Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

The recent CPI release of 4.0% for the year ended 31 March 2024 was a step in the right direction, falling further again from the December number of 4.7%. It arrived in line with economists’ consensus levels and slightly higher than what the RBNZ thought (3.8%).

But it was still noticeably above the ‘accepted’ 1-3% target range.  

Consequently, the RBNZ let all parties know it, with a brief statement noting that the “OCR needed to remain at restrictive levels for a sustained period”. Also unhelpful was that despite ’tradable inflation’ printing at 1.6% p.a., non-tradable inflation was 5.8% p.a. (more on this at the end of the article) leading most economists to say “we need to be here longer” and pushing out rate cut forecasts further into 2025.

But are we yet again being over obsessed with looking backwards rather than looking at what’s happening right now?

Let us explain. The latest CPI print of 4.0% is made up of 4 quarters - and they look like this:

Quarter ending June 2023:                         1.1%

Quarter ending September 2023:           1.8%

Quarter ending December 2023:             0.5%

Quarter ending March 202424:                0.6%

Total equals                                                           4.0% for the year

 

So, what if we extrapolated forward the last six months of CPI change and annualised this to the rest of the year?

Well, we would get a 2.2% inflation rate, being (0.5%+0.6%) x 2 which is smack bang in the middle of our target range.

The graph below shows it best by plotting the six-month annualised figure against the annual figure since 2017.

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

 We’ve been through (and arguably are still going through) a period of       pretty ugly inflation in New Zealand.   Inflation has impacted on all   sectors of our economy. but farming felt it more keenly being exposed to   some big increases in wages, fertiliser and fuel.

So, given the changes in inflation, what does a good milk payout now look like?

With many farmers looking to make investment decisions and also considering hedging policies, we thought it might be useful to put out a few graphs showing the difference between inflation and non inflation adjusted payout data over the last 20 years to assist.

 

 

 

 

 

 

 

 

 

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

We all want to pay the lowest interest rate possible. It makes perfect sense. Two years ago our budgets had good allowances for principal and tax, but this year those amounts have all but rolled into the interest line. 

Contrary to some opinions on this subject, I think that one of the greatest aspects of being a farm borrower is that you can get a rate based on how good you are, rather than a one size fits all rate like those buying a house. It gives you an element of control and brings in to focus the things that are important when you are presenting your business to a bank. The key is knowing how to access these benefits.

Rates are high again, and that's always when the question of fairness arises. They're not the highest they have been, but they are a lot higher than they have been for the last few years. To be honest we were pretty lucky that rates went as low as they did during the downturn in the dairy sector otherwise things would have been a lot worse for us as an industry. With the current challenges in the red meat sector, it makes sense to be looking hard at these costs.

So, what’s driving the increases?

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

There’s nothing like a sporting analogy to focus the mind. I’ve enjoyed watching the cricket on free to view and the new commentary team lead by Scotty ‘‘Sumo’ Stevenson.

I’m also looking forward to the Razor Robinson era. I’m not in the Razor fan club, but I must admit I am warming to him and the fresh approach. You don’t get many “full credits” from Razor.

Often players who have been overlooked by the last AB’s coach have a second chance. The most obvious example in New Zealand rugby was the John Hart - Laurie Mains transition. Hart’s AB’s team was full of Aucklanders , whereas Laurie picked a lot of players from regional New Zealand, including Southland’s very own Simon Culhane. I was lucky enough to play alongside Simon, and he typified the Laurie Mains era of a tough, skillful hard worker with no frills.

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Let’s be honest, last year was a bit tough.  

Expectations of dairy payout dropped to very low levels, lamb prices kept going lower than expected and interest rates went higher on the back of inflation that was stickier than ever. On top of that we started the year with a devastating cyclone that ripped the heart out of a major horticulture area, and we had a government that very few farmers thought was in their corner.    

It wasn’t just farming either – homeowners and business owners alike all got a collective feeling of malaise as recession started to spread its tentacles. Confidence surveys in both farming and non-farming sectors alike plumbed new depths.  

But, for this article, it’s a new year and let’s sweep the broom a bit for 2024, because there’s some things that farmers can start feeling more optimistic about as we head into the year.

 

1. Interest rates have leveled off and look likely to fall. 

It’s hard to imagine that a little over 12 months ago (pre-xmas 2022), we were at an OCR of 3.5% which was then lifted to 4.25% in Dec 2022. Very few (read: nil!) commentators were predicting that we would end up as high as 5.5% before the job on squashing inflation appeared done.  

