Part six of our coverage of the ANZ report Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand

ANZ has released a major Report (.pdf 13MB) detailing the opportunities for Australia and New Zealand for agricultural commodities over the next 30 years.

Gareth Vaughan discussed the Report's finding with ANZ's Graham Turley.

Over the next few weeks, we will take a closer look at what the Report finds for New Zealand. This week we look at the current state of agriculture in New Zealand and Australia.

ANZ's report finds that a global race is emerging to develop high potential agricultural opportunities.

Successful agricultural industries do not happen by accident but take many years of development to build complementary strengths across a number of areas.

The following is an extract of part six of the full Report focussing on the New Zealand aspects.

What it means for key stakeholders

KEY THEMES: 

- Policy makers will play a critical role in reinvigorating Australian and New Zealand agriculture across all sectors.

- Investors who understand agriculture very well stand to create significant wealth from agricultural investments.

- Industry participants including farmers, agribusinesses and industry bodies all play important roles in driving change.

Policy discussions vital to lead the change

The sector-wide outcomes outlined in part 5 can be achieved through a broad, realistic national discussion about the state of agriculture in both Australia and New Zealand.

Such discussions should focus on addressing the shortcomings in capital access, labour supply and innovation.

The discussion needs to portray agriculture as a sector of the future rather than one of the past.

In Australia, the recent Green Paper, the National Food Plan, released by the Australian Government is a very positive start to this process. While New Zealand is yet to have a similar plan in place, recent papers such as ‘A Call to Arms’ by the Riddet Institute are also promising steps in the right direction.

Discussions should focus on the following themes:

1. Fostering an environment that encourages private investment.

Given the capital required to meet Asian soft commodity demand growth, the discussion should begin with how to connect both domestic and foreign capital markets with agriculture.

Obvious related themes include facilitating private investment in agriculture, the adoption of new farm ownership and operation structures, together with greater private sector investment in critical off-farm infrastructure.

Establishing a clear approach to foreign investment while bringing public sentiment along this journey will be a critical part of the process. Achieving this should first involve improvements in data gathering, such as implementing a national register, to gauge the true extent of foreign ownership in agricultural assets. Gaining this understanding is a key step toward fostering an informed national discussion on a topic that often draws public concern.

Discussions should also adopt a long term perspective with as much recognition of the benefits as the risks that would need to be mitigated. A clear policy framework is needed to manage the rise of Australia and New Zealand’s Asian neighbours and support the continued growth in trade and investment.

This should include a thorough review of Australia’s FIRB, and potential further review of New Zealand’s OIO, to ensure these regulators have the necessary mandate and resources to effectively protect national interests whilst encouraging desirable foreign investment in agriculture. Recent developments in both countries have been promising. The Australian Government has commissioned a White Paper on ‘Australia in the Asian Century’ while the New Zealand Government has released a ‘NZ Inc’ China Strategy.

2. Addressing labour shortages and developing future leaders.

Rebuilding the agricultural labour force requires both short and long term focus.

First, developing the next generation of leaders depends on redefining the image of the sector and boosting development platforms, such as universities, vocational education and training and traineeship programs.

Second, introducing rural relocation incentives (including via taxation, training, or infrastructure) and better publicising seasonal opportunities could improve the sector’s capability to attract domestic labour.

Finally, enhancing immigration policies to attract and retain agricultural labour in regional areas could help fill remaining labour force gaps.

3. Managing land use conflicts.

The New Zealand Government is taking an active interest in managing the productivity and sustainability of agricultural land but more focus on protecting the size of productive land may be required.

Underpinning the policy approaches should be robust land-use data and analysis of future availability and requirements. Both countries should continue efforts to establish comprehensive and internally consistent land use data.

4. Establishing clear and transparent water markets.

In New Zealand, policy makers could use Australia’s experience as a case study to trigger further policy reforms to improve water use efficiency and allocation.

