At NZAB, we have sought to create to create an environment where the best bankers and business professionals can find a home, working directly for the farmer. We wanted them to stay deeply involved and grow commercially with the sector, deploying their significant experience for the benefit of the farmer.  

Since we started NZAB, we have had a strategy to create a culture and a business model that allows those who believe what we believe to invest and grow alongside our vision. It's exciting to see that start to come to fruition. 

Over time, we want more of our staff to do the same so they can continue to come to work each day feeling even more empowered to help their farmers get what they deserve. 

Please join us in congratulating Nick, Chris, Mike and Michael!

In doing so, we thank you for your support. Without your ongoing business, or you telling your other farming peers about us, we wouldn’t be where we are today.

For those of you that don’t know them, you can find out a bit more about these great people below.

The economic world has been in a state of flux over the last 12 months with significant changes in both product prices and the cost of production.

In the agriculture sector it has been no different with large cost increases in FY 22, but correspondingly large lifts in product prices as well. You can see a bit more about the FY 22 year in review from our own dataset in this article.

In FY 22, we extracted actual data from our New Zealand wide customer database which showed operating costs had a significant lift from the year before of around 15%, well above the NZ CPI rate for the same period of 6.9%.

But that change in cost didn’t stop at the end of FY 22.  

This week, we’ve surveyed our Client Directors across New Zealand to see where their customer budgets are landing for FY 23. As you might expect, that range is relatively significant, from $5 per KgMS to $7.20. However, the average is landing at $6.25 per KgMS before depreciation.

So whilst the dairy sector is “enjoying” record payouts, the devil, as they say, is very much in the detail.

To add some further data to this anecdote, we’ve put together the graph below which examines how dairy EBIT per KgMS has been trending over the last 20+ years. The data is sourced from Dairy NZ’s economic data since 1999 to 2021. For FY 22 we’ve used our own data set and for FY 23 we’ve used a $9 cashflow payout less our surveyed average cost of $6.25 above (plus an allowance for depreciation).

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.

With the RBNZ about to embark on their five-yearly review, which follows a report titled How Central Bank Mistakes after 2019 Led to Inflation, we thought we’d add our small voice to the conversation.

If you recall, the RBNZ went in to bat (with a very big bat) during Covid to ensure the economy didn’t tip over and the credit/banking system remained functional.  

It did this with three broad tools:

1. Aggressively cut the “OCR” to stimulate borrowing (this is “Reserve Bank 101” for stimulating an economy during shock or recession).
2. Devised and then embarked on the “LSAP” (Large Scale Asset Purchase Programme) – this is a sophisticated way of saying “printing money” as the RBNZ purchased government bonds in the secondary market to stimulate more purchasing demand for newly released (and additional) government bonds – to support new government spending during this time.
3. Devised and then embarked on the FLP (Funding for Lending Programme) – where the banks had access to large additional facilities at RBNZ at the cost of the OCR at the time.
   
   

All of these had the impact of providing a significant amount of new money into the banking sector.

What wasn't thought about at the time, was how the banks would then use that money.

The graph below shows the rolling 12 month change in Home, Business and Agriculture lending, with source data from RBNZ. It covers the period before, during and after those programmes.

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.

Welcome back all - it’s been a wee while since I’ve put an article out to you all – July involved a bit of skiing and a bit of offshore sun but it’s great to be back with spring just around the corner.

What’s not so spring-like is the fear of increasing interest rates – ostensibly being driven by the RBNZ to head off seemingly out of control inflation.

Inflation and whether it goes up or down is primarily about two things - the amount of excess demand in an economy versus the capacity (supply) of the economy to meet that demand.

In layman’s terms, it could be described as the amount of spare cash floating around, coupled with an individual’s willingness to spend it versus the amount of goods or services available. Too much demand and too little supply and prices go up. And then so do interest rates to ensure things don’t get out of control

And it’s not just about that supply/demand dynamic as of right now – its also about how people feel about their future that will dictate that imbalance – if people think things will get worse in the future they’re more likely to shut up shop with their spending now - that’s why customer sentiment surveys are so important as a “lead indicator” for what inflation might do.

However, we’re all human right?

Sometimes its actually the physical impact of a lack of money - actually feeling it, that is required, before people actually change their spending habits.   In other words, people have to touch the fire before they change.

Which brings me to a really interesting data set we’ve pulled from the RBNZ. The below graph is the actual average rate that people are paying on their home loans right now (to the end of May 2022).

The recent announcement in this year’s budget to provide greater support to New Zealand businesses created plenty of discussion, not least about whether or not government was equipped to be able to make a scheme like this work.   To recap, you can find an article on this here: https://www.stuff.co.nz/business/128682597/government-to-invest-100m-taking-stakes-in-small-businesses.

But one thing the debate misses, is how much of a drop in the bucket the $100m amount is and how different, subtler regulatory changes would have significantly more effect.

