.

But given they are at historic lows that isn’t unexpected and it’s better to have slightly higher interest rates than let inflation get out of control.


Rural round-up

October 29, 2012

Agricultural debt an economic winner – Brian Gaynor:

New Zealand has a strange attitude towards debt. We criticise the agriculture sector for having too much debt even though it generates the bulk of the country’s export earnings.

Meanwhile individuals are encouraged to take on more and more debt albeit this generates little economic activity and makes residential property less and less affordable for new home buyers.

This weird situation is highlighted in a recent report by the Ministry of Primary Industries, an amalgam of the old agriculture, forestry, fishing and food safety ministries. It also comes through in a major report by ANZ Bank, “Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand”. . .

Farmers may be pressured to trade shares for cash:

Dairy farming representatives have suggested that some highly indebted farmers may find themselves under pressure from their banks to sell the economic rights to some of their Fonterra shares for cash.

Fonterra has released details of the shareholders fund which it’s launching next month as part of its Trading Among Farmers plan.

TAF will allow outsiders to invest in the dividend earnings from shares that farmers deposit in the fund, in exchange for the cash value of the shares. . .

Scientist pursuing life-long fascination – Sally Rae:

Julie Everett-Hincks’ fascination with sheep breeding and lamb survival began at a young age.

Now a senior scientist at AgResearch Invermay, Dr Everett-Hincks grew up on a sheep farm in South Otago and, as soon as she could walk, she was out with her father on the farm.

Even as a young girl, she wondered “why some sheep made better mothers than other sheep”. . .

Ministry boss operation focussed – Tim Fulton:

The petrol-head running the Ministry for Primary Industries loves his engines, although he’s been known to pad around Pastoral House in a sports jacket and the most modern of casual shoes. This man you could have just met at a BBQ is Wayne McNee, a leading driver of the country’s economic growth.

He’s spending a fair bit of private time getting ready to marry for a second time and has only just quit ploughing plenty into his son’s motor-racing career.

Jamie McNee is a top New Zealand hope, having excelled in Toyota Racing formula four and then the Toyota Championship where he finished third, winning a couple of races.

McNee senior says motor-racing is one of his passions but it got to a point with Jamie, spending roughly $150,000 a year, where he couldn’t sustain the cost of funding his career. . .

Sheep take over Spanish streets:

Spanish shepherds led a flock of more than 2,000 sheep through central Madrid on Sunday in defence of ancient grazing, migration and droving rights threatened by urban sprawl and modern agricultural practices.

Many tourists and residents were surprised to see traffic cut to allow the ovine parade to bleat its way across some of Madrid’s most upscale urban streets.

The right to use droving routes that wind across land that was open fields and woodland before Madrid grew from a rural hamlet to the great metropolis it is today has existed since at least 1273. . .

Community Activities and Bass Guitar Balance Busy Farming Lives:
Southland farmer Euan Templeton is not a big TV watcher.As well as running a 545ha sheep and beef farm at Waimatuku, east of Riverton, Euan and wife Linda are involved in a host of off-farm activities that “keep us young”.Music and gardening are key hobbies for the couple. Euan is captain of the local Boys Brigade company, a church elder and a member of the Lions Club. He also sings in the Southern Sounds Barber Shop Chorus and plays bass in a rock band.

All this makes for a busy life, but Euan reckons they have achieved a fairly good balance between the demands of their coastal farm and their off-farm interests. . .


Farmers on top in two-tier economy

September 24, 2012

Brian Gaynor thinks the rural sector is showing city slickers the way:

A trip to Dunedin for the South African rugby test last weekend has reinforced the view that New Zealand is rapidly developing a two-tier economy.

On one hand is the rural community which is increasingly inhabited by energetic and entrepreneurial farmers with a long-term perspective.

At the other end of the scale are far too many lethargic and conservative city dwellers who are more interested in trim lattes and recent house price movement. . . 

Unfortunately the country’s rural enterprise has bypassed the NZX because farmers are not convinced of the opportunities offered by our capital markets.