The approval in May 2011 of the National Policy Statement for Freshwater Management set in motion a number of water management improvements. Further discussions will be required to determine important details of associated regional plans – particularly on allocation limits and systems.

Considerable work remains and regional councils must ensure these improvements are reached without delay.

5. Establishing a better policy framework for R&D and extension.

In New Zealand, the Ministry of Science and Innovation was established in 2011 to oversee and improve the nation’s science and innovation system, while the agricultural Primary Growth Partnerships (PGP) scheme, now worth almost NZ$500 million, was introduced in 2009 to boost productivity.

Through the PGP scheme, the recent introduction of the FARMIQ initiative to drive innovation and productivity in New Zealand’s red meat industry is an example of a promising step in the right direction.

New Zealand’s Ministry of Science and Innovation should ensure sufficient focus is placed on agriculture such that industry-specific challenges are addressed. New Zealand should also consider reviewing the public sector’s involvement in extension services given current concerns on the effectiveness of the fully privatised model.

Furthermore, both countries could benefit from setting a clearer approach to biotechnology in agriculture, particularly in genetic modification, through a well-defined position supported by a consistent set of policies.

6. Encouraging supply chain investment and innovation.

Coordination and contestability are fundamental for successful agricultural gateways. This is a particularly important area of focus for Australia. It is timely to consider how to promote contestability – by identifying how best to facilitate the entry of fringe players such as rail operators, traders, and local processors, or the development of new forms of cooperatives. There is also a question of whether regulation should be strengthened in highly concentrated markets. While the Productivity Commission has already reviewed some agricultural supply chains, for example wheat in 2010, this area requires ongoing monitoring and review. Significant underinvestment in some areas of infrastructure, particularly in Australia’s east coast railways for grain, also needs urgent attention as they have become major growth constraints.

7. Increasing market access.

In addition to driving free trade negotiations, governments in both countries can play an active role in facilitating major agricultural trade transactions. This includes establishing frameworks for strategic off-take agreements.

Recent progress in Australia has been promising. A joint study with the Chinese Government was initiated to consider the potential for large-scale Chinese investment in undeveloped land in northern Australia. While there are clear public concerns about increased foreign investment in agriculture, it should be noted that mutually beneficial agreements do not necessarily have to involve land ownership. In addition, fostering a stronger network of agricultural counsellors could also help achieve market access goals through policy advocacy with host governments.

8. Establishing supportive fiscal and monetary policy.

Changing macroeconomic environments fundamentally influence the cost competitiveness of export-oriented industries.

In recent years, the cost competitiveness of Australian and New Zealand exports has been hurt by the strength of the national currencies. A useful debate on whether there is a role for governments to alleviate pressures on trade-exposed sectors by dampening inflating exchange rates would be timely for the agricultural sector.

How much could be done by running account surpluses and increasing outbound foreign investment (e.g. via a larger sovereign wealth fund), and would it be beneficial to the overall economy?

Investors and high growth agricultural industries

Current market dynamics and resource constraints in agriculture create enormous opportunities for investors.

As the global race to build competitive advantage unfolds in the coming decades, not all industries and markets will emerge as equals – there will be winners and losers.

Investors might look to high growth product areas and markets around the world, and the agricultural industries that effectively serve these opportunities.

There is already increasing global activity across three agricultural investment options:

1. Direct investment in commodity markets.

This includes investments through futures, exchange-traded funds (ETFs), or traditional commodity index products, which have outperformed other asset classes in recent years. Agricultural commodities have the advantage of being relatively less reliant on global economic conditions. Prices are also more supply driven, which is largely influenced by weather conditions with no direct relationship to other asset classes, and provides a strong inflation hedge. However, agricultural commodities are more volatile with limitations in forecasting supply and demand imbalances due to weather impacts.

2. Investment in portfolio equities.

There are a broad range of direct players, as well as suppliers and service providers with high exposure to agriculture. Agricultural equities have significantly outperformed other benchmark indices over the past decade, but like agricultural commodities, have been more volatile.

