new zealand economics anz agri focus · the wine industry is a growth story for new zealand. but...

NEW ZEALAND ECONOMICSANZ AGRI FOCUS

ANZ RESEARCH

TURNING WATER INTO WINE

FEATURE ARTICLE: WINE INDUSTRY – REMEDIES FOR GROWING PAINS

The wine industry is a growth story for New Zealand. But the industry is suffering from growing pains. Key issues include a splintering of approaches between small and large wine companies, bulk exports undermining branded/bottled wine, over-reliance on one variety, increased regulation/taxes/compliance costs, and higher production costs. Remedies include targeting expansion in existing markets and opening up new markets, stronger focus on “super premium” positioning, strategies to strengthen relationships and rebuild trust within the industry, collaboration to manage supply and inventory, a stronger focus on efficiencies throughout the supply chain – with consolidation inevitable, and continued research and marketing into maintaining a high-quality public image of New Zealand wine.

THE MONTH IN REVIEW

The good season continues for livestock farmers up and down the country, but the soggy end to summer has made it difficult for others. Livestock are in good condition and there is lots of supplementary feed in storage. The lack of sunshine hours has affected the quality and maturity of many crops.

RURAL PROPERTY MARKET

Upward pricing pressure is starting to emerge for livestock-aligned property. Increased confidence levels about the outlook for grape prices and kiwifruit has seen a few properties sold at reasonable levels, establishing benchmarks. We don’t foresee the rural property market getting up a full head of steam.

KEY COMMODITIES AND FINANCIAL MARKET VARIABLES

The high NZD remains the major drag on farm-gate prices. The upside is that the high NZD directly lowers tradable inflation and means the RBNZ can keep the OCR at its current level for longer.

ECONOMIC BACKDROP

The NZ economy continues to navigate a complex web of structural and cyclical impulses. In such an environment one sees volatility, a subdued trend rate of growth, mixed economic signals, and polarised performance within sectors. This picture will continue for some time, with upside rebound potential capped by the realities of balance sheet restoration.

BORROWING STRATEGY

Recent developments such as the release of softer Q4 GDP data and the mild reduction in the dairy payout have been consistent with the RBNZ’s main message – that it is in no hurry to lift the OCR. The global scene is still fraught with uncertainty. With markets pricing in a much more rapid rise in the OCR than the RBNZ projects, borrowers still have time on their side.

EDUCATION CORNER: NEW ZEALAND’S NATURAL RESOURCE ENDOWMENT

New Zealand is uniquely placed in the world. The World Bank has estimated the wealth of nations; New Zealand comes in at 20th of 152 countries for total wealth per capita, and 8th for natural capital. More importantly we top the list for ‘renewable’ natural capital per capita. Our ranking in the natural capital per capita stakes is also higher than Australia.

MARCH 2012

INSIDE

Feature Article 2The Month in Review 16Rural Property Market 17Economic Indicators 19Key Commodities 21Economic Backdrop 27Borrowing Strategy 28Education Corner 29Key Tables and Forecasts 32

CONTRIBUTORS

Cameron BagrieChief EconomistTelephone: +64 4 802 2212E-mail: [email protected]

Con WilliamsRural EconomistTelephone: +64 4 802 2361E-mail: [email protected]

David CroySenior Interest Rate StrategistTelephone: +64 4 576 1022E-mail: [email protected]

ANZ Agri Focus / March 2012 / 2 of 34

SUMMARY

The wine industry is a growth story for New Zealand, with significant achievements since the last downturn in the 1980s. But the industry is suffering from growing pains. Sauvignon Blanc has led the New Zealand industry onto the world stage. However, it is also the variety behind much of the industry’s current challenges.

Key issues include a splintering between small and large wine companies of approaches to rebalance the books, bulk exports undermining branded/bottled wine, over-reliance on one variety, increased regulation/taxes/compliance costs, and higher production costs.

We have identified six remedies to help address the industry’s growing pains and ensure it emerges leaner and meaner:

• Grow demand, through targeting expansion in existing markets and opening up new markets.

• Continued focus on “super premium” positioning for New World (not the supermarket!) wines.

• Strengthen relationships and rebuild trust within the industry.

• Collaboration to manage supply and inventory.

• Focus on productivity and collaboration to drive efficiencies throughout the supply chain.

• Continued research and marketing into maintaining a high-quality public image of New Zealand wine.

The goal is an industry that is focused on proprietary branding, with high quality, high margins, a carefully managed supply-demand balance, and economies of scale in production and distribution. The benefits from strengthened relationships and more collaboration can be achieved via consolidation within the industry.

THE NEW ZEALAND WINE INDUSTRY IS A GROWTH STORY

For the New Zealand economy’s wider development it is critical that boutique industries such as the wine industry are nurtured and flourish. The industry encapsulates many of the unique strategic advantages New Zealand offers (i.e. brand, clean-green image, exploiting natural climatic conditions) and the product complements the emergence of Asia’s middle class.

The past two decades have seen some significant achievements across the wine industry. Marlborough Sauvignon Blanc has been established as a

world-leading varietal, and this has brought many international accolades and awards. This has also seen an enormous expansion in exports to a wider range of markets. Total exports have now hit the $1 billion mark and total sales are $1.5 billion. Market-leading positions for New World wines have been established in many of these export destinations and we continue to break new ground in others.

This growth has also brought challenges and growing pains. The recent supply imbalance has its roots in the 1980s and 1990s. Internationally, New Zealand attracted attention as a New World wine producer, with Marlborough Sauvignon Blanc a major point of difference. Subsequently the door was opened for other New Zealand varietals. On the domestic front, changes to licensing laws, the emergence of baby boomers as wine drinkers, a greater exposure to foreign wine-drinking habits and the improved quality of New Zealand wines all contributed to an increase in demand. This saw the area planted in Sauvignon Blanc quadruple during the 1990s.