There were a large number of energetic Waikato dairy farmers on the late evening flight to Dunedin for the test match. They talked about their farming operations and the many opportunities they had. A number of them were considering purchasing or leasing additional farms.

They also commented that, in contrast to their parents, they were businessmen rather than farmers and this allowed them to get away for a long weekend.

Farming has always been a business and good farmers have always been good business people. These days the sensible ones realise that doesn’t mean being tied to the farm all day, every day, all year.

Last weekend was in stark contrast to the first weekend in July 1983, when the All Blacks played the British Lions in Dunedin.

The domestic sharemarket, which had surged 39.1 per cent since the end of 1982, had begun its long upward momentum and the urban business community was optimistic and expanding.

The flight to Dunedin 29 years ago was dominated by people from the business, investment, finance and legal sectors.

Few North Island farmers flew to Dunedin in 1983 because the sector was being propped up by Prime Minister Robert Muldoon’s supplementary minimum price scheme and was not in good shape.

In addition, the traditional family farm structure did not allow many farmers to get away for long weekends.

This year, Dunedin seemed to be full of prosperous farmers even though the high New Zealand dollar is supposed to have had a major negative impact on exporters.

By chance I played golf with a Central Otago merino stud and station owner and his son-in-law who had recently returned to New Zealand after a number of years overseas.

The merino farmer was engaging, ambitious, entrepreneurial and the sort of person needed in the urban business community. New irrigation schemes are being developed on his property and a large proportion of its wool is sold directly to Japan, bypassing the traditional auction system.

My golfing opponent sees plenty of opportunities for his business and is not concerned about the high NZ dollar.

He believes that businesses face adverse conditions, whether it is bad weather or a high dollar, and they have to deal with these problems rather than moan about them.

Exactly – in business and in life there are always factors beyond your control. Successful people concentrate on what they can do and influence rather than wasting energy on things over which they have little or no control.

The farmer, or more appropriately businessman, is a man of action. He hits a mean golf ball, was in Auckland last month for the Wallabies test and is off to South Africa for the All Blacks game in Soweto on October 6.

He was quick to note that he will get in some hunting and fishing while in South Africa.

His son-in-law has returned from London where he was employed in the equities division of a large international bank. There are almost no opportunities for his skills in New Zealand, particularly in the South Island, so he is looking for openings in the rural sector.

How many young investment industry people would have been happy to look for employment in the depressed rural sector thirty years ago?

Very few. We lost a generation of young people who thought there weren’t opportunities on farms and in farm support.

They might have been right then, but that isn’t the case now. With farming’s return to prosperity have come new opportunities on farms and in farm support and servicing. That is bringing young people back to rural communities with social and economic benefits for them and the towns which service and supply them.

The new Dunedin indoor stadium, which is a fantastic facility, also seemed to be full of season-ticket holding farmers.

We got a hard time when they discovered we were from Auckland.

They wanted to know why we didn’t build a new stadium on the city’s waterfront when we had the chance. They also wanted to know what Auckland did with all the money it sucked out of the South Island.

The banter was friendly but there is a clear difference between the progressiveness of the rural community and the conservatism of the cities.

Farmers argue that Auckland would never approve a new modern indoor football stadium and it is urban dwellers who are mainly opposed to the Government’s proposed partial privatisation programme.

The rural sector largely supports partial privatisation as long as the Government maintains 51 per cent control.

I’m not sure if there is a rural-urban split on the sale of assets, but farmers know that one way to get through droughts or other tough times is to cash-up non-core investments.

At a post-match function I was approached by two New Zealanders in their early 30s who have lived in the United Kingdom for the past few years.

One of them, who had worked for a large investment bank in London, had returned permanently to New Zealand but was finding it difficult to get a job.

The other said he could never come home because there are no openings for his expertise in the New Zealand finance sector.

The clear message is that the rural economy is confident and on a roll whereas the urban business community is finding it difficult to gain momentum in the more competitive world.

The world needs protein and that’s what New Zealand is very good at producing.

New Zealand’s total exports have increased nearly six fold since 1983, from $7.9 billion to $46.7 billion, while the contribution of meat, dairy and wool has fallen from 53.8 per cent to 37.3 per cent.

