5 Minutes with Nathan Penny

ASB Senior Rural Economist

Can we get a repeat of 2019's record commodity prices this year?

My take on that would be: probably not. Last year, African swine fever was massive and the key driver for record meat prices, the New Zealand dollar was very supportive for farmgate prices, global dairy supply was tight, while horticulture's stellar run continued. In many ways, the ducks really lined up last year and we're unlikely to have such a good run in 2020.

I still think this year is going to be healthy for commodity prices. African swine fever continues to underpin meat prices, although lifting global supply is likely to take the cherry off the top of prices. Meanwhile, global food demand generally remains solid and supportive of prices.

Looking at the sectors, if 2018 was horticulture's (kiwifruit's) year and 2019 was meat's turn to shine, I think dairy is going to be 2020's star. In fact, I wouldn't rule out the possibility of an $8.00/kg milk price in either 2019/20 or 2020/21.

All up, I think we are looking at a positive year for farmgate incomes.

As we go to print, the coronavirus outbreak has thrown up the potential for change to the 2020 agri outlook (at least in the short term). My base case remains that the  outbreak will give a sharp and short-lived hit to global food markets. However, there is a risk that the outbreak's impact could persist through to mid-year. Click here for ASB's updates on the impact of coronavirus.


So where are interest rates heading?

Interest rates set record lows over last year and in many cases as we start 2020, borrowing rates on offer for farmers remain close to, if not at, record lows. For the remainder of the year and beyond, I anticipate that borrowing rates are more likely to rise. There is some upward pressure on interest rates from lifting global interest rates, a lower chance that the Reserve Bank will cut its interest rate and as new bank capital regulations take effect. With the above in mind, farmers can lock in very low interest rates now and should plan to deal with higher interest rate costs over coming years.


Do you have a personal goal this year?

I'm either being very ambitious or I'm going through a mid-life crisis as I've signed up for the Oxfam Trailwalker in March! This is a 100km walk over 36 hours held in and around Whakatane. My team is called the 'Queen St Cockies' and donations are gratefully received –  money raised will go to vulnerable communities in the Pacific and Southeast Asia. www.oxfamtrailwalker.org.nz 


We've heard that banks aren't lending to farmers. Is that true?

This is one myth I can definitely bust – ASB is open for new business across all rural sectors. Remember, both the agri sector and banks' operating environments have changed. The best example of this is in the dairy sector where farmers have traditionally had the option of interest-only terms, supported by the fact that dairy land prices have been rising over time.

Now, in the absence of land price gains for the most part, the lending equation has changed. It makes sense for both farmers and banks to move to principal-andinterest loan repayment terms. This means the focus has shifted from farming-for-capital-gain to farming-forprofit/ cash-return.  We think this is a healthy shift for the sector in terms of farm resilience and sustainability. ASB is working closely with our farm clients and their stakeholders to make this shift over many years. In other words, ASB is playing a long game here as we believe in the long-term prospects of our agri sector.

Changing tack, what will the post-Brexit era look like for us?

When the English first voted to leave the EU in 2016, I along with most other analysts were concerned about the impact on our lamb exports and in particular, lamb export prices. As it turns out, we needn't have worried. In the season following the Brexit vote, lamb prices cracked $8/kg for the first time and at the end of 2019, they had gone one better, passing the $9/kg mark.

As such, Brexit has been a blessing in disguise. It has forced New Zealand meat companies to wean themselves off the British market; an important traditional market, but one that has long been in decline. As it turns out, the markets we have switched to have actually performed much better than the UK market ever has. Notably, the US and Chinese markets have performed well in recent years.

Looking forward, I see the UK as a market on the decline and one that provides limited opportunities for us. There are many more markets closer to home, particularly in Asia, that are growing fast and are short on quality food – they're just the kind of markets we like.


What gets your goat up?

The Sunday Programme interviewed movie director, James Cameron, last year and if you didn't see it there was one statement that really irked me: "I think what we need is a nice transition to a meatless or relatively meatless world in 20 or 30 years.

In an effort to quell my anger, I decided to write a letter to educate James Cameron (and others) on the great things that Kiwi farmers are doing. I pointed out that:

  1. Aotearoa produces enough food to feed around 50 million people
  2. Our dairy production is the most efficient in the world on a greenhouse gas emissions basis
  3. New Zealand's pasture-based beef production is also the most efficient in the world (using the same metric)
  4. Kiwi farmers, unlike many in the Northern Hemisphere (including Canada where he's from) have farmed subsidy-free since the 1980s.


How do you think environmental constraints will affect farmers' back pockets?

In many cases, environmental constraints are going to lead to higher farmgate prices. So yes, compliance costs are rising but increasingly these costs are going to be reflected in prices. Essentially, the environmental constraints are limiting production or supply growth and with demand still firm, prices are subsequently rising.

Secondly, it's important to note that our competitors in other countries are facing very similar challenges. Thus, the challenge becomes a competitive one i.e. if our farmers can incorporate environmental and other compliance into their businesses better or more efficiently than overseas rivals, this will be a competitive advantage for us.


Speaking of eco-friendly – how can we get hold of an ASB sustainaball?

Yeah, the balls are pretty cool eh? Like many a Kiwi out there, I have spent time combing through backyard bushes for long-lost tennis balls! Who'd have known that regular tennis balls can take hundreds of years to biodegrade versus less than 10 years for one of these. You can get an ASB sustainaball via www.asb.co.nz/community/asb-classic


You're a dairy expert – what's your takeaway for those farmers?

Despite what the mainstream media might say, I believe it's a great time to be a dairy farmer. I think that the milk price has structurally moved higher and will average between $6.50/kg and $7.50/kg over the next 10 years.

Importantly I also believe milk price volatility has reduced, which will come as a relief to farmers. With a healthy milk price outlook and low interest rates, dairy farmers are well-positioned for the challenges ahead.

The question is: how can they build ongoing resilience into their businesses? I think a stronger balance sheet is key as it will help see off future challenges including compliance, environmental constraints, succession planning and others.

Already, many farmers have paid down a portion of debt over the past year and I applaud their efforts. With the healthy milk price and very low interest rates, I argue that it's a good time to continue down this track.


What's the best thing about your job?

I travel all around, from Whangarei to Gore, and I get a real buzz from meeting farmers, learning what makes them tick and discussing their challenges. I love how willing they are to talk – I've learnt so much from them at Field Days and discussion groups. Speaking of Gore, I recently spoke at the Farmlands Gore store opening and then a shareholder breakfast in Winton – I can't overstate how fun and insightful they were.

I'm always keen to chat to please get in touch!

Contact Nathan: 021 918 928, Nathan.penny@asb.co.nz, @ASBmarkets (Twitter), Nathan Penny (LinkedIn). Sign up to his emails at www.asb.co.nz/contact-us/registerfor- email-updates.