Open to different thinking

Mark Hiddleston. Photo / Supplied

It's difficult to believe that a sector that represents a significant part of the New Zealand economy often struggles to secure the investment it needs to fund new innovation, growth, intergenerational succession, productivity gains and meet compliance needs.

Even our most successful agri-businesses find it hard to attract funding to meet all their needs.

Few successful agri-businesses are listed on the NZX. Many are co-operatives or family-owned operations where current funding options are rather narrow.

The need for investment right across all the businesses involved in agriculture is required to supercharge high growth areas, such as a range of horticultural crop, or forestry expansion. It can also be used to speed up product transformation and further 'value-add' activities; improve the performance of supply chains; increase capacity in certain areas and market integration.

It can help serve larger markets 365 days of the year; fund more research and development; create new on-farm productivity innovations; facilitate intergenerational succession; and provide more investment to solve environmental and social challenges associated with different land uses.

At the same time, traditional sources of funding have been reduced due to changing political and economic factors. Last year the new coalition Government announced stricter economic tests for foreigners when investing in farmland.

Bank credit has tightened due to reduced risk appetite, banking regulatory changes and a number of concerns around what compliance and regulatory changes will mean for earnings and costs.

It all adds up to a new landscape for access to capital in the agriculture sector that will require new innovations in funding as well as adaptable business ownership and management structures.

The ANZ Greener Pastures report looked at different export growth scenarios until 2050 and the sectors' capital requirements to achieve this using current asset valuations and retained earnings at the time.

We estimate a capital gap of $340 billion out until 2050. It showed that to achieve real asset growth of 2.1 per cent per annum until 2050, $210b of capital would be required to grow production/value and $130b for intergenerational succession/farm turnover — a total of $340b. Some of this is expected to be funded via debt and retained earnings, but a capital gap of $110b, or $2.8b a year was identified.

The analysis was completed in 2011 but remains just as relevant today with real export value having run above this at 2.4 per cent per annum since then.

There is a clear need to increase the diversity of the investor base into the sector, but this will require a change in emphasis on farm returns. Relying on capital gain to create wealth is a thing of the past as investors will be focusing on yield.

To attract new investors the sector will have to present itself differently and be open to different thinking, experiences and access to new technology and techniques. So where might the investment come from?

Equity partnerships — In essence, equity partnerships bring external investment funds, sometimes pooled, sometimes from single entities or investors, into a sector which has historically — and riskily — relied more on debt. They aren't new and have were started in the 1970s and early 1980s to develop kiwifruit, sheep and beef farms. Traditionally, equity partnerships have enabled specialised skillsets to generate greater efficiencies and higher farm production.

What we're seeing now is greater interest in partnerships along the product development and distribution parts of the supply chain.

Creating products targeted to preferences of groups of consumers is key to adding value, but it requires in depth knowledge of the target market and how to access it.

Iwi/Māori investment — Māori entities are already major stakeholders in New Zealand agriculture, and through both investment and acquisition we are seeing Māori establish increasing leadership roles in these industries. ANZ research has highlighted low levels of debt and large liquid holdings of cash and managed funds as key levers that iwi/Māori investors have as they look to build scale, productivity and innovation to further develop their resources on a sustainable basis. For New Zealand farm owners looking for someone to continue the legacy they started, Māori with their long-term outlook and strong values can be a good option.

The large-scale kiwifruit purchase by Tauranga Moana-based Māori Trust, Ngāi Tukairangi, is a great example of this, and also ensured a key NZ agricultural asset was retained in New Zealand ownership.

Superannuation funds — Political preferences for ethical onshore investments that grow jobs may see interest in agriculture investment from superannuation and Kiwisaver funds.

The NZ Super Fund has an explicit mandate to invest in New Zealand and is too big to do it solely on the listed market. It has already bought 21 New Zealand dairy farms and has indicated that investment into other types of rural land, such as cropping, were on its radar. It currently has a $150 million portfolio of New Zealand rural land managed by FarmRight. We expect that Kiwisaver funds will show increasing interest in agriculture but many pastures have to be crossed in terms of how such an investment vehicle would be structured, who would be responsible for it and whether any of the Kiwisaver providers are big enough to put together a dedicated agribusiness fund. In Australia, superannuation funds have banded together to form standalone unlisted investment vehicles they can all access, but they have much larger assets under management than in NZ.

Green finance — Green finance uses instruments or investments (equity or debt) to finance or re-finance projects that have a positive impact on the environment. Green bonds are one of the most developed financing instruments within the green finance world and they're being used to fund climate-friendly projects globally. They are a growing market and so far mostly applied in the property, transport, renewable energy and energy efficiency sectors (in global terms) but with real potential for application in the Agri sector for sustainable land use practises, water efficiency, water and waste management, and energy efficiency.

Green bonds haven't yet been used to help fund agriculture ventures in New Zealand, but we see the potential.

● Mark Hiddleston is Managing Director Commercial and Agri at ANZ New Zealand.