This gives the impression that the urban economy is making a greater contribution to exports than it did 30 years ago.

However, the following points should be noted about these figures:

Meat, dairy and wool’s contribution has increased from 34.5 per cent to 37.5 per cent of total exports over the past decade as the dairy industry has gained huge momentum.

If we add logs, Taranaki oil, fruit, wine, fish, casein and Tiwai Point’s aluminium then major exports from the non-urban economy represent 60 per cent of the country’s total exports.

The rural sector has a large trade surplus with the rest of the world while the country’s urban economy runs a substantial overseas trade deficit.

Meanwhile, residential house prices have soared nearly eight fold since 1983, compared with a six fold rise in exports, and that is the most important development as far as many city inhabitants are concerned.

The problem with the housing market is we mainly borrow offshore, through the banks, to inflate house prices and we have to export more and more rural products just to pay the interest on these overseas loans.

In addition, we are making residential property more unaffordable for first home buyers.

Council zoning is at least partially responsible for that though I do have sympathy for the argument against putting houses on productive land.

The final chapter in the Dunedin story is that a number of us stayed on after the British Lions test in 1983 to visit listed companies based in the southern city. In those days Dunedin had its own stock exchange and fifteen listed companies including Alliance Textiles, Arthur Barnett, D.I.C., Doneghys, Hallenstein Bros., National Insurance and Wilson Neil.

The stock exchange is gone and the city now has only BLISS Technologies, Pacific Edge and Scott Technology listed on the NZX.

Businesses and stock exchanges are migrating from smaller to larger urban areas throughout the world but the issue in New Zealand is that business enterprise is moving from the cities to the rural sector and it is not interested in stock exchange listings.

One Waikato dairy farmer remarked on the flight to Dunedin that farmers had a long-term perspective and there was no way that they would allow outsiders to buy Fonterra shares because these non-farmer shareholders would accept the first offer from Chinese interests, just as they will with Fisher & Paykel Appliances.

Who can blame him for taking this point of view?

One reason dairy farmers in New Zealand are doing so well is that most supply a co-operative which means the return to the supplier is of more importance than in companies whose concern is more with shareholders.

We were also in Dunedin for that rugby match with several other farmers as guests of Ravensdown.

In spite of the lower payout and higher dollar, all were positive about farming and many were open to further development and new opportunities.


FSU fails foreign investment 101

October 17, 2009

When I posted on Farming Systems Uruguay in August I was restrained in my criticism.

I didn’t say that we were so unimpressed by what we learned when we visited one of their farms that we sold our shares in the company as soon as we got home.

I didn’t say that the manager of the farm we visited, who is one of New Zealand’s top dairy farmers, wasn’t being left to manage. He had to answer to the company’s representative who visited once a week not just on strategy but on day to day farming practices.

I didn’t say that the manager had only had a two-week Spanish course when he arrived, been getting just one lesson a week since then and his wife and children weren’t getting any help with the language at all.

I didn’t say that the manager told us of visiting another FSU farm where he’d been concerned that the cows were hungry and asked why they weren’t in a paddock with more grass. He was told that was being saved for the directors’ visit.

I didn’t say that everything we saw contradicted the glowing picture being painted in New Zealand of the company, its farms and the opportunities in Uruguay.

I didn’t say that we could see there was money in the business for PGG Wrightson and anyone else who could clip the ticket but we couldn’t see what was in it for investors in FSU.

I didn’t say any of that on the earlier post because it’s more than two years since we were there and I thought things might have improved. Brian Gaynor’s column shows they haven’t.

Everything he writes supports what we saw and heard in Uruguay.

What works in business in one country doesn’t necessarily work in another. The sobering lessons from the experiences of several companies which ventured across the Tasman show that and at least they speak the same language there.

Uruguay is not just another country, it has a different climate, different language and different culture.

It’s on a similar latitude to northern New Zealand but on a continent which gets much hotter than we do. Pastures which last 10 years or more here will have to be replaced every two or three years there. That’s good for PGG Wrightson which has the rights to all the business on the farms and will sell the seed. But it’s not good for farm profits and FSU shareholders.

