We are in very interesting times right now.
There are some big forces about to play out in the main trading banks operating in New Zealand. We believe this will culminate into a wave of capital that the Agri sector hasn't seen for the past 5-7 years.
That wave of capital coming to the Agri sector is going to have some interesting effects on asset values, funding costs and decision making.
A debate amongst family...
In the Timaru office we have an ongoing debate about capital gain in various asset classes over the next 5 years. Because there are three headstrong and slightly argumentative Lamings' in this particular office, we each took opposing views.
As you’ll see, it’s led me to want to share some insights about residential property.
If you are a reader of our content, you’ll know capital gain often follows where there are lumpy flows of credit.
The credit flow has been well and truly pumped into the housing market, due to the banks preferring the simplicity and profitability of home lending. This, coupled with ultra-low wholesale borrowing rates, The RBNZ "Funding for Lending" programme (RBNZ lending to retail banks at the OCR) and Large Scale Asset Purchase Program (printing money and buying bonds), has contributed to historically low retail housing rates and investors chasing assets.
The Corelogic NZ House Price Index shows properties in New Zealand lifted 14.50% in the 12 months to January, 7.6% in the last 3 months and a mind boggling 100.1% since the peak of 2007 pre GFC. You can’t ignore these numbers. Whether it be the interest rate story above, or the lack of supply, or perceived immigration, the stats are the stats.
There are always some terrific ads at half time in the Super Bowl.
Arguably the most prime time spot in American TV advertising, the cost of securing a timeslot is enormous. This year, a 30-second commercial for Super Bowl 54 in 2020 cost about $5.6 million. I don’t think you’ll ever see NZAB with an ad at the Super Bowl but who knows, we should dream big!
So, if you’re a company that’s up for that you’ve got to have a catchy ad. Some of the ads are comic genius, featuring some big-name actors along to boot.
Take one of this year’s ads from “Rocket Mortgages” – it was a cracker. The theme of “certain is better” was really simple and it resonated with us a lot.
It starts with a couple about to bid on their first home before wondering out loud: “I’m pretty sure we can afford this?”.
Cue the entrance to a big-name comedian who then goes through various humorous analogies of the limitations of the statement “how can you be sure?”.
You can see the whole clip here
I love cause and effect. Squeeze a balloon and it will pop out somewhere else. Squeeze it enough and it will pop.
Banking is a bit like that at the moment, but for once in a long time, Agri may be set to benefit.
As you all know there’s heaps of noise about the housing market going up, lots of investor frenzy and yet again the purchase of the ubiquitous family home seems to be getting further out of reach for more families.
Its political dynamite – a hugely populist issue and one that the current Government seems determined to solve.
Why do they need to make changes and step this up a gear? “It’s the capital, stupid”
The Government has chucked a few traditional things at it (LVR restrictions) and ruled out a few others (capital gains tax), but they aren’t really working. They haven’t in other countries either. That’s because it doesn’t actually address the underlying issue - How ridiculously easy capital is available from banks in the home loan sector. As we say in the office - “It’s the capital, stupid”.
Big picture for a moment, there was massive stimulus last year with the RBNZ supporting the availability of capital to both Government and the Banks by continually expanding its Large-Scale Asset Purchasing (LSAP) to over $100bn (effectively printing money).
A fair chunk of this money has found its way into the banking sector and the banking sector’s regulations and corporate profitability models are highly stimulative toward home lending. This is simply because:
But is all that set to change?
There’s some big sound bites coming from this Government at present. Take these from Grant Robertson:
“We want to tilt the balance towards first home buyers while also incentivising more investment into the construction of homes”
“We all know that building more houses, particularly affordable housing is critical, but we can also do more to manage demand, particularly from those who are speculating”.
“It is the time for bold action. The market has moved quickly and rapidly in a way that is not sustainable – we have to confront some tough decisions and we will do that”
Now some of that will be referring to the upcoming changes in the RMA. But make no mistake, he’s about to make it way tougher to invest into housing (if you’re an investor purchasing existing homes).
Bank’s are feeling it too. They’ve become a lot more sensitive to the social impacts of lending. They don’t want to be seen to be encouraging the property market (via increased capital availability) to take it out of reach of family homeowners.
So here are some new ways that we could see the Government influencing this, aside from more LVR restrictions:
The RBNZ introduces (directed by Government) a second RBNZ amendment act – changing the mandate of the bank to include housing affordability alongside monetary policy and full sustainable employment.
To actually implement that, the RBNZ would then immediately increase the RWA (Risk Weighted Assets) requirements for banks’ lending to investor rental properties. In short, it requires the banks to hold more capital against these loans making them less profitable.
Cue much higher interest rates for these loans as banks find them less profitable.
I can hear the cries of “this makes no economic sense” straight away but the Government won’t care. And they did it in the UK in 2017 to stifle property investment.
This would immediately make housing less attractive.
Incidentally, it’s not as bad as it sounds (net impact might by about 1-2% reduction in cash yield), but this will put the frighteners up the investor market. I would still expect new builds to be exempt from this.
And why is this good for Agri?
Well, the amount of capital in the banking system is not reducing.
Think of that balloon again – you squeeze one area, its going to pop out somewhere else. Make some parts of the lending sector less profitable for banks and they will examine the profitability of other parts of their portfolio more favorably.
Agri is one of them.
Scale is important here - take the below graph showing the change in lending in both Agri and Housing over the last 12 months
We’re absolutely thrilled to welcome two new team members to NZAB, on the back of strong support from our growing customer base.
With the huge growth down in Southland being led by Michael McKenzie, we welcome Grant Dermody as Client Director to work alongside him, as an advisory lead.
Likewise in Palmerston North, Brendan’s team is expanding yet again and we’re delighted that Charlotte Grogan has agreed to join us, again in the position as Client Director.