Things further accelerated in the 2000s when all of these factors combined with an environment where capital was easily accessible, risk appetites were high, and there was a penchant for capital gain over profit. This lead to some speculative development. During this period the total area of vineyards in New Zealand increased more than three-fold to nearly 34,000 hectares, an annual compound growth rate of 11.5 percent.


Vineyard area by region

Marlborough57%

Nelson 3%

Canterbury/Waipara 5%

Otago 5%

Other 5%

Auckland/Northland 2%

Gisborne 6%

Hawkes Bay 14%

Wairarapa/Wellington 3%

Sources: ANZ, National Bank, NZ Winegrowers


GROWTH METRICS FOR NZ WINE INDUSTRY

2000 2011%

Change

Wine Companies 358 698 +195%

Producing Area (hectares)

10,200 33,600 +329%

Tonnes Crushed 80,100 328,000 +409%

Average yield (per hectare)

7.9 9.8 +124%

Total Production (millions of litres)

57 235 +412%

Domestic sales (millions of litres)

41.3 66.3 +161%

Export sales (millions of litres)

19.2 154.7 +806%

Total earnings at export values ($bn)

$0.53 $1.56 +294%


THE TIPPING POINT

The timing of the economic downturn could not have been worse as it coincided with New Zealand producing record-high volumes of grapes. The year-on-year increase in supply between the 2007 and 2008 vintage was a jaw-dropping 40 percent. Grape yields had been on an upward trajectory since 2000, and the expansion in the growing area from the early 2000s was also influential. This was especially the case for Sauvignon Blanc.

While supply was stabilised in 2009 and 2010 at the higher level of production, the 2011 Sauvignon Blanc vintage was a record 13.4 tonnes per hectare. This pushed total Sauvignon Blanc grape supply in 2011 up nearly 30 percent to 224,000 tonnes, and New Zealand grape supply to a new record of 328,000 tonnes.

Sauvignon Blanc now accounts for 70 percent of New Zealand’s total wine production. This is 20 percentage points up on 2007, when Sauvignon Blanc accounted for half of the New Zealand vintage.

The fall-out affected the industry by:

1. Pricing pressure, significantly reducing net margins.

2. Increased inventory levels, combining with pricing pressure to considerably reduce cash flow. The result was increased debt levels, weakened balance sheets, suppressed asset values, and limited ability to exit.

3. Aggregate grape grower debt increased from $1.07 billion in 2008 to $1.40 billion in 2011 (+31 percent). Wineries’ aggregate debt also increased from $0.89 billion to $0.97 billion (+10 percent) over the same period.

4. Consequently funding pressures rose at a time of elevated uncertainty in many markets.


NZ Wine Production

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50

100

150

200

250

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012f 2014f


Forecast

Litres (millions)

Other wine varieties

Sauvignon Blanc wine production

Total NZ vineyard area

0

5

10

15

20

25

30

35

40

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012f 2014f


ForecastHectares (000s)

NZ Total

Sauvignon Blanc

NZ Grape Yields

0

2

4

6

8

10

12

14

16

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012f 2014f


ForecastTonnes per hectare

Other varieties

Sauvignon Blanc


5. There was an increase in the supply of relatively “homeless” wine to shift excess production. This pushed down margins throughout the supply chain for bulk wine and created competitive pressure on packaged/branded products.

6. The dilution of New Zealand’s brand and quality characteristics from packaged/branded wine to bulk and house brands. This occurred in some of New Zealand’s key export markets and mostly in the high-volume retail channel.

The nationwide vineyard acreage grew sharply until 2008, but levelled off considerably when prices began to fall. Limited appetite for expansion and very little new area coming into production means the size of vintages over the next 3+ years will be driven primarily by yields. The forecast lower yields for the 2012 vintage, courtesy of a more average growing season in Marlborough for Sauvignon Blanc, will no doubt help with the short-term picture. Nevertheless, questions remain about whether this will be enough to compensate grape growers for lower volumes.

No matter what metric you look at, the wine industry has all the symptoms of growing pains. In particular for one variety: Sauvignon Blanc. While there are some causes for optimism about the future, risks remain material.

SPLINTERING OF APPROACHES – BUT WHICH IS RIGHT?

There are a number of different business models in the wine industry; as is true of most primary industries. Some are more successful than others. While the industry can be categorised into grape growers and wine companies, in reality many entities do both, to a greater or lesser extent.

WINE COMPANIES BY CATEGORY

Category Number% total number

% total production

Category 1 619 88.2% 12.7%

Category 2 73 10.4% 41.1%

Category 3 10 1.4% 47.0%

Total 702 100% 100%

Category 1 = grape wine sales not exceeding 200,000 litresCategory 2 = grape wine sales between 200,000 to 4 million litresCategory 3 = grape wine sales more than 4 million litres


The official statistics say there are currently 702 wine companies, near double the number in 2000. The number of grape growers is listed as 851, down from 1,117 at the peak in 2008. This implies there has been some consolidation in grape-growing entities over the last three years, as the area in vineyards has not decreased. The number of wine companies is strongly skewed to the little guy, with sales not exceeding 200,000 litres, or revenues of less than $2 million. A lot of these businesses are focused on the domestic or Australian market, rather than exporting further abroad. However, the 10 large category 3 wineries control approximately 50 percent of New Zealand’s total wine supply. Therefore, their strategic choices are likely to govern the future direction of the industry.

The recent supply imbalance issues and lower grape/export prices seem to have promoted a splintering in approaches between the Davids and Goliaths of the industry regarding how to rebalance the books.

Over the page are some key statistics from an annual Deloitte/NZ winegrowers benchmarking survey, which has been conducted since 2006. While the sample is not fully representative of the industry, and changes from year-to-year create some ‘noise’, the results do provide some confirmation of the anecdotes regarding what smaller and larger players have been trying to do to restore profitability.

