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.

Take a look at the below graph.

The underlying data is sourced from RBNZ, and in particular data that compares the interest income earned by New Zealand banks on residential mortgage loans verse business loans. These values are represented as percentages of the value of their loans.

In other words, this is the average interest rate paid by the average home loan borrower verse a business borrower (which includes Agri).

Do you have a farming business who has growth aspirations but you’re not sure how to fund this?

Are you a large farming business looking to exit some or all of your assets but want to leave some of your exiting capital in the sector, in a business and sector you know?

Do you have some capital, but not enough and want to make some bigger leaps in the farming sector?

Maybe you’ve got a farming business but feel that your current capital structure isn’t match fit, suited to your business needs or doesn’t allow you to sleep at night?

Are a wholesale investor and you want to invest directly into a farming operation and enjoy returns from both profit and capital growth?

Or, maybe you’re a wholesale investor and want a fixed return by advancing a loan to a first mortgage backed by land?

Are you interested in short- or medium-term loans with enhanced returns where the risk return equation is compelling?

In our last article we wrote about the key drivers of success including the need for deeper capital markets to support and encourage greater prosperity in New Zealand.   We received lots of feedback on this article which demonstrates just how real these needs are.

(If any of the above examples resonate with you, click on this link and fill out the form and we will be in touch).

So, what is NZAB’s role in meeting these needs?

Since we started back in 2017, we’ve been on a mission to help farmers get back in control of their banking.

This means that we work hard to understand their businesses deeply and help them act with confidence so they can focus on what they’re good at, which takes the worry out of the rest.

For the most part, that means working with the farmer and their bank to ensure both sides get what they need.

However, increasingly we are finding more and more need for non-bank funding solutions. This ranges from equity capital to private debt and everything that sits in between.  

 As good as New Zealand banks have been at providing debt capital, its simply not enough to cover the entire spectrum of needs of the Agri sector.

The current regulations in the banking sector have prompted banks to simplify their credit criteria and, as a result, limit the level of risk they are willing to undertake. Consequently, when farmers make a lending request, it often feels like trying to fit a square peg into a round hole. This mismatch can lead to fluctuations in credit appetite and a wavering of confidence within the industry, ultimately impacting returns and asset values.

Whilst there is significant capital in New Zealand and around the world the spectrum of currently available funding solutions for New Zealand Agri is actually quite limited. The reality is that our capital markets in Agri are thin and underdeveloped.   

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 has been considerable debate recently in the media about the fairness of the current tax system and in particular how the very wealthy in New Zealand should be taxed.   It has led to a quite emotional debate about the “fairness” of the relative contribution of taxation as a percentage of total earnings whether the be realised or unrealised.

As I explored the competing views, it just ended up saddening me. Listening to the debate, the framing of the topic of “fairness” was only in terms of the split of a tax burden – instead of a future based and more aspirational debate on how we might educate and share the fundamental traits of success – which is how wealthy people got to where they are in the first place.

In other words, it was an all-consuming discussion about the division of the outcomes of wealth without any consideration to the building blocks of wealth or success or how those things could be fostered to increase prosperity.    

In this sense, the greatest unfairness today is that only some parts of society are fortunate enough to be ingrained with and/or educated on the traits of business success (and therefore learn and emulate them with wealth often flowing) -  and a fair chunk of the New Zealand population is not.

To start this discussion, I want to share my observations of the traits of successfully wealthy people – typically business owners.

After being in the finance sector for almost 25 years I have been privileged to work alongside some very successful people and see first-hand what makes them tick.   My experiences come from seeing first-hand how these people flourish and grow during both economic boom and economic fortitude.  

 (Please note that as a reader you might not find all of these traits “good” given we all have differing values and everyone has a different version of “success”, hence they are observations not endorsements).