3. Direct investment in agricultural assets.

This could be achieved either by investing directly in land and downstream supply chain assets, or investing indirectly via a number of managed agricultural land funds. Agricultural funds management has grown rapidly in recent years, involving large scale financial institutions, hedge funds, trusts and private/public companies pursuing farm ownership. This has seen significant increases in global land acquisition activity. The Land Matrix project reported that there has been a substantial increase in major agriculture related land deals (both in number and area) over the past 10 years with most purchases in Africa and Asia168. Among others, there is significant value in acquiring poorly managed farmland with high potential for productivity improvements. There has also been significant M&A activity in downstream assets across the globe as agribusinesses expand their global presence and manage risk. 

Australian and New Zealand agriculture clearly hold significant potential and deserve ongoing consideration from investors. Both countries feature sophisticated, export-oriented supply chains that produce products that are in high demand from key growth markets. Unlike major agricultural exporters in the developing world, Australia and New Zealand are politically stable, have strong corporate governance and have demonstrated sound economic fundamentals.

While traditional investors from developed economies will undoubtedly continue to invest in Australia and New Zealand, capital constraints in the region are creating exciting opportunities for emerging investors. In stark contrast to alarming current account deficits in many key western economies, rapid economic growth and high savings rates in emerging economies are seeing a material shift in global wealth. By 2020, emerging investors, mostly in Asia, could dramatically increase their share of the world’s financial assets to 36%, up from 21% in 2010.

Importantly, foreign investment in Australian and New Zealand agriculture is not a new concept. From the earliest stage of colonial development, traditional investors from the West have played an important role in the countries’ economic development. For example, British investors have been at the heart of the birth of Australia’s wool and wheat industries, as with American investors for cotton farming. In recent years, there has been significant investment activity from both traditional and emerging investors. Cargill, Glencore, Bunge, JBS, Wilmar, Bright Foods, Mitr Phol and COFCO are just some examples of agribusinesses which have made recent investments. As an investor, being aware of the local investment environment and its potential challenges will greatly increase the likelihood of making successful investments in both countries:

- Policies and approval processes exist to ensure major foreign investment proposals align to national interests and should be well understood when considering investment options. The policies are enforced by Australia’s FIRB and New Zealand’s OIO. There is also significant value in understanding Australia and New Zealand’s broader policy environment, including labour laws and land and water regulations.

- As with many countries, there are public concerns around foreign investment in agriculture, particularly direct investments in farmland. Investors could also consider alternative investment strategies, including equity partnerships or strategic off-take agreements for farm assets and forming joint-ventures with local players for downstream assets. Moreover, history has shown that taking the time to gain the support from key stakeholders, including industry and community leaders, plays an important role in the successful acquisitions of agricultural assets.

- Cultural differences and sensitivity are important factors contributing to the success of foreign ventures. Experience in Australia, New Zealand and beyond has shown that completely replacing local management with foreign leadership often adversely impacts business performance and efficacy. Maintaining local talent where possible has proven to be more effective.

Farmers will need to invest for long term growth

The decision-making of individual farmers sits at the core of Australia and New Zealand’s ability to capture the global opportunity.

Growth in farm profitability cannot merely rely on the potential for continued increases in global soft commodity prices. Sustained growth in agriculture requires farmers to place a relentless focus on volume growth and optimising for higher margins.

This is achieved through delivering higher-value products and increased output-driven productivity.

Farmers play a pivotal role in driving the next wave of growth by:

1. Improving physical and financial performance.

Farmers need to focus on increasing productivity, lowering debt and improving profitability. Like any producers, they must be actively involved in benchmarking their performance, replicating the success of others and seeking advice from extension providers to apply better technologies and practices.

2. Making long term investments to build competitive advantage.

Farmers will need to focus on long term growth through increasing technology adoption, increasing scale and investing in people. Making business and succession plans is extremely important in planning for the future and provides greater clarity when securing capital. New types of farm ownership models could facilitate farm succession or alleviate capital constraints. Banks and financial institutions can offer advice and help facilitate these transactions.