The survey is normally split into five categories according to revenue turnover: less than $1 million; $1-5 million; $5-10 million; $10-20 million; and $20 million plus. We have averaged and aggregated the results to emphasise the general response to the tough times by the smaller and larger players in the industry. Our breakdown is revenue turnover of less than and greater than $5 million. Turnover of less than $5 million should capture all of the category 1 wineries, and above $5 million, categories 2 and 3.


Grape and export wine prices

500

1,000

1,500

2,000

2,500

1993 1995 1997 1999 2001 2003 2005 2007 2009 20112.5

5.0

7.5

10.0

12.5


$ per tonne $ per litre

Grape prices (LHS)

Export prices (RHS)

Up, but by how much?


In addition, the latest survey also notes that while the results show “averages”, there are profitable businesses within each of the categories. Other data sources would convey a similar message.

Comparing the average results over the 2007 to 2011 period shows some clear trends. Smaller players have been trying to ride out the lower returns by focusing on maintaining a higher price point and the value of their brand. This has proved to be very difficult, with per-case revenue decreasing by 50 percent, from over $200 in 2007 to near $100 in 2011. Some cost-cutting has taken place, but often stock has had to be stored because of difficulty in shifting it at the higher price point, reducing cashflow. The variance in inventory build-up between the small and large producers over the last four years has been marked. Smaller players have had inventory turnover consistently below 100 percent until 2011.

In contrast, the larger players have experienced a decline in per case revenue of only 23 percent over the same period. This is despite bulk wine exports from New Zealand increasing from 4 percent of total exports in 2005 to 36 percent now, with a large proportion likely to have come from bigger wineries. This is reflected in inventory turnover,

which has been near, or above 100 percent in three of the last four years. So the smaller scale producers look to have suffered more from the growth in supply and the materially increased influence of targeted bulk exports, including specialist players in that field.

On the “cost of goods sold” side of the ledger, savings have been made in many categories. Cost of goods sold have usually ranged between 50 to 60 percent of total revenue, and had been relatively stable as a proportion of total revenue until 2010. This implies there was some fat in the system that could be taken out, but there is probably not a lot of room for further movement.

Smaller wineries substantially reduced their cost of goods sold during the 2007 to 2009 period, but bounced back in 2010. There was a reduction in the labour and packaging costs for smaller wineries. However, the main influence on the cost of production during this period was increasing inventory, which was balanced out by a stock movement adjustment in the gross margin. One of the most notable statistics is the lower labour, overhead and packaging costs per case for large wineries. This is primarily due to bigger production runs and better economies of scale.


KEY FINANCIAL METRICS FOR WINE COMPANIES SPLIT BY TURNOVER

Year 2007 2008 2009 2010 2011

Per case analysisUnder $5m

Over $5m

Under $5m

Over $5m

Under $5m

Over $5m

Under $5m

Over $5m

Under $5m

Over $5m

Gross Sales of wine $203 $130 $143 $115 $93 $109 $121 $104 $103 $100

Total Gross Revenue $242 $156 $165 $132 $113 $129 $170 $114 $136 $117

Total cost of goods sold $120 $84 $86 $71 $63 $69 $121 $69 $80 $68

Total sales and marketing expenses

$22 $12 $10 $16 $13 $17 $28 $18 $14 $15

Total general and administration expenses

$52 $26 $50 $18 $28 $19 $35 $13 $20 $8

Total Expenditure $194 $122 $146 $105 $104 $105 $184 $100 $114 $91

EBIT $47 $35 $19 $27 $10 $24 –$14 $14 $22 $26

Interest expense –$14 –$11 –$15 –$10 –$11 –$7 –$17 –$7 –$9 –$7

Profit/(loss) before tax $21 $23 $5 $19 –$2 $15 –$31 $6 $8 $13

Some other key KPIs:

Inventory turnover1 71% 87% 67% 93% 72% 117% 100% 132%

Debt to equity ratio 246% 101% 78% 71% 95% 86% 73% 65%

Interest cover ratio2 178% 334% –68 % 223% 193% 291%

EBIT to assets (average) 17.3% 10.2% 5.6% 9.8% 2.9% 8.8% –2.2% 5.6% 9.1% 7.3%

Cost of borrowing 7.9% 7.9% 8.1% 8.1% 8.5% 8.5% 8.3% 8.3% 7.2% 7.2%

Sources: ANZ, National Bank and Deloitte’s annual New Zealand wine industry benchmarking survey. Note figures may not add due to rounding.

1 Calculated as the cost of goods sold dividend by the closing inventory figure. A figure of less than 100% indicates increasing inventory levels.2 Calculated as earnings before interest and tax dividend by interest expenditure. A standard measure in banking covenants, levels of 200% to 300%

typically required.


The other main expenditure categories are sales and marketing, as well as general/administrative expenses. In general, these two categories have been around 35 percent of total revenue for smaller wineries and 25 percent for larger wineries. As a proportion of total revenue, they have also been relatively stable over the last four years, apart from 2011 where they have taken another leg down. However, large wineries have managed to make bigger cuts to general expenses and modestly increase advertising in response to the tougher times. Smaller wineries first cut advertising and marketing substantially in 2008 and 2009, but then reinvested in 2010, before cutting back again. Smaller wineries also decreased their general/administrative costs from some $50 to $20 per case, but this is still well above the $8 per case achieved by larger wineries in 2011.

In general, the survey results show that larger wineries have been better able to adjust their business model, and leverage off scale, to ride out the tough times. As the analysis is per case, volume sold is important and again large wineries have the advantage here. Larger players have targeted bulk sales to supermarkets offshore under their own one-off private label for a particular production run, or the supermarkets’ private brands. Frequently bulk wine has been used as leverage, with wineries agreeing to supply bulk in order to get their finished/premium wines on the shelf, particularly in overseas supermarkets. The focus has been on standard taste, packaging and mass advertising to shift larger volumes at a lower per unit cost. Hence, bulk wine exports for private and supermarket brand labels has increased to 36 percent of total wine exports.