But the story has changed.

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

A few of the main banks have just finished their full year reporting releases and their profits are again hitting high levels on the back of record net interest margins and lowering operating costs.

The New Zealand divisions are all performing handsomely on the back of the ongoing expansionary lending to the home loan sectors in the earlier part of the financial year plus record margins on the back of the open supply of cheaper funds.

However, it’s worth paying particular attention to the near identical messaging coming from the Banks about their first half performances being much better than the second half.

Here’s some statements they’ve made:

ANZ, in its press release noted that “it was a game of two halves. The good performance of the bank in the first half of the 2022/23 final year reflected the tailwinds of the Covid fiscal stimulus in the economy..”   and “but in the second half of the year our performance slowed due to the more difficult environment NZ is entering”.

BNZ’s CEO Dan Huggins, who recorded a record rise in profit, noted that “BNZ's profit fell 12.5% in the second half-year versus the first-half to $704 million reflecting a broader economic slowdown in New Zealand” and “The second-half net interest margin dropped nine basis points to 2.36% from 2.45% in the first-half.

 

Let us interpret this for you.

Home lending growth has stalled, and deposit rates have climbed higher than expected, reducing the record margins banks were otherwise enjoying when there was excess cash floating around New Zealand, a result of the record stimulus provided by the government and RBNZ at the time. The Banks’ increase in profit is a result of extra lending volume multiplied by any additional margin increase between cost of deposits and return on loans.

We noted this starting to appear when we opined that Banks were increasing their business and agri margins at a greater rate than needed due to fixed rate home loans dragging on their returns. 

 

At this point, it’s worth remembering how Banks think when it comes to setting performance targets for their profits for their upcoming year.

Typically, cyclical considerations (i.e higher profits at times where market conditions allow, lower profits when not) are largely ignored. Instead, a newly minted, higher profit target is sought for the upcoming year, regardless of how good the prior year was.  

Typically, this “ask” will range between 5-10% increase on the prior year. This will need to come from either greater lending, better margins or lower costs. In most cases, all of these categories are targeted.

The Bank is a business and businesses increase profit by either selling more at better margins and at lower costs of operation. For Banks, this is largely a function of more lending growth (volume) x better lending margin (the gap between costs of deposits and lending rates) less business operating costs (people, branches and systems).  

Now let’s overlay that with the current speed of the economy. The back half of 2023 has seen a sluggish economy with low lending volumes.

Flowing into at least the first half of 2024, the forecast is for more of the same with persistently higher interest rates continuing to stifle credit growth.

 

With this backdrop in mind, we see the following things becoming evident in the Agri lending market as we go through 2024.

 

1. New transactions or customers that fit neatly* (*see point 4 below) into Banks’ Agri lending appetite, and in particular those from new customers, will remain strong and possibly get stronger.

Despite much lower commodity product prices and much higher interest rates, demand for new Agri transactions will remain strong where they fit into tight banking criteria.

This is the volume part of the increasing profit equation, a simple rationale of needing to continue to grow the balance sheet against a backdrop of lowering demand. The need for volume will be exacerbated by low lending volumes in the housing market.

If the deal fits neatly into Bank criteria, expect to see most main Banks lining up to bank it, with strong appetite and with very strong competition with pricing.

 

2. Conversely, look for Banks to increase margin on existing customers, or be slow to pass on reductions in deposits costs.  

This is where we will really see a two-step market.

The need to deliver profits against a backdrop of low lending volumes means that there will be increased focus on the margin multiplier of the profit equation. This will be in the form of portfolio wide increases in margin for “funding” or “liquidity” premiums and will become more evident when underlying base rates (30-80 day bills and swaps) begin to fall.

Equally, whilst Bank deposit costs have been increasing for the last two years, these are now starting to reach their peak and will eventually start falling. How quickly or slowly this is passed on is a strong profit determinant for the Bank.

You will also see a stringent focus on “pricing to the risk curve” – this means that those customers that have higher credit risk will ultimately be charged more as Banks look closely at each customers’ credit rating and ensure they are getting an “efficient” return on their capital. This will feel particularly difficult for those customers who are already under profit pressure.

 

3. Look out for further Bank “head count” reductions to lower operating costs.

The final lever that Bank’s will be examining is their ability to earn the same, but with less operating costs.

