Unfortunately, there is no clear consensus on what direction should be taken for the sector to thrive in future.
Bagrie told a meeting organised by Bayleys Whanganui on the state of the rural economy there has been no hard analysis of where the sector is going to find future growth streams when a coherent strategy to drive change is needed.
The former ANZ chief economist who now heads Bagrie Economics asked what NZ is doing to explore further developing its own aquaculture prospects.
Increasing the amount of value-added red meat products for export and getting a free-trade deal with China were steps in the right direction to base future growth on but won’t be enough on their own.
There’s a need to turbocharge ideas now to regenerate prosperity further down the track.
It’s not a scenario restricted to agriculture.
Along with dairying, former key economic drivers now facing headwinds also include non-renewables, house and land prices, rapid credit accumulation and migration. They have contributed to a lot of economic growth but not high-quality growth.
“What are the replacement sources to lift productivity? Where is the plan?”
The dollar value of NZ dairy exports has risen 8% a year since 1990 but land use capacity and dairy’s environmental impact mean that won’t continue so growth has to come from elsewhere.
Bagrie is not expecting dairy’s export value to drop between now and 2030 but predicts it will be flat. Taking the 8% annual rise out of the economy will leave a $20 billion hole by 2030 in terms of what would have been earned if it had continued.
One of the biggest problems is too much focus on short-term goals rather than an eye on the longer game. There’s been a lot of emphasis on near-term profit cycles but not enough thought given to the bigger picture.
That’s been coupled with a shortage of quality advice from local and central government bureaucrats with the election cycle also driving short-term decisions.
It all adds up to a drag on sustainable growth and while Bagrie can see what the Government is trying to achieve its execution is not working.
Farms are businesses needing certainty when planning ahead and making investment decisions.
When that’s not there they hold fire and now the finer points of a lot of Government policies and their financial cost is up in the air, creating uncertainty.
In recent years the rural sector has been hit by what Bagrie calls grumpflation where growth is slowing and costs are rising.
“Income generation is being whacked by rising costs,” he said.
Farm costs are rising at double the inflation rate. That is hard to pass on so margins are being squeezed.
Healthy commodity prices mean farm incomes don’t look too bad, with the exception of forestry.
However, banks are keeping a close eye on debt, particularly in the dairy sector, which, at $41b, accounts for about two-thirds of the rural sector’s $63b debt.
Despite banks saying publicly they are still open to lending money to dairy farmers Bagrie does not believe that’s the case.
Instead, they are looking to diversify their lending with strong growth in sectors like horticulture.
They are looking closely at their rural loans, leading to some tough discussions with some farmer clients because repricing risk is not easy.
There’s been a lot of attention paid to Fonterra’s balance sheet, with many co-op members unhappy with the performance of some of its investments, especially overseas.
Fonterra has invested a lot of money in stainless steel, based on production rising.
That’s not going to happen so he expects more asset write-downs.
What’s happened so far is just the start and he does not think the co-op’s China business is worth as much as shown.
Change is needed at Fonterra and Bagrie hopes it comes soon because NZ needs a strong Fonterra.
The global economy is being plagued by a lot of uncertainty, with a significant part of the problem caused by political and economic problems overlapping, whether they be the China-United States trade war or the growing uncertainty of Brexit.
Economic problems are easier to fix than political ones but governments will need to show leadership.
In the meantime, the next couple of years will continue to be volatile, he said.