The net result so far has not been pretty for smaller players, with earnings before interest and tax (EBIT) decreasing from $47 to -$14 per case in 2010, before getting back into positive territory in 2011. This has caused many to capitalise debt and look for increased off-business income to get them through. The capitalising of debt and higher working capital requirements can be seen in the increase in interest expenditure from $14 to $17 per case. This is despite interest rates being reduced to historical lows over this period. You can only do this for so long, and that period of time isn’t that long in today’s world.

Larger players have experienced a decline in EBIT per case, but not to the same extent. EBIT has gone from $35 per case in 2007 to $26 per case in 2011, but better yields and consolidation have seen larger volumes sold. This has provided an offset to softer earnings per case.

That said, the downward trend in profit metrics is the primary concern. This needs to change. Cash return on assets (EBIT to assets) has slipped across all players, to unsustainable levels for smaller wineries. While returns were positive in 2011, this is more due to asset values being re-priced, rather than higher cash returns. The levels in 2009 and 2010 are below the cost of capital, which severely affects viability if highly geared.

Which strategy (large scale/low margin/consistent quality vs. proprietary branding/high margin/carefully managed supply demand balance/high quality) is right or wrong is always going to be a matter of debate and depend on one’s situation. The question of future direction will be a matter of ongoing teeth-gnashing.

It seems to us that both strategies cannot happily coexist together. At the moment cash return on asset metrics do not stack up. We have therefore seen asset prices revalued, albeit most are trying to sit tight, or introduce new capital, to avoid selling-up and taking an ice bath. As a generalisation, the majority of businesses that have failed to date are those that have limited industry experience and/or have been undercapitalised.

So one approach will need to win out, as many grape growers and wineries have relatively few alternative uses for their land, and/or heavy investment in specialist wine-making equipment. This is unlike the meat and fibre industry, where farmers have managed to diversify their income streams, rather than address sticky issues. We note though that in the case of the meat industry this has simply bought time, and significant issues still require addressing.


Marlborough vineyard property market

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50

100

150

200

250

1999 2001 2003 2005 2007 2009 20110

5

10

15

20

25

30

35

Source: Alexander Hayward Ltd Property Advisers

$ per ha ($000)Annual no. land

transactions

Land price per hectare

Number of transactions


REMEDIES FOR THE GROWING PAINS

While the big picture issues are readily apparent, the solutions or strategies to rebalance the situation are not. Simplistically, you could say that if short-term supply and bulk sales can be stabilised, the industry can ride out the recent rough period relatively quickly. The early indications of the 2012 vintage’s size and subsequent re-pricing occurring on the ground certainly point to this. We also know there is never one silver bullet to ensure long-term viability. The ideal is an industry that is focused on proprietary branding, with high quality, high margins, a carefully managed supply demand balance, and economies of scale in production and distribution. Broadly, we have identified six remedies to help address the industry’s growing pains and ensure it emerges on the right track. These are:

• Grow demand, through targeting expansion in existing markets and opening up new markets.

• Continued focus on “super premium” positioning for New World wines.

• Strengthen relationships and rebuild trust within the industry.

• Collaboration to manage supply and inventory.

• Focus on costs and productivity to drive efficiencies throughout the supply chain.

• Continued research and marketing into maintaining a high-quality public image of New Zealand wine.

GROW DEMAND THROUGH TARGETING EXPANSION IN EXISTING MARKETS AND OPENING UP NEW MARKETS

The industry’s issues with the current supply imbalance have masked the success of the industry in growing exports over the past decade. Annual compound export growth has been 21 percent per annum, or 12.5 million litres per year over this period. However, a lot of the recent growth has been into lower-margin markets.

The 2010-11 sales data shows export markets made up 70 percent of sales. This is a sea-change from 10 years ago when exports were just 32 percent of sales. However, the domestic market is still the largest individual market for New Zealand wine, and per capita consumption of New Zealand wine has doubled over the past decade to 15 litres per person. Overall, domestic per capita consumption has only increased by 22 percent to 21.3 litres per person, with the difference in growth rates reflecting a larger market share for New Zealand wine. Plateauing

consumption, wine sold at uneconomic margins, increased regulation, and current market share now limit opportunities to grow the domestic pie further. Therefore, the most profitable growth is going to be via exports and pushing product into higher-margin markets offshore.

The fastest-growing export destinations for New Zealand wine over the last 10 years have been Australia and the US. Combined with the United Kingdom these three markets have grown to be 58 percent of total New Zealand wine sales by volume, up from 25 percent in 2000. These three markets now make up 87 percent of exports by volume, and 79 percent by value. Growth in export markets beyond 2012 is forecast by NZ Winegrowers to be around 5 percent per annum, mainly driven by growth in Asian and US markets. Australian demand is forecast to be flat and the UK slightly down.


NZ wine export destinations by volume

Canada4%

Australia30%

Ireland1%

Netherlands3%

USA22%

Others3% Germany

1%

UK35%

Japan1%


NZ Wine Sales

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80

120

160

200

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013f

Sources: ANZ, National Bank, Statistics NZ, NZ Winegrowers

Litres (million)

Domestic sales

Export sales

Forecast


In terms of New Zealand’s share of global trade, we are only 1.5 percent of total trade, but manage to sneak into the top 12 exporters, in eleventh place. This means we are never going to compete in the mass market, especially when our overall production is only 1 percent of total global production and 5-6 percent of that of bigger players like France and Italy.

Some recent analysis by Trade and Enterprise NZ shows New Zealand’s exports are currently skewed towards the Anglo-Saxon countries. Our three main export markets account for 43 percent of the global value of total wine imports and 20 percent of global wine consumption. We have the largest market share of imports into Australia and one of the fastest-growing market shares in the US and UK – all in all a good performance. One geographical area where we seem to be underweight is Northern Europe, which accounts for some 15 percent of global consumption and 32 percent of global imports, yet only 4 percent of New Zealand’s total wine exports.