Ultimately this means working their business towards a “lower cost to serve” with more accounts per bank staff member or a greater use of technology to make non-human decisions. Either way means that the average banker will be having to do more, with less.

Having the necessary time to understand your credit proposal will come under pressure, particularly if it’s not presented well or not perfectly “in the box”.

 

4. The “swift and easy” credit approval “box” will continue to get smaller, leading to the need to present transactions even more carefully and consider non-main Bank capital solutions.

This is the double-edged sword from the above point- less time from bankers to consider applications and in general, less desire to consider transactions that don’t meet strict bank underwriting criteria or spend time on transactions that have been prepared to a sub-par level.

More than ever, if a Bank does not show appetite with a transaction, it does not mean that the farmer's strategy is flawed, its just that the Bank’s credit underwriting criteria is getting tighter, or possibly the credit risk is not presented in the right manner. And that’s a very important distinction.  

This will mean farmers will need to think carefully about how they present the transaction, plus consider other, more suitable forms of capital, including equity or non-main bank debt capital to better achieve or execute on their strategy.

 

So, what should you do with all this?

First, none of this is new, but here are some things that will become really important for you in 2024.

1. Ensure that your strategy and credit proposal is well presented.  

The banking process is equal parts objective (financials, balance sheet etc) and equal parts subjective (judgement on quality of decision making, advisors, strategy, rationale for past performance etc).

Knowing how to present your business in line with how a Bank assesses credit risk is vital for a yes or no, plus also for how your credit rating lands. This is doubly important where bankers have less time to understand what you’re trying to achieve/ask for.

 

2. Create a market for your loan.

This doesn’t mean taking your loan to all the Banks and asking for the best rate. This means ensuring that your business is of a sufficient quality that multiple Banks would want to have you as a customer.    In other words, create something that a bank would like to buy.

Don’t let your business get to a place where you are “marooned” with one Bank. But also, don’t worry if you’re in this camp - many farmers will be right now – but careful navigation around the current situation and creating a plan to move into a better level of credit risk over time is important.

 

3. If all of this feels like the Agri Debt market is pulling in different directions, all at once – you’re right.  

The Agri market for banking requires a very specific set of skills to navigate successfully. 2024 may well throw up the most “imperfect market” for Agri loans that we’ve seen yet.   The difference between yes or no, or the vast range in interest rate that the market will deliver will have significant ramifications on your business.

 

And if all of this seems a little too hard, drop NZAB a line.

NZAB was created to bridge the gap between farmers and their Bank.

New Zealand has some of the best farmers in the world. In a highly regulated and complex finance industry that continuously evolves, we ensure our farmers are informed and empowered to ensure they stay at the top of their game.

We’d be happy to show you why we’re the leading provider of Agri Finance advice across New Zealand. We use our scale, influence and experience to get our farmers the most competitive finance solutions they deserve.

 

Go to our website at www.nzab.co.nz for more, fill out this form, or call/email us direct on 0800 692 212 and info@nzab.co.nz

 

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Kiwibank has been nothing short of a success.

It was initially set up in 2002 as a brainchild of the Alliance MP Jim Anderton, who was in a coalition government with Labour at the time, with a purpose of establishing a locally owned bank with profits that stayed in New Zealand, rather than headed overseas.

A quick tour of its history shows that from day dot, it launched over 200 branches nationwide, partnering with (and ultimately owned by) NZ Post. By 2008 it had grown to 600,000 customers, campaigning on “joining the movement” (i.e., away from Australian owned banks) and winning new customers on stronger customer satisfaction.

It continued to grow and in 2016, NZ Post sold 47% of it to NZ Super and ACC.   Fast forward to 2022, and the entire business was purchased from the syndicate by the New Zealand Government for an estimated $2.1bn.

As of June 2023, Kiwibank has total assets (loans) of $29.7bn, giving them a 5.62% share (on a "dollars lent” basis) of all New Zealand main bank lending. It also continues to head in the right direction, up from 4.39% five years ago. That’s impressive growth.    

Profitability is OK, but not as good as the Australian banks. Return on equity of 6-7% lags the main other banks who typically average about 12-15% (Return on equity (ROE) is the ratio of profit after tax to average equity).

Interestingly, their net interest margin is slightly higher than most banks at 2.5%, meaning they’re highly effective at using deposits to earn income (the net interest margin (NIM) is the ratio of net interest income to average interest-bearing assets, where net interest income is income received less income paid).

