Agribusiness Report: Ag sector needs cash injection

ASB's Mark Heer

Last year the Ministry of Primary Industries said it wanted New Zealand primary sector exports to double by 2025. This means lifting 2013's $32 billion of exports to $64 billion a year.

ASB general manager for rural banking Mark Heer says it is an ambitious, achievable goal. He says: "To hit the target, most of the growth will come from agriculture. That means new investment."

Heer says about $200 billion of fresh capital is needed to double New Zealand's agricultural output. "Half the money will come from debt, half will come from equity. We think local investors have the appetite for most of the money, but our estimates are will be around $15 to $20 billion short and that will need to come from elsewhere".

Much of the extra capital is needed for irrigation projects.

New Zealand has plenty of rainfall; the developments and schemes are about moving and storing water from places and times of abundance to where and when supplies are less reliable. Though the large irrigation engineering projects get the headlines, Heer says as much money again needs to be spent on farms with re-grassing and equipment like centre pivot irrigators.

If production increases as planned, there will be a need for capital to fund additional processing capacity. Large agricultural businesses like Fonterra, Westland Milk, Alliance Group, Silver Fern Farms and so on are all adding capacity; so are businesses like fertiliser companies. Heer says doubling exports will also require additional investment in transport and ports.

Traditional farmers have some scope to raise debt capital -- that's the way things have operated for decades. However, Heer says the emergence of multi-farm enterprises brings with it the opportunity to bring in third party passive equity finance -- and that is relatively new.

He says there are a couple of hundred corporate farm businesses now operating in New Zealand: "Typically they might own five or six dairy farms. In some cases they came about when a capable farmer expanded their business, some are family owned, others have a more formal company structure."

Corporate farms, sometimes called group farms, can be substantial businesses; some have in the region of $100 million to $200 million in assets.

Heer says corporate farms have five key characteristics:

?First, corporate farms tend to have a management structure more like a mid-sized company than a traditional family owned farm. Heer says: "The business puts leadership in place and then hires professional farm managers, operations managers and maybe even a financial manager."

?Second, Heer says the corporate farm will usually create a business office. Again this is more like what you would find in a mid-sized firm. The office will handle matters such as company payroll, health and safety, compliance, production forecasting and so on. These offices can be in a farm building, but they might also be located in a nearby town.

?Third, corporate farms tend to have more formal governance structures. He says: "This can be as simple as a family, but more often now it is a board. The aim is to bring in a broader group of people with a wider range of skills."

?Fourth, Heer says corporate farms typically focus on building a robust balance sheet. The goal is to ensure there's enough to deal with, say, a drought year.

?Heer's fifth trend is the most recent. He says there's now a move to ensure corporate farms are "investor ready". They have the mechanisms in place to attract third-party equity. He says there are people pioneering this right now.

Investors looking at farming want to see certain things. "They look at the structure and how risk is managed. They want to see evidence of plans to cope with the growth challenges".

"Typically a corporate farm business had all its assets in a single sector -- today that mainly means dairy although some operations include beef and lamb farms. They can be geographically diverse," Heer says.

Although there are diversified corporate farms, having focus means farm managers can set up repeatable systems and win economies of scale.

The move to corporate farming is closely linked to New Zealand's shift from sheep and beef production to dairy. Growing animals for meat requires fewer people and less on-farm infrastructure.

Heer says converting land from meat production to dairy is costly. If a piece of land previously used for meat farming costs a few million dollars, it will typically cost that much again to get it ready for dairy. The good news is the spending tends to happen in the local community. Dairy farming also creates more jobs and that also pumps more money into communities.

The flip side of this equation is that operating cashflow returns for dairy farms are considerably stronger.

Heer says it's important to create a balance between increased productivity and environmental sustainability. He says the ASB talked to farmer customers who have made it clear they are keen to maintain standards, but are concerned about the cost of upgrading systems, protecting waterways and other environmental improvements.

The bank came up with the Rural Environmental Compliance Loan to help farmers make the necessary improvements. It's a low-cost loan. Heer says it is effectively a not-for-profit. The bank priced it at the ASB's cost of funding with no customer margins.

Heer says the ASB had two goals when it set up the loan: "We wanted to provide low-cost funding to help farmers become compliant with environmental regulations. Ultimately this helps them with their global competitive advantages. At the same time we wanted to increase the level of conversation between the bank and farmers over environmental issues".

Farmers can borrow up to $200,000 over five years from the scheme. ASB launched the loan a year ago and in the first 12 months it has funded 412 projects for a total of $50 million.