Switzerland, Denmark, Belgium, Sweden and the Netherlands are attractive markets. They drink and spend a lot on imported wine, because they do not have a lot of domestic production. Currently they are not as exposed to New Zealand wine on a per capita basis as the UK.

In terms of market potential right here right now to shift product into higher margin markets, Sweden, Denmark and the Netherlands stand out. This is because they import more “New World” wines, such as Sauvignon Blanc, and are bigger overall markets. While the growth of exports into these three markets has been the greatest of all the Northern European countries, they have not matched the growth into our big three, especially the US and Australia. As an example of the immediate opportunity, if New Zealand were to match our market share in the UK in these three markets, this would be equivalent to around half our current exports to the UK, or 16 percent of the large 2011 Sauvignon Blanc crop.


Wine – Skewed to Anglo-Saxon countries

2% 2%

32%13%

22%

27%

5%

19%

31%

15%

32%

4%

4%

3%

32%

6%

1%

7%

4%7%

9%4%

14%5% 2%

% of global wineconsumption

% of global wineimport value

% of NZ exportvalue

Sources: ANZ, National Bank, UN Comtrade; UN DESA; Wine Institute (CA);Coriolis analysis

AustraliaUSA/Canada

UK/Ireland

Northern Europe

Russia

France/Italy/Spain/Portugal

Other EuropeChina/Japan/Other

Asia

Other

20%

89%

Top 12 countries for wine consumption

0

5

10

15

20

25

30

Fra

nce

USA

Italy

Germ

any

Chin

a

Uk

Spain

Arg

entina

Russ

ia

Aust

ralia

Port

ugal

Canada

Sources: ANZ, National Bank, OIV

Decreasing

Stable

Increasing

Hecto litres million

Market attractiveness matrix: Northern Europe wine markets

$0

$20

$40

$60

$80

$100

$120

$140

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38

Wine import value per capita (US$)

Total wine consumption per capita (l/capita)

Sources: UN Comtrade; UN DESA; Wine Institute (CA); Coriolis analysis

Size of bubble = expenditure on NZ wine per capita (US$)

Big wine drinkers who spend a lot per capita on imports

PolandRussia

Germany

Belgium

Netherlands

United KingdomIceland

Norway

Ireland

Finland

Austria

Sweden

Denmark

Switzerland

Top 12 countries for wine exports

0

5

10

15

20

25

Italy

Spain

Fra

nce

Aust

ralia

Chile

USA

South

Afr

ica

Germ

any

Arg

entina

Port

ugal

New

Zeala

nd

Mold

avia

Sources: ANZ, National Bank, OIV

Hecto litres million

Decreasing

Increasing


Of course the bigger picture involves the Asian consumer, who is right on our doorstep, but the mass market does not yet quite have the purchasing power to pay for New Zealand wine. This is a longer-term game.

Specifically, China is a country of significant growth opportunities. Exports to this market have grown substantially over the last 10 years, with compound growth of 58 percent since New Zealand’s Free Trade Agreement in 2008. All wine import tariffs are scheduled to be removed by 2012. China’s wine consumption has almost tripled since 2003, to a volume of 1.35 billion litres. Per capita consumption is forecast to grow from approximately one litre per person to three by 2020. This equates to growth of 2.7 billion litres per annum by 2020, which is approximately 9 times the size of New Zealand’s current total production.

Currently, there are over 500 vineyards in China. Industry data shows that the top three wine brands – Changyu, Great Wall and Dynasty – control as much

as 50-60 percent of the market. A large proportion of the growth into 2020 is expected to be imports.

Chinese bulk wine import volumes have increased, due to the increase in consumption and the relatively slow growth of domestic grape production. Together, Chile and Australia account for some 80 percent of the bulk wine imported. New Zealand’s bulk wine imports are small and priced at a high value per litre. This wine falls into the premium wine category due to its price – both bulk and bottled. Indeed, New Zealand bulk wine is 3-5 times more expensive than other bulk wines in this market, and has therefore not been widely sought by Chinese wine companies that operate on price in the low to medium end market.

The forecast growth in wine consumption is due to a drive by the Chinese Government to encourage consumers to drink less grain-based spirits, and more grape wine and beer. Other factors include the increased influence of Western eating and drinking habits; rising average incomes; and urbanisation. Wine has become a fashionable drink for the wealthy younger generations of urban Chinese, and the favoured drink of China’s elite.

Tastes are becoming increasingly sophisticated. Not only is there more foreign wine available in restaurants and stores, but the number, variety and quality of domestic wines has increased. Wine still accounts for less than 5 percent of total alcohol retail consumption in China, but is expected to grow by 15 percent per annum over the next five years. Despite having a population of 1.3 billion, the vast majority (e.g. rural workers and lower paid industrial workers) are unlikely to buy wine. However, this still leaves a marketable population of approximately 170 million people. Unfortunately for New Zealand, red wine has made more inroads than white. This will take time and effort to change.

All-in-all there are new and existing markets that could be more aggressively targeted now, to move supply and inventories into high margin distribution channels and markets. Others will need to be nurtured further to bear fruit.

CONTINUED FOCUS ON “SUPER PREMIUM” POSITIONING FOR NEW WORLD WINES.

The use of bulk wine exports to shift some of the “homeless” wine in recent years has pushed margins down throughout the supply chain for bulk wine and grape growers. This has created competitive pressure on packaged/branded products in some of our higher-volume sales channels, such as supermarket chains in the UK. It has also transferred brand power from New Zealand wineries to private


Consumption trends in New Zealand's Top 5 wine markets + China

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sources: ANZ, National Bank, Organisation Internationale

Australia

Per capita wine consumption

New Zealand

UK

Canada

US

China

Market potential matrix: Northern Europe markets and the opportunity for New Zealand wine

$0

$50

$100

$150

$200

$250

$300

$350

$400

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

New World wine import value (US$m)

New World wine as a % of total wine import value (% of US$)

Sources: UN Comtrade; UN DESA; Wine Institute (CA); Coriolis analysis

Size of bubble = expenditure on NZ wine per capita (US$)

High potential markets for further NZ export growth

Germany

Belgium

Switzerland

Austria

Russia

Norway

Netherlands

Sweden

Denmark

Iceland

Ireland

Finland

UK


labels. This has increased the risks of brand dilution and contamination, potentially marring New Zealand’s reputation. Offshore bottling of bulk exports increases the risk of contamination, with bottlers often outside the jurisdiction of New Zealand’s food safety standards. Issues could include sugar addition, dilution, blending, fraudulent labelling and quality deterioration.

