The world's population continues to grow by around 220,000 people a day. The middle class continues to rise. There are more people who need to be fed and more people who are prepared to pay for protein.
New Zealand's food and fibre commodities are selling at record prices. Dairy, meat, logs and fruit are trading at all-time highs. Yet research carried out last year for the ASB shows only one in five producers feels "very confident" about their future in farming. The same number told researchers they are not confident.
ASB Rural Banking general manager Ben Speedy says while the long-term outlook for New Zealand's food and fibre producers is very positive and there is much to be confident about, many food and fibre producers worry about managing through the medium term. The same ASB research found three out of four of the producers surveyed are concerned about the impact of environmental regulations on their business.
"There are some challenging transition areas with agriculture being included in the emissions trading scheme," says Speedy. "It's something we need to nut out, but ultimately producers are adaptive."
"It's easy to feel burdened by the issues facing producers at the moment. In addition to the environmental pressures, farm working expenses are rising fast and there is a lack of access to labour.
"Yet the industry is in good shape. It's a great time to be a food and fibre producer in New Zealand."
While there will always be short-term downturns, analysts expect commodity prices will continue to rise over the long term because of embedded international supply issues. Many of these work in New Zealand's favour.
Speedy points out that all around the world countries that produce food face constraints.
"It could be from the physical effects of climate change or measures their producers need to take to reduce emissions," he explains. "Many of the world's food systems are based on high inputs — which are now under pressure. Then there are outbreaks of diseases like swine flu and similar. But people will always need protein and there's a displacement when, say, there is less pork on the market. This is good news for our sheep farmers.
"The world's population continues to grow by around 220,000 people a day. The middle class continues to rise. There are more people who need to be fed and more people who are prepared to pay for protein. That's something we are good at producing."
New Zealand's advantage is that most of our producers offer grass-fed animals at a time consumers around the world are becoming increasingly concerned about the way animal protein is produced.
Small scale growth: hop growers are expanding on the back of the craft beer boom. Photo / Supplied
In some overseas markets, people question the idea of growing plants to feed animals when the plants could be used more efficiently to feed humans. That puts pressure on factory farming, which in turn continues to reinforce and support demand for New Zealand's high-quality protein.
Apart from the obvious economic benefits of higher commodity prices, the extra income has seen producers pay down debt at record levels in recent years. The ASB research found more than half of all food and fibre producers are considering accelerating debt repayments. Speedy says dairy farmers have led the charge and that is timely.
"For years the Reserve Bank Stability Report worried that there was too much debt in the dairy sector, he says. "It's one reason the Reserve Bank required banks to hold more capital for agricultural lending.
"The most recent Stability Report congratulated dairy farmers for the amount of debt they repaid. Since 2018 the average dairy producer has repaid a sum equivalent to $3 per kilo of milk solid. This takes the average debt for a dairy farmer from $22 to $19 per kilo.
That's important not only for balance sheet strength but also for resilience, especially since we are now seeing rising interest rates."
While dairy farmers are de-leveraging, lending to horticulture has more than doubled in the last five years. Speedy says that is almost entirely down to the kiwifruit industry which has performed well and needs capital for growth: "The bulk of the money has gone on developing large scale orchards. A second reason for lending growth is producers converting from green kiwifruit to gold kiwifruit which requires a licence from Zespri that can cost many thousands of dollars.
"There's a lot of external capital coming into the industry to help fund its expansion."
Similar changes are happening with apple growers and, on a far smaller scale, hop growers who are expanding on the back of the craft beer boom.
He says horticulture has been an exciting commercialisation story. The upshot is the benefits of plant research and the development of new varieties, making them commercial and then building a fully integrated value chain right through from growing to having new products, new brands and entering new markets.
High commodity prices mean farm values are increasing. There has been a sea change in the way farms change hands. Historically, Speedy says, someone would buy a farm because they felt they could farm it better than the previous person and make more money, which would grow the value of the property. That's still the case, but today that thinking needs to take environmental practices into account with considerations about the stock carrying capacity and what changes you can or can't make to a property.
Another challenge for someone considering buying a farm is who will work the land.
Speedy says: "Given the shortage of labour, people are more hesitant about buying a farm unless they know who is going to run it for them. They have to back themselves to recruit an appropriate manager. Ideally, they would develop staff themselves which they can then take through to a new property. This doesn't restrict owner-operators, but it does make buying more challenging for others."
Speedy says now is a good time for farm owners to think about succession plans. "There are so many great opportunities at present given that commodity prices are strong.
Values will likely continue to appreciate and there are greater diversification opportunities. So there are lots of good opportunities to follow through with the execution of those succession plans."
Higher revenues mean the food and fibre sector is resilient to cost increases. In March this year, the ASB's Rural Research survey found one in three food or fibre producers faced cost increases. A year earlier only one farmer in eight faced an increase. Speedy says today's figure would be closer to 80 per cent. The challenge facing the sector is there is little opportunity to pass on cost increases, yet commodity prices are rising faster.
The ASB is seeing the ratio of farm working expense to total farm income decreasing. "If you think about dairy, the cost of production might have gone from $5 to $6 for a kilogram of milk solids, but the long-term average pay-out has gone from around $7.5 to $9.5."
"We've never seen as much cash come into the bank from farm proceeds as in the last 12 to 18 months. It's unprecedented.
We don't want to downplay the challenges, they are real, but we're asking producers to focus on margins and act appropriately. Should they be chasing higher production or making other management decisions?
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