1. They work exceptionally hard.   They are not 9-5 people, five days a week. They work long hours and weekends but don’t even realise they’re working.  They step in when required to get things done, often sacrificing other aspects of life to achieve it.
2. They focus on what they are good at (in most cases, what they enjoy doing) and they made a business around it.   This is also the reason that they work exceptionally hard. They’re not really interested in working for other people – they have a strong desire to create something themselves.
3. They put all their eggs in one basket, initially.   This is a financial advisors “no-no” but the reality is that they didn’t get to the position of wealth by “diversifying their investments”.   They backed themselves on one business or one asset class and stuck to what they knew best.  At times, their apparent lack of appreciation of the risk of their single business approach (or conversely their utter belief in what they are doing) can be startling.  This also meant that some of these people failed.   (Note: you will see wealthy people having quite diversified investments but that was typically after they’d created their wealth in one enterprise).
4. However, they are nearly always “operationally excellent” in their one business – producing a good or service better or cheaper than most of their peers or innovating to produce something different or develop their asset to greater levels of productivity. This allowed them to attract more capital, whether it was bank debt or other investors wanting to participate with them. They didn’t get very wealthy because they simply had a heap of one asset class waiting to go up in value.
5. Their mindset is neither optimistic nor pessimistic but realistic. They have a great ability to step back from a problem or challenge with a laser sharp focus on understanding the issue and solving it.
6. They have excellent market and business relationships in their wider sector and really enjoy connecting with other suppliers and producers to learn and share. This nearly always builds deep trust that enables further business down the track.
7. More likely than not they are not “super intelligent” in the academic sense of the word Instead they have strong intuition and belief in a certain pathway forged on past or observed success. They don’t spend days analysing the upside and downside of a potential investment.   In their minds, many a good idea died in the depths of a spreadsheet.
8. Because they enjoy what they’re doing and are playing to their strengths, they have long term investment horizons. They don’t chop and change out of a market but stick to something over a long period and enjoy the benefits when others drop out.
9. They are humble and often talk about their failures first, well before their success.
10. They look to maximise their access to external capital to support their strong belief in their business and growth strategy.
11. They have great partners.   Mostly, I mean this to be their husband or their wife but this also includes non-family business partners.   They often have quite different strengths and complement and support each other in business and life.  
12. They are not motivated by money but are motivated by growth. They don’t set a target around a certain wealth figure they want to achieve – instead the wealth is a by-product of playing to their strengths and doing their business very well.
13. They surround themselves with great advisors, but still make the decisions themselves and own them deeply.   They don’t seek to blame others when things don’t go as planned.
14. They seek to control as much of the risk in their business as possible, by owning all the uncertain parts of their supply chain but not necessarily “control freaks” with their people.
15. They are typically very normal, highly respectful and down to earth people.

So, let’s get back to the topic of fairness in the context of wealth in New Zealand. What I don’t think is fair, is only a small section of New Zealand actually understands these traits. Not enough of New Zealand gets exposure to what really makes and creates business and/or wealth.

And that pool is shrinking further.

So how could we rectify this?

Let’s not think that these are just the traits of the super wealthy either- they are also the traits of plenty of smaller local successful businesspeople who put considerable risk and capital on the line to create something a little bit better for themselves, their family and their communities.

Firstly, let’s celebrate them better and learn from them.

We need to change the New Zealand ethos so that these people actually feel willing to share what’s made them successful. At the moment and particularly following this tax debate there is little incentive for any of these people to engage in this discussion – instead it has only served to drive anyone who has been remotely successful further from the spotlight.

We need to create a New Zealand wide and eventually ingrained culture of celebrating success.

“Celebration” doesn’t mean that we’re throwing street parades, it means listening to their stories, understanding what drives them, asking them questions and trying to understand more deeply what got them to where they are.  

Let’s feature their stories more prominently in the media on a regular basis or go one step further and set up a TV program via New Zealand on air that charts their growth stories.

From a school perspective, wouldn’t it be neat that the local school was able to hear from a local businessperson on a regular basis so they could listen, get inspired, build connections and eventually emulate those traits if they found it resonated with them.   This could even lead to a nationwide set up of a business mentoring type program where secondary school children can learn from an existing business owner.