Fortunately, there have been no major contamination incidents so far, and the price received for bottled export sales has only decreased by 6.5 percent since 2007 when bulk exports began to emerge. The average export price per litre of bottled wine was $9.30 in 2007, compared with $8.70 in 2011. However, bulk wine only made up 5 percent of total exports in 2007, and the price ratio of bottled to bulk wine was 1.5. Now bulk exports have grown to 28 percent of total exports in 2011, and the price ratio of bottled to bulk wine has grown to three. This has left the national average price for wine at $7.70 per litre in 2011, compared with $9.80 per litre in 2007 (-21%).

It is acknowledged that an element of bulk wine will remain a feature of the industry, especially as a relief valve when there is a large vintage due to good seasonal/growing conditions. It can also be a bargaining chip with supermarkets and allows for foreign-owned New Zealand wine companies to ship in bulk to subsidiary bottling plants offshore to keep bottling and packaging costs down. However, the point remains, New Zealand Wine incorporated is accepted as a fundamentally higher-cost producer.

When you look at New Zealand’s grape production costs against a range of competitors, our costs are twice the average, and nearly three and a half times higher than South Africa, one of the lowest-cost grape producers. This means we have a higher break-even for our wine when it lands in its export destination compared with most of our competitors. Therefore, high quality, proprietary-branded packaged wine with a high margin/price focus is an imperative for New Zealand’s competitiveness and bottom lines.

PricewaterhouseCoopers in their recent review of NZ winegrowers have estimated competitors are currently selling private label wines into the UK at just £0.06 per bottle. This is half New Zealand’s freight cost and just 6 percent of our breakeven FOB price at £1.02 per bottle. At a minimum (to generate profit), the price back at the winery gate in New Zealand needs to be £1.15 per bottle, or NZ$2.30. This is well above what some of the low-cost producers are currently selling at £0.18 per bottle. Therefore, while bulk exports of New Zealand wine are viable in certain market segments, it must be at levels nowhere near low-cost competitors such as Chile, USA and South Africa.


Value Proposition between bulk vs. bottle in 2011

0

2

4

6

8

10

12

Sources: ANZ, National Bank, PwC

$/L

Domestic66.3 m litres

Export Packaged111 m litres

Export Bulk44 m litres

$610m $965m

$128m

9.2e8.7

2.9

Average 7.7

Total value: $1.74b, Total volume: 221m litres

2007 volume

Value Proposition between bulk vs. bottled in 2007

0

2

4

6

8

10

12


$/L

Domestic44.8 m litres

Export Packaged72.5 m litres

Export Bulk3.5 m litres

$485m9m

$675m

$22m

10.0e 9.3

6.3

Average 9.8

Total value: $1.19b, Total volume: 121m litres

Comparison of grape production costs by country

0

100

200

300

400

500

600

NZ$tonne

USA California Central Valley

16

Spain La

Mancha

11.5

Argentina Mendoza

13.5

Chile Central Valley

13

Australia Riverlands

Murray, Riverina

23

NZMarlborough (not warm climate!)

12.1

S Africa Breedekl,

Little Karoo

18


T/ha (white)

Grows Sauvignon Blanc in warm areas


Looking at in-market prices for our three main export markets shows we achieve a price premium over the competition in the majority of cases. In-market pricing in the UK shows New Zealand has achieved the second-highest price for imported wine into the UK market behind France. In fact, we actually managed to attract a better price premium in the UK market than France from 2000 to 2006. However, the increased presence of bulk wine under private labels through UK supermarket chains has severely dented average prices since 2008. The UK now takes nearly 50 percent of New Zealand’s total bulk wine exports. It is interesting to note that low-price private label wines, produced in-market from bulk exports, now account for 5 of the top 10 best selling New Zealand wines in the UK.

Given France’s rich wine heritage, they will always demand a price premium over most competing countries. The concern is how much divergence we are starting to see in pricing between French wine and ours in our top export destinations. France has increased their price in the US over

the last 10 years. While we initially achieved this outcome too, we have now dropped off the pace over the last four years. The US accounts for only 15 percent of our bulk exports.

In Australia, New Zealand wine prices collapsed in 2009 largely due to increased bulk exports. Australia now accounts for 30 percent of our total bulk exports. While our market share of imports increased from 22 percent in 2000 to just over 50 percent now, we now demand a similar price to most other countries that export to Australia. France seems to offer a better exemplar; they have managed to quadruple exports and double their price in the Australian market over the last 10 years. Similar pricing pressures have been experienced in the domestic market, where a drive to sell excess volumes has resulted in heavily discounted New Zealand wines in retail outlets.