Why their profitability of their business lags versus others (on a ROE basis) is probably due to the operating expenditure being much higher at 65% of total income, versus their peers at 40-50%.   This may be symptomatic of a growing business and a larger number of smaller accounts.

Home loans are the biggest part of Kiwibank, but Business banking is rocketing up.

 

Below is the makeup of Kiwibank’s assets (loans) – from five years ago until today.

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

Foreign direct investment (“FDI”) into New Zealand agriculture has been a political hot potato since it became a significant election issue in 2017, leading to material changes in OIO regulations, materially restricting FDI into New Zealand farmland on the back of it.   The regulations enacted at the time had the effect of restricting any investment into New Zealand land that was >5ha in size, with exceptions carved out for minority stakes in entities that hold land (<25%) and also those that deliver significant economic benefit to New Zealand (something that has been subsequently difficult to obtain as an exception).

However, the majority of economic data suggests that foreign direct investment (FDI) is advantageous to those countries that receive it. FDI promotes efficiency by enabling the allocation of resources to their most valuable purpose and introducing innovative technology and managerial methods that stimulate competition for resources, increase business revenues and enhance productivity growth.

In short, it creates more economic prosperity.

With the imminent change of government, plus the growing need to ensure New Zealand remains a high value economy in the future and funds all its necessary infrastructure upgrades, the discussion on FDI is about to amplify.

Let’s start this discussion with a graph. Below is all foreign direct investment since 1990 into New Zealand as a percentage of GDP compared to our nearest neighbour, Australia.  

Information only disclaimer. The information and commentary in this email are provided for general information purposes only. We recommend the recipients seek financial advice about their circumstances from their adviser before making any financial or investment decision or taking any action.

In our article last week on the 'The Agri Banking Sector Through the Eyes of a Young Professional' I mentioned about some of the pearls of wisdom I had gathered from the ‘old Gen X’s’ that have a lot more wisdom than myself!

If you recall, writing this article started when I was asked to prepare an introductory document for our next Graduate to help bring them up to speed as they themselves enter the sector. Upon putting together the document I went to the people of NZAB and asked for their best ‘tip of the trade’ or ‘key piece of advice’ they wished they had when they first started out, and I received some absolute rippers that were too good not to share.

I believe there will be something that will resonate with every reader no matter the stage in your career. I have put them into sections based on some of the key messages that came through below: 

 

1. Draw on the knowledge of those around you to help assist your growth. 

•  “Utilise the experience around you – ensure you spend time around those you can learn from, ask to go out on joint visits and the like. See how different people work and process things, and then see what resonates with you and how you can apply that to your own methods and approaches going forward".
• “Don’t think you need too or will learn everything straight away. Ask lots of questions, listen to conversations and try to soak it all in. It will come over time with experience, use the wealth of experience already within your business to help you along the way".
• “Enjoy the journey. You’ll never get another time in your career to observe and learn from so many different people before having to be accountable for your own clients. Many Grads are tempted to rush to a ‘better job title’ but I often think back fondly on my time as a Grad".
• “Everyone you work with in your time as a Grad brings their own skills and experiences that others don’t necessarily possess. They’ll also do things in a different way from their peers that will still achieve the outcome they require. Look at all people as a resource to tap into rather than at their job title. You never know when you will need someone’s specialist skills or knowledge at a future time in your career and their preparedness to help you will depend on how you treated them from all the various interactions, they had with you". 
  
  

2. Listen and ask lots of questions.

• “Practice listening and get really good at it".
• “Never be scared of asking questions if you don’t know the answer, even if it’s multiple questions. Sometimes we’re scared of that, thinking it makes us feel like we don’t know enough and that somehow will make us inferior - but that’s not the case in real life. Asking questions (or simply confirming what you think you’ve heard) shows a curious mind and a focus on getting more accurate information with a better understanding - excellent qualities".
• “You have a free 12 months to ask as many questions as possible about anything and everything. Make sure you use the 12 months wisely and learn as much as you can".
• “Enjoy. It’s a special time in your career that you will look back on fondly in time to come. Don’t be in a rush. You will get there fast enough and the more you learn now through asking questions, exposure to conversations and meetings where you don’t have to play an active role in will be some of the best learnings you’ll ever get".
• “Starting off as a Graduate is one of the most privileged positions to be in from the perspective that all you must do is show interest, ask questions, take notes and observe. Other than your colleagues giving you things to do for your development, you are literally there to learn the ropes without external delivery expectations. You have earned the Grad role through your ability to talk (communicate and articulate), your personality and the investment you made into yourself at University. You may have learnt some theory that is relevant to your job, but this next step is about bringing theory and commercial reality together. It’s important to have an opinion, and sometimes demonstrate your understanding of what’s been discussed, but your best position to come from is a place of curiosity rather than knowledge".