We love working on behalf of our farmers to make them truly at the centre of their financing needs and give them the confidence and direction to grow and also the ability to sleep at night.
We’re up to 17 staff now, across NZ, and we’re not finished. We’re going to keep cherry picking the best people in banking and finance and unleash all their skills and experience into your camp, so farmers can truly get what they deserve from their banking relationship.
We very much appreciate all of our customers, both old and new. We work hard for them and they reward us by telling their business peers - about NZAB and how we could be part of their own growth story.
We know negative thinking isn't great, but 100% positive thinking doesn't always work either. Welcome to neutral thinking.
I’m an avid podcast listener.
Early morning runs and a fair amount of time in the car provides plenty of downtime to be entertained, educated or just zoned out!
One theme I have found really interesting in a few different forums recently has been around the power of “neutral” thinking.
It’s not hard to find literature and information on the power of positive thinking.
Books like "The Secret" espouse the value of positivity, visualising an outcome and then having it almost magically turn to reality.
By contrast, we all probably appreciate the dangers of negative thinking.
One study I read suggested that a negative thought is 70 times more powerful than a positive one!
Neutral thinking by contrast is far more constructive.
2020 was an interesting year for farmers. When Covid initially hit there was significant uncertainty as to the impact on soft commodities, it would be fair to say that things did not play out anywhere near where most market commentators thought or feared, myself included.
Early estimates of a significant retrenchment in Dairy prices were well wide of the mark and even though venison, lamb and beef went backwards, they still didn’t plunge the depths that some might have feared.
Being prepared for all eventualities is a smart thing as a year seems to be a long time in farming and economic cycles these days.
For those of you that managed to get away, we hope you’re well rested and fired up for the year ahead. For those of you yet (but about to) to take a break, we’re now jealous!
As we step into 2021, we thought we’d put out some of the keys to success when dealing with your bank. All designed to ensure you remain in control of your banking process and get the best possible interest rate. This is not an exhaustive list but will get you started in 2021.
Now is the time to revise your cashflow forecast for the remainder of the season.
If you are a follower of our insights, you’ll know how important it is at the start of the season to meet with the bank and present your budget together with the key strategic initiatives, for the year ahead.
Being nimble and responding to change in the assumptions that made the original budget, is equally important.
Being better informed about where your business is right now, and what that means for the rest of the season leads to better on-farm decisions. This leads to better and earlier decisions around both “defensive actions” or “investment thinking”
Keeping in mind your original budget is locked and loaded, necessary changes for the remainder of the Financial year can be made in a “Revised Cashflow Forecast”.
When is a good time to review? - All the time!
We’re always reviewing clients forecast based on changes to performance or external factors and checking the impacts of those changes on the cash position of the business, and ability to meet obligations. However, now is probably one of the most important times to look at it.
Your original budget is likely to be based on Fonterra’s opening forecast of $6.15, with a production curve similar to last year, interest rates possibly higher than they are now.
Payout is now $6.80, Canterbury’s production has had an excellent start to the season, but a difficult October, interest rates continue to fall, and the budgeted export heifers may not go. There’s a lot to think about.
A Case Study: Pro-active forecasting leads to higher farmer confidence and better bank discussions.
Below is a recent example of a Customer’s revised cashflow completed after a thorough diagnostic on the remainder of the season:
My daughter turns six later in the month, so to celebrate we had a big gathering of friends and family over the weekend. Thankfully no injuries on the bouncy castle (this time!).
Naturally the conversation turned to the recent election, but also the potential impact on farming from the National Environmental Standards released earlier in the year, especially given the election result and a continued swing to the Left.
I won’t begin to go into the detail of the standards, nor the potential options to manage and mitigate the potential impacts (nor our respective political views!).
What I would like to do is talk more broadly about what we at NZAB are seeing as the key themes in this space, and the potential impact on farming businesses and their ability to access capital going forward.
What is ESG? (Environmental, Social, Governance)
You will have no doubt seen or heard this acronym in the last while. Environmental, Social and Corporate Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. For investors, bankers, regulators and governors of businesses across all sectors, it is an increasingly important aspect in how they assess the future performance of companies (return and risk).
We’re seeing the impact of this already in loan pricing
In September 2019, Synlait Milk accessed a $50m loan from ANZ Bank that has its pricing linked to the ESG policies and performance of the company. This is a clear demonstration of how Bank’s are looking to incentivise good performance in this space, on the basis that it knows that key risks are being managed, but also that the business may reap economic benefits.
Similarly, the Auckland City Council has gone to the market recently, raising $500m via the issue of a “Green Bond” – essentially accessing funding on a long-term basis that is allocated to council projects with an environmental or sustainability focus.
The world is awash with so called “green money”. This pool of relatively cheap and long-term funding looks set to continue to grow.
Consumers are already valuing products that have great ESG fundamentals
You don’t have to go too far in the media at the moment to find examples of companies looking to leverage what they are doing environmentally to help appeal to consumers.
Recent examples include Fonterra’s Carbon Zero Milk; Anchor with plant based milk bottles; Southern Pastures purchasing Lewis Road Creamery outright as it looks to leverage its 10 Star Values Program; Bostock Chicken and its Bio-degradable Meat Packaging - the examples are endless and show the value consumers are starting to place on good practice in this space.
These are positive innovations and reflect a focus from NZ producers on meeting consumer needs, whilst hopefully driving higher returns within the farm gate. We are well placed as a sector to take advantage of these changes in consumer preference, the rewards represent the carrot rather than the stick.
So what about ESG in the Banking Sector?
As illustrated via the Synlait example, Bank’s are starting to put a much greater focus on both their clients, and their own, environmental and social policies.