Bulk wine is one of the most powerful global trends of recent years. New Zealand still has a lower proportion of bulk exports than almost every other major exporter, and our bulk sales


Wine - UK imports value by country

0

1

2

3

4

5

6

7

8

9

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

USA South AfricaAustralia ChileItaly SpainOther New ZealandFrance

US$/litre

Sources: ANZ, National Bank, UN Comtrade database; Coriolis analysis

Wine - Australia imports value by country

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

Other Italy

New Zealand France

US$/litre


Australia imports market share by country

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011p

Other Italy France New ZealandPercent


Cross country comparison of private label wine in the UK for 2011

1.020.39

0.391.81

1.811.15

1.600.72

1.00

0.12

0

1

2

3

4

5

6

7

Private Label UK-pkgd direct

Private Label UK-pkgd direct

VAT

Retail Margin

Excise

CCT

UK Bottling &Frt

Bulk SeaFreight

FOB

£/bottle


FOB = £0.06

£4.30

£5.99Typical private label price for Chile, USA, South Africa

Indicative break-even for long term NZ

viability


remain a drop in the global ocean. Nevertheless, the risks of unbranded bulk wine exports eroding the price premium of the New Zealand wine brand, and risks of contamination, are as real as ever and should not be overlooked. Lessons from our neighbours Australia shows how quickly bulk exports can come to dominate a country’s supply and undermine the reputation and price of bottled product. Without significant industry collaboration the New Zealand wine industry faces a similar future. Average in-market price data in the UK, Australia and US shows we are heading that way. In short, a portfolio approach is needed to ensure the majority of our product is positioned and connected directly with super-premium markets. This is where the higher margins reside to compensate for our higher cost of production. This means the proportion of sales sold as bulk and indirectly to the end market needs to be stabilised and reduced.

Other opportunities to ensure “super premium” positioning include:

• Continue to explore opportunities for another distinctive world-leading varietal style to complement Sauvignon Blanc.

• Pushing sustainability and leveraging off New Zealand’s clean green image. Currently 90 percent of producers are a member of Sustainable Winegrowing NZ.

• Generic marketing raising awareness of all New Zealand wine types, brands and regions.

• Strengthening premium price categories in existing and new markets.

• Development of higher value-added products, including the continued broadening of the

packaged product range – oaked, aged and sparkling Sauvignon Blanc are examples.

• Building consumer loyalty schemes.

SIDE NOTE ON EXCHANGE RATE EFFECT ON NEW ZEALAND PRICES

Some have highlighted the stronger exchange rate as the sole downside to achieving better NZ dollar pricing. We beg to differ. Yes, it has had an effect over the last two years as the New Zealand economy and NZD has recovered since 2008 events, but the larger impact since 2007 has been from the increase in lower-value bulk exports. The two charts below show the average export price achieved from 1994 to 2011 and the year-to-year effect of in-market price movements and exchange rates. Of the $2.10 per litre decrease in the export price from 2007 to 2011, in-market prices have decreased by $2.90 per litre and the weighted exchange rate has provided an offset of $0.80 per litre. The main exchange rate benefit has been via a lower NZD/AUD down from 0.88 to 0.77, with the Australian market accounting for a third of total exports.


2011 EBIT margin estimates for NZ Sauvignon Blanc into Australia

1.52

3.38

1.72

4.16

3.02

4.90

0

1

2

3

4

5

6

A$9 pkgdWarburn

A$12 net, pkgd NZ

A$15 indirect to

supermarket,pkgd NZ

A$15 direct to

supermarket,pkgd NZ

A$19 indirect to

supermarket,pkgd NZ

A$35 indirect to ontrade, pkgd NZ


A$/bottle

Lower priced brand

Premium brand

EBIT = Earnings Before Interest and TaxNote: A$9 and A$12 are private label or retailer-exclusive brands and accordingly no marketing spend has been charged to these optionsEstimates based on NZW in-market sources

Average export price

0

2

4

6

8

10

12

1994 1996 1998 2000 2002 2004 2006 2008 2010


NZD per litre

Market and exchange rate year-to-year

-6

-4

-2

0

2

4

6

8

1994 1996 1998 2000 2002 2004 2006 2008 2010

Market change

Exchange rate change


NZD per litre


STRENGTHEN RELATIONSHIPS AND REBUILD TRUST WITHIN THE INDUSTRY

Mutual benefits can often be gained from strong relationships and working together. This is especially the case when a greater focus is required on exporting from our cosy little spot in the Southern Ocean. With a greater emphasis on “super premium” export markets, bigger players often have the balance sheet, history, brand recognition and distribution channels to open up new markets, as well as keep the cost of production lower via their scale. These business features will be essential to address and provide solutions for the five other remedies we have outlined for industry success. Many of these features will be able to be achieved if the industry can work alongside one another in each facet of the supply chain.

LARGEST NEW ZEALAND WINE COMPANIES

Ultimate Parent

LocationParent Major Brands

Constellation New Zealand

Kim Crawford, Nobilo, Fall Harvest, Selaks, Drylands, Monkey Bay, White Cloud,

Station Road, Bach 22

Pernod Ricard New Zealand

Brancott Estate, Stoneleigh, Church Road, Deutz

Delegat’s Group

LimitedOyster Bay, Delegat’s Wine

Estate

Lion Nathan

Lindauer, Corbans, Saints, Wither Hills, Huntaway,

Bensen Block

Foster’s Group

Matua Valley, Angel Cove, Squealing Pig

Villa Maria

EstateVilla Maria Estate, Esk

Valley, Vidal

Foley Family

WinesVavasour, Dashwood

The MH Wine

GroupMud House, Waipara Hills

An injection of foreign capital/ownership can also bring many of these benefits when a greater export focus is required. Empirical research into the impact of foreign investment suggests strong tangible benefits to the local economy in the form of trade liberalisation, business connections, and the introduction of new capital, knowledge, innovation and technologies. The impact is particularly tangible for nations that have an insufficient pool of domestic savings.

However, there is a balance to be struck. Only three of New Zealand’s top eight wine companies remain in New Zealand ownership. In total it is

now estimated 40 percent of New Zealand’s production is by foreign-owned entities. A key issue here is what happens if the strategic goals of such organisations do not align to NZ Inc. Obviously there is a regulatory framework everyone operates under locally. However, we’d be remiss if we didn’t point out the obvious potential for tension. At the local level, industry fortunes are tied: what groups and individuals do offers both negative (a poor drop could undermine the NZ brand) and positive externalities (via one entity increasing the perception/awareness of NZ wine in a specific market) across the industry. A strong offshore ownership content adds to both the negative and positive externality possibilities from beyond NZ’s borders.