3. Building stronger networks to strengthen industry bargaining power.

Building stronger networks can enable greater knowledge sharing and provide a more unified voice to other supply chain participants. In supply chains with downstream monopoly or oligopoly structures, supporting new entrants or forming bargaining or downstream-oriented cooperatives could also assist in enhancing contestability and alignment.

Agribusinesses need to drive investment in their supply chains

In Australia and New Zealand there is a growing need for agribusinesses to demonstrate leadership, particularly in three key areas:

1. Empowering farmers and building trust.

Supporting farmers to succeed delivers more growth for downstream players in the long term. Agribusinesses, particularly in highly concentrated markets, will need to work closely with farmers to ensure greater alignment of short-term and long term objectives. For example, becoming more involved in farm extension could help boost supply and build greater trust with farmers.

2. Informing local industries on global best practices and market requirements.

As the primary industry stakeholder with direct involvement with end customers, agribusinesses play a critical role in informing farmers, research institutions and other industry participants on global best practices, and market opportunities and requirements. Given many have extensive global footprints, agribusinesses also have huge potential to enhance market access for local agricultural industries.

3. Investing in the future of the industry with government and industry bodies.

Agribusinesses can make agricultural industries more robust and capable of future growth by working with government and supply chain players to resolve key infrastructure constraints through co-investing or negotiating incentives and collaborating with industry bodies and educators to promote agricultural careers, for example through career fairs and internship programs.

Industry bodies, and Encouraging growth and investment

Industry bodies play an important role in advocating the soft commodity opportunity to their members and beyond.

There is an important opportunity for these organisations to be more proactive in promoting their industry and inspiring young people to make a difference in agriculture. This is a critical ingredient in addressing the escalating labour force issues in Australia and New Zealand.

Industry bodies have enormous potential to deliver positive impacts for their industries in a number of ways:

1. Advocating the values, needs and challenges of their industry.

As each agricultural industry holds unique challenges, industry bodies will achieve consistent results through a unified voice. They represent the industry when in dialogue with communities, policy makers, research bodies, and educational institutions.

The ‘State of the Industry’ report prepared by Australia’s industry body, Grain Growers, is an example of an effort to outline industry issues and challenges. Furthermore, Dairy NZ’s ‘GoDairy!’ campaigns have sought to boost the reputation of industries and promote career prospects to young people.

2. Disseminating knowledge to improve the performance of stakeholders.

Given the significant performance gap among farmers, industry bodies are well placed to help farmers improve profitability.

In particular, they should act as a trusted collector and provider of valuable industry knowledge, including R&D developments, benchmarks and best practices. They should also encourage industry participants to invest in long term growth.

3. Facilitating greater coordination among industry stakeholders.

Supply chain failures often require strong involvement from bipartisan parties to resolve effectively. Industry bodies are in a unique position to increase dialogue among industry participants and secure change.

Deloitte’s New Zealand ‘Red Meat Sector Strategy Report’, commissioned by two major industry bodies, has been a positive step in addressing the serious coordination issues in the industry.

4. Coordinating and sharing knowledge with other industry bodies.

Industry bodies could benefit from greater coordination and collaboration across the industries they represent to collectively increase knowledge.

For example, there is evidence to suggest that innovation developed by Dairy NZ to improve the quality of pasture growth could be beneficial and more widely used by the red meat industry.

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This story has been adapted from Part 6 of the ANZ report: Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand (.pdf 13MB)

Here is Gareth Vaughan's interview with ANZ's Graham Turley.

Part two deals with the global soft commodity opportunity and you can read that part here »

Part two deals with the enormous opportunity and you can read that part here »

Part three deals with building competitive advantage in key markets and you can read that part here »

Part four deals with the current state of agriculture in New Zealand and Australia and you can read that part here »

Part five deals with unlocking the full potential and you can read that part here »

Part seven is the final section and will follow next week. Seizing the opportunity to become the food bowl of Asia.