New Zealand economy could not afford for the primary sector
to under-invest in its future, KPMG agribusiness partner Ian
Proudfoot said yesterday.
The industry made a significant contribution in paying for
the schools, hospitals and infrastructure New Zealanders
relied on to support the lifestyles to which they had become
accustomed, he said in releasing the agribusiness section of
the KPMG review of financial institutions.
The Government had challenged the industry to increase its
contribution to the economy by doubling its export returns
over the next decade. Meeting the challenge relied on the
industry successfully increasing its production, increasing
the value generated from that production and establishing new
intellectual property export markets.
''This all requires significant investment, not only behind
the farmgate in New Zealand but along the full value chain
into the markets that our customers live in and work in.
''We believe this means the industry will need to look for
alternative sources of capital.''
It was unlikely banks would be permitted to meet the needs of
the industry for both succession and growth capital as the
Reserve Bank actively regulated the supply of credit to the
sector, Mr Proudfoot said.
The Greener Pastures report, commissioned by the ANZ Bank in
late 2012, estimated the primary sector needed about $130
billion of capital between now and 2050 before a dollar was
spent on productivity growth and business improvement.
''The reality is much of this replacement capital requirement
is new borrowing as the farmers leaving the industry have
owned their land for decades, have no or low gearing and are
realising significant capital gains on exiting the
Historically, much of the equity in the primary sector had
come from the incumbent farming families who had held their
wealth in land assets and grown their business by investing
in more land, Mr Proudfoot said.
The challenge was where the next generation of capital would
come from to support the long-term growth of the industry.
The industry was expected to need more than $210 billion of
additional capital on farms and across supply chains to
deliver on its growth expectations.
The importance of Maori and iwi organisations to the
long-term future of the primary sector could not be
understated, he said.
''They will be an important source of next-generation capital
and have investment horizons that sit comfortably with
Maori were intergenerational investors, clearly recognising
the importance of taking a long-term view. But they also had
a far more developed awareness of the importance of farming
the land sustainably and an ability to add a substantive back
story to products which resonated well with many
Direct foreign investment would also remain a significant
source of capital for the sector into the future, providing
there were no dramatic, politically-motivated swings in
investment policies, Mr Proudfoot said.
''The challenge is for New Zealand to avoid following
Australia and selling many of our processing marketing assets
to foreign investors without retaining an ability to secure a
fair share of the value our primary assets can generate.''
There was little doubt the primary sector would remain
challenging for professional directors - whether they were
buying assets directly or investing in equity.
However, the growing demand for agricultural products meant
many investors wished to gain exposure to the primary sector
within their portfolio. The industry had to create a
sufficient number of propositions to enable investors to take
a portfolio approach across industry segments and geographies
to address the inherent risks they perceived in the industry,
For international investors, New Zealand used to present a
stable, low-risk investment environment. The changes made to
the foreign direct investment regime around agricultural land
holdings had created uncertainty and made New Zealand
comparatively less attractive to international investors -
particularly the high land prices.
The other fundamental block for many investors to buying
primary sector assets had been the returns they delivered, Mr
A 3% or 4% cash return meant the asset category had returned
well below the hurdle most professional investors set for
The Government had a role to play in supporting the long-term
economic development of the country.
Through the Primary Growth Partnership, the Government had
committed to provide more than $300 million of investment in
market-facing research and development projects which had
huge potential for New Zealand's exports.
The Government had also committed to provide foundation
investment in irrigation schemes with the potential to drive
a step change in agricultural productivity.
''It is in kick-starting high-risk, transformational projects
where the Government had a key role to play in partnership
with other next-generation investors.''
Next-generation investors would have higher expectations of
the industry. But without the capital, the likelihood of
maximising the prosperity uplift the primary sector could
deliver to the wider economy was remote. The industry needed
to work hard to meet those expectations, Mr Proudfoot said.
At a glance
• About $130 billion needed to facilitate farmer
• More than $210 billion additional capital needed to deliver
on growth expectations
• Maori and iwi will play a key part in next generation
• Direct foreign investment will remain a significant source