Call for primary sector to meet investment challenge

Irrigation projects have a major part to play in New Zealand's rural sector growth. Photo by ODT.The 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 industry.''

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 agriculture.''

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 international consumers.

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, he said.

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 Proudfoot said.

A 3% or 4% cash return meant the asset category had returned well below the hurdle most professional investors set for their portfolios.

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 retirements

• More than $210 billion additional capital needed to deliver on growth expectations

• Maori and iwi will play a key part in next generation investment

• Direct foreign investment will remain a significant source of capital


 

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