Spanish is probably one of the easier languages for English speakers to learn. With total immersion you should have a good grasp of the basics after three months and be reasonably fluent in a year. But Gaynor says the last New Zealand manager who had been in Uruguay for two and a half years never learned the language.

 It is the height of ignorance to live and work in another country without being able to converse with the locals. It’s also not good for business because you never get the full story if you have to rely on interpreters. But that the manager didn’t learn isn’t necessarily his fault. If his staff spoke English they would when talking to him and the demands of the farm would take precedence over Spanish classes.

But one of the first lessons of foreign investment 101 is that the people working on the ground must speak the local language. Ensuring its managers and their families learn Spanish should be one of FSU’s priorities.

Then there’s the culture. They do things differently in Latin America you can’t just pick up what works here, transplant it there and expect it to work as it does at home.

Adolf at No Minister is even less impressed than I am. He blames the directors. They are responsible for the decisions they made but I think they only see what the people in Uruguay want them to see and have no idea of what’s really going on.

PGW will make money by clipping the ticket on everything the farms buy but it’s going to be a long time before the farms make a profit and shareholders get a return on their investment.

There are wider concerns too. Crafar Farms has shown what happens when a business grows too quickly without good processes, systems and staff. If that happens here, the potential for problems half a world away are even greater.

New Zealand deserves its reputation for high standards of animal welfare and environmental practice. Our reputation is at risk  from companies which try to emulate what we do here in other countries and fail to do it properly.


Higher debt = less control

September 21, 2009

Fonterra shareholders weren’t keen on a public float of the cooperative because they didn’t want to lose control.

But if a business has a lot of debt, as Fonterra does,  it’s the banks not the shareholders who are in control.

Brian Gaynor says:

Those of us who were around in the 1980s are brutally aware that majority shareholders lose control when companies are highly leveraged and get themselves into trouble. In that situation the lenders take full control and shareholders have limited rights.

This is occurring with a number of companies at present, including PGG Wrightson.

Farmer resistance to outside capital could ultimately weaken their control because it forces Fonterra to borrow more and more and these lenders rank ahead of farmers, both in terms of their supplier and shareholder roles.

There is a strong argument that farmers would have more control of Fonterra if the co-operative issued new capital to outside shareholders, farmers continued to hold a clear majority of the shares and the new capital was used to repay debt.

If outside capital is used to repay debt then farmers are in a better position, particularly as far as their supplier role is concerned.

Cactus Kate also recognises the danger of too much debt:

Farmers are now likely to fund Fonterra’s restructuring after wide-spread rejection of an NZX listing.

We know what that effectively means. Something that was problematic in 1987 to New Zealanders – they will have to borrow more to buy shares.

The overseas banks will fund Fonterra’s restructuring.

She also suggests a solution:

Rather than limit the ownership of shareholding to farmers in New Zealand they could and should widen the issue to beneficiaries of family or trading trusts owning these farms. There must be thousands of such beneficiaries out there with spare cash earned in others sectors of the workforce to plug some of the gap.

That could effectively happen now if beneficiaries lent money to the farms. However, the shares wouldn’t be in the beneficiaries’ names and Kate thinks farmers might be too proud to ask for loans.

 So why not issue shares to the beneficiary instead of a loan? The beneficiary of the trust is related to the farm with an equitable interest in Fonterra, they are not entirely unrelated parties which would be saleable to farmers as there is no control interest lost or overseas take-over attempts possible.

The voting rights could remain with the farm to which the beneficiary is tied to, yet the equity be issued in the name of the beneficiary related. While it will not raise all the money required, surely reaching into the pockets of the wider Fonterra community is preferable to putting individual farms further at the mercy of overseas owned banks with more debt stresses?

She suggests that shares could also be issued to individuals who have an interest in dairy farms through corporate or collective ownership.

That could happen indirectly now if individuals lend to the farm but it would still be the supplier not the lender who owned the shares. Kate’s plan would allow the lenders who are already financially committed to farms to own shares as individuals.

Voting shares are tied to milk production so farmers would retain control but the catchment from which capital could be raised would be increased.


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