3. Always show respect and never be quick to act or judge. 

• “Our business and banking is about people. You can never know what people are juggling or managing that you can’t see. Approach every interaction, whether it’s with clients or the bank with empathy. Always “seek first to understand” before responding".
• “Respect the Customers/Farmers you deal with. We are in a privileged position where these farmers open the door to us and show us their businesses at an operational and financial level. Each and every farmer has earned the right to be where they are today".
• “I remember getting told when I was first a Relationship Manager to never make assumptions about a deal before you have had the meeting. Super hard to do, but so true".
• “Never burn bridges - even when dealing with people you don’t see eye to eye with, treat them with respect as you never know who they are either related too or have some level of influence over".
• “The advisory industry is a lot of fun and a great opportunity to develop lifelong contacts and friendships along the way. We are in a super privileged position to see the good, the bad and the ugly. Remember that we are there to help, not cast judgement. So always be respectful of the fact that despite the challenging situations that some people face, this wasn’t how they saw it panning out and they once warranted all the debt that a bank has provided that now sees them in the position, they are in".
  
  

4. Get involved and just give it a go!

• “Don’t be afraid of giving things a go, the more exposure you have the quicker the learning curve. We all start at the same place but if you apply yourself and put yourself in situations to learn and grow you will accelerate your development. Try to avoid sitting on the sidelines because you don’t feel qualified".
• “Turn up to work with a good "can do attitude" and a smile. Login to your emails, keep them open all day, and regularly check them".
• “Have a crack at working things out yourself (look at old papers that have been completed) but also don't be afraid to ask for help".
• “Make an effort to introduce yourself to the whole team - in all regions, there's a wealth of experience, and everyone is itching to share their knowledge. Relationships with the team help build confidence to build relationships with clients and other intermediaries".
• “Attitude and intent are the absolute key. As a Grad, you’re not hired because you are expected to know how to do the job, you are hired for your perceived ability to learn and execute. Say "yes" to everything regardless of who’s job it is (above or below you) and put your shoulder in to every chance you have”.
• “Try first, ask second’. This is the best way to learn. Have a crack at a model, or a review and then ask questions once you’ve done what you can".
• "Travel and see the country! The best thing you can do as a Grad is move as far away from home and your comfort zone as possible. You meet a ton of new people, build key relationships that may come in useful later in your career, but most importantly if you mess anything up, it’s not in your hometown!!".
• “I remember coming into the Bank as a Grad, thinking there was expectation on me to know what I was talking about. I don’t recall ever being given the perspective of the fact that nothing was really expected from you, other than to be grateful for the opportunity, be respectful and be eager to learn".
• “Don’t sit back and wait. The best people in the business are usually too busy to be totally effective mentors (that’s possibly unfair to some, but generally I have found it to be true) so if you want to learn, you’ve got to force your way in by demonstrating some usefulness or value to those high performers. Look for ways to do this, it might be prepping a meeting, or some extra insights etc".
  
  

5. Sometimes the basics can be the most important. 

• “You can be taught banking and technical skills, but the soft skills are more important. Being able to structure meetings and talk to people is most important".
• “Admit when you don’t know something. It can be a bit intimidating to tell a farmer that you don’t know the answer to their question, but they respect honesty, and can smell bullshit from miles away. If you don’t know, then say so, but offer up a plan to get back to them".
• "Remember you are now part of your business’s brand. People will affiliate you with that business at any interaction. We’ve all had slip ups, but make sure you are carrying yourself at a level that you would be proud to be talked about".
• “Get it right - clients pay us a lot of money to get the job done and to do it professionally. It is always a good idea to get someone else to proof your work before sending out to clients/banks etc".
  
  

6. Bonus advice.

• “No good happens after 11pm. Go home. If you do push the boat out a bit far, always front the next day on time".
  
  

On that note I’m going to call it a day. No matter the stage of your career there is always something you can do better.

We are involved in a very exciting industry that is constantly evolving which means there is always something to learn. I hope there was something in this article that helped you do just that today!

Thank you to those who responded following my first article, it was great to hear from you and I enjoyed those who challenged my thinking – again please feel free to drop me a line if you have any follow up comments!