Take this graph of bank funding to the different sectors, since 2008. We’ve chosen 2008 as a starting point, as that was post GFC and a raft of banking regulatory capital changes emanated from this time.

With the RBNZ recently sharing updated bank metrics for the period ending 31 March 2022, its time for us to dive back in and see what movements are afoot.

Welcome to the latest edition of our NZAB Bank Dashboard.

There's some surprising data in here - Bank lending growth continues to break records (and nearly all of it in the home loan sector) despite the changes that were implemented via the new CCCFA rules late last year.   

Agri loan repayments are accelerating and nearly all of it in the dairy sector.  At this rate, the dairy sector would repay all its debt ($37bn) in the next 14 years!

Business lending continues to have moderate growth for a 4th quarter in a row with Kiwibank making a massive charge over the last year with over 22% year on year growth in their business lending portfolio.   

The big loser in the Business and Agri space is still ANZ - they have shed 1% market share in Agri in the last 12 months and almost the same in the business sector- seemingly to lend more to NZ housing.       

Interestingly Westpac also appear to have stalled. For total loans, they're growing at half the New Zealand average and have shed a whopping 1.25% of market share in business banking alone over the last 12 months.   

As always, if you have any questions, please contact us directly.

Welcome to the first in a series of articles  reviewing the financial results of the 2022 Dairy season.

At NZAB, we've got a large data set now as a result of significant investment in a data analytics platform which we use to support our clients with real time insights. We're able to use this platform to look at the trends that we are seeing in the dairy industry and provide real time insights rather than having to wait a year for the benchmarking systems to catch up.

Given most farmers are starting to think about setting budgets for next season, it's important to have a bit of a guide as to what is happening to costs so that we can make informed decisions. But it is also critical that our bankers understand what's going on here, as many covenants are set around variances on costs, many of which are outside of farmer control. 

So this first article covers our high level insights. Following this we will dive deeper into the individual trends and particular insights we take from it.

This is also an interactive series. So please get in touch with your questions, and we will publish a Q&A alongside our upcoming articles.

Milk Production and Revenue:

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 latest financial stability report from the RBNZ brings back to the surface a hot topic for us and our farming and business customers – that being the significantly greater amounts of capital that the RBNZ requires banks to hold when they lend to a farmer or business versus a homeowner.

The main trading banks are required to hold vastly more of their own equity capital against a farming or business loan making those loans much less profitable to make. This leads directly to less lending and higher interest cost margins in those sectors versus home lending.

We warned about the flow of capital going straight to home lending back in 2020 when the RBNZ started its “Funding for Lending” and “Large Scale Asset Purchases” programmes (i.e printing money).  You can find that article here. 

Earlier, in this article, we actively called for RBNZ to proactively make capital changes to help the New Zealand Primary Sector. 

It was clear back then that the RBNZ’s capital rules were (and still are) set up to encourage home lending and discourage farm and business lending.

So back to the latest report from the RBNZ

(you can find the full copy here)

Here are some direct quotes from that report:

“Overall, risks to the financial system from the dairy sector have diminished considerably in recent years”

“On average, dairy farmers have repaid around $3 of bank debt per kgMS in recent years”

“Total dairy sector debt has declined by around 12 percent ($5b) since its peak level in 2018”

“[On the Ukraine Crisis]… higher food prices should also benefit agricultural exporters. New Zealand’s dairy and meat stocks are predominantly pasture-fed, and should fare better than overseas grain-fed competitors”

The following graph, produced by the RBNZ, best shows the significant repayments made in the sector and the strong position they’re now in.  

The underpinning 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 help manage some c. $3bn of NZ Farming and business loans across NZ so we get to see the picture across all the banks and other funding sources. This gets our customers the best outcome for their farm or business funding.

With all our customers, we are continuously having discussions about managing their interest rates. In particular, this involves managing the drivers of that; the big ones being credit quality, market competition for their loans and also underlying base rate movement.

When we talk about “base rate movements”, we’re talking about the movement in swaps (being the general underpinning of a fixed rate) and the movement in the 90-day bill (being the general underpinning of a floating rate)

There’s a heck of a lot of change in both at present (check out our earlier article on the significant fixed rate differences we were observing between banks) so it’s always worth looking into some of the interesting things happening out there at present.

Case in point is this graph below.

This is a graph that shows the average of all of the four main bank’s forecasts (Westpac, ANZ, BNZ and ASB) for the 90 day bill out to September 2023 – at this point all bank’s think this will be the peak of the 90 day bill (The spread of the peak that makes up the average ranges from 3.10% to 3.60%).

We have then compared this to the swap rates for different terms from 1- 5years.

After our last article discussing two of the larger drivers of land value change over time (payout and debt availability – you can find it here), we had a bit of discussion about the payout data going back over time.

I thought I’d just pick up on this point with a couple of graphs.

Here is our payout graph (with data sourced from LIC), which makes for interesting reading.