Government has a role to play – by not being the blockage.

How can New Zealand obtain greater prosperity if we continue to frame the discussion around fairness in the context of distribution of the outputs of wealth- instead of encouraging the wider distribution of the knowledge and drivers of success?    

This doesn’t mean that the taxation system doesn’t need an overhaul; but where are the policies and ethos alongside that create incentives and/or provide education and learning for people to get into enterprise and have a go?

Both NZTE (NZ Trade and Enterprise) and the Icehouse do an excellent job of coaching and connecting businesses with both skill and capital. But they have limited resources – how could we turbocharge these entities to create a much greater suite of new and more successful enterprises in New Zealand?

Ironically, with greater regulations and conditions designed to improve prosperity for the worker, this unintentionally means that larger or more corporate businesses are more likely to thrive, rather than smaller ones, due to burdening regulatory overhead costs and complexity that can only be carried at scale.  

Middle ground needs to be found.

We need to deepen our capital markets beyond the main trading banks.

Current access to capital comes largely from the main New Zealand trading banks that are set up mostly to support mortgage lending. The required depth to support growth businesses is simply not available in New Zealand. Therefore, we require more suitable capital via a greater depth of equity capital and investment funds dedicated to this purpose.

I note the government’s earlier commitment in 2022 to establish a $100m growth fund was a good start but it has quietly disappeared off the radar without any execution.  This was to emulate the Australian version that has a $540m fund created by Government and the main trading banks that take minority stakes in businesses to support their growth.   Imagine if NZ went large and put a billion dollars together to turbocharge the process?  

The unsurprising thing about capital investment in any one sector is that it is self-perpetuating as more capital is made available, other participants enter the fray, creating a functioning market where people feel confident to invest.

NZAB has a role to play here as we widen the network and connect with more capital providers that want to get access to investment and funding opportunities in the Agri sector.  And at the same time educate the wider market on the very compelling risk and return that the sector provides for participants with capital.   You’ll see more from us on this topic soon.

Drop us a line at any time - whether you want to chat more about your own success, access to capital or maybe you’ve also got your own pillars of success to share. Please feel free to reach out on 0800 692 212 or 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.

Last week we penned an article about how hard budgeting will be this year given the falling milk price, costs remaining stubbornly high and lots of macro forces that could pull both factors either up or down over the next 12 months.

Within that, one of our key points is that farm operating margins in any one year are very rarely “average”, they always shift from being great to being very poor.   We went further and said that looking at those operating margins over a longer period of time (3-5 years) is critical when dealing with your own mindset and also that of your bank.

Reflexive decisions due to apparent near-term financial stress felt by farmers and/or their capital providers can have a detrimental impact on farmers mindsets.   They can impact their confidence in their own well established and proven operating systems and their confidence to invest in productivity.     Both farmers and banks know that margins can swing and things average out over a longer period, but sometimes it’s a good idea to put this topic up in lights and support with actual data to ensure stability with mid-term strategy.  

With that in mind, this article summarises some actual dairy farm margin data over both the last two years and then against the last 20+ years to support that point.

First up below is a bar representation of the last two years of average financial performance plus FY 24 forecasted and then all three years averaged in the final column.  

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 our clients we’re always in a continuous budget setting and forecasting mode so we can try and stay well ahead of what might happen and what impact it might have on key decisions. This can include debt repayment, capex projects, expansion feasibility and working capital facility management.

It would be fair to say that the last six months have been very difficult with significant downwardly revised income projections and costs still remaining sticky (and even increasing) on the back of inflation spiraling.

Going into FY 24, this is not going to get easier with a wide range of milk payout, meat and crop price expectations in the marketplace and rapidly changing macro events that may or may not flow through to on-farm input and capital costs.

With that intro out of the way, the following are some key thoughts as we move through the budgeting phase for FY 24.

First, what milk payout should we use?

First of all, some data. Below is Fonterra payout, since 2010 with dividend on top. The yellow line is the five-year average, and the dark line is the ten year average.