Other options from improved collaboration include joint processing, distribution and marketing, to reduce costs and maximise capacity utilisation. We see further consolidation within the industry as both necessary and inevitable.

COLLABORATION TO MANAGE SUPPLY AND INVENTORY

The strengthening in relationships to manage supply and inventory levels, especially for Sauvignon Blanc, is also important to help stabilise returns over the next 3-5 years. If the industry were to continue to experience high yields then it is forecast that supply will continue to overshoot demand until well into 2014-15. This would continue to see inventory levels increase, creating further uncertainty, pressure on cash returns, and asset values.

The persistent overshooting since 2005, and increased inventory levels, create a large amount of business uncertainty for all players in the supply chain. This is not good for business


Supply and demand balance of NZ wine

-125

-100

-75

-50

-25

0

25

50

75

100

125

2001 2003 2005 2007 2009 2011 2013f


Litres (millions)

Actual

Low yieldAverage yield

High yield


planning and investment in the industry. Better collaboration and management of yields and directly matching this to premium markets via contracted arrangements will help minimise this year-to-year uncertainty. This will allow improved business planning and increased investment to occur. This is arguably one of the easier of the remedies to implement industry-wide, and has had some success in keeping the 2009 and 2010 vintages at reasonable levels.

The upshot is average yields will see the balance between sales and supply reached much sooner, which would help stabilise pricing. The forecast smaller 2012 vintage will help, but a continued focus on this area is required.

FOCUS ON COSTS AND PRODUCTIVITY TO DRIVE EFFICIENCIES THROUGHOUT THE SUPPLY CHAIN

The wine industry has suffered something akin to negative jaws for their margins since the early 2000s. This is a phenomenon that has been seen in many other export-oriented sectors in New Zealand. The terms of exchange chart above shows that the prices paid for inputs have risen by 40 percent since 2000, nearly 4 percent per annum, whereas the prices received for exports at the port have declined by 20 percent over the same period. This has seen the industry’s terms of exchange drop by 43 percent over the same period, and 50 percent from its peak in 2002. Of course using the average export price overstates the issue, as packaged or bottled wine has performed better, but the trend is clear either way. This needs to be reversed. Four of the six remedies help address the “prices received” side of the ledger. This, and strengthening relationships throughout the industry, help address the other side.

As highlighted earlier, the big decrease in absolute expenditure over the last several years looks like it has run its course for now. While there has been an improvement in productivity during this period, the issue is how this can be further extended into the larger expenditure categories over the medium term. The above chart shows some of the key culprits for input price increases over the last 11 years. To address this, improved productivity and new innovation by the sector is required. This usually requires more investment in research and development, along with technology transfer. This is obviously difficult when cash available for reinvestment is slim. However, this is a double-edged sword when the longer term is contemplated.

Material progress has been made on more automation for pruning and thinning for yield management, reducing labour issues and costs. Joint


Horticultural farm input price movements: 2000-2011

-20 0 20 40 60 80 100

Interest rates

Weed and pest control

Packaging costs

Fertiliser

Wages

Rent and hire

AdministrationFreight

Insurance premiums

Repairs & maintenance

Harvesting costs

Rates

Fuel

Electricity

Sources: ANZ, National Bank, Statistics NZPercent

NZ wine inventory levels

0

50

100

150

200

250

300

350

2001 2003 2005 2007 2009 20110.0

0.5

1.0

1.5

2.0

2.5

3.0


Stock to sales ratio (RHS)

Stock to sales ratio

Total stock (LHS)

Litres (millions)

Wine industry terms of exchange

50

100

150

200

250

1994 1996 1998 2000 2002 2004 2006 2008 2010

Sources: ANZ, National Bank, Statistics NZ, NZ Winegrowers

Index (Base 1994 = 100)

Prices paid for inputs

Export prices received for all wine

Terms of exchange

Export prices received for all packaged wine


marketing and the sharing of administrative costs between businesses is another option, interlinked to strong industry relationships. The non-tradable component of cost increases, such as electricity and rates, has also been high. This needs more proactive engagement from industry stakeholders with regulators (local and central government) and the service providers to ensure the sector gets appropriate services/regulation but at a competitive price. There will also be many other ideas that could fall under this banner.

CONTINUED RESEARCH AND MARKETING INTO MAINTAINING A HIGH-QUALITY PUBLIC IMAGE OF NEW ZEALAND WINE

Another issue that has grown in importance is sensible alcohol consumption. This message is being increasingly pushed in New Zealand and abroad. Domestically the Alcohol Advisory Council of NZ (ALAC) is focused on reducing alcohol-related harm and views the alcohol in wine to be the same as spirits, RTDs etc. ALAC has also reported rising incidence of harm events connected with wine. As prices have fallen, wine has become relevant to those buying on the basis of millilitres of alcohol per dollar spent. The Sale of Liquor Act review has provided a “lightning rod” for conservative forces. Trading partners have also been proposing unnecessarily restrictive rules (i.e. Thai graphic warnings similar to the images on NZ cigarette packets) or using harmful consumption as a smokescreen for protectionist tariffs. The emotive nature of these issues, encouraged by proactive and well-organised lobby groups, has tended to drive discussions towards punitive rather than effective legislative solutions in many cases.

All this raises the compliance costs for New Zealand wine producers and excise taxes in domestic and international markets. It also provides risks to New Zealand’s wine image through being associated with harm-related incidents.

New Zealand Wine Inc will need to embed social responsibility into their DNA to demonstrate to stakeholders that the industry is playing its part in addressing harmful alcohol consumption. This can be done via research into the benefits of wine drinking, proactive engagement with regulators to ensure effective legislation, and appropriate marketing of wine as a socially responsible alcoholic beverage. The last thing the wine industry needs is to become the new tobacco industry.

UPSHOT

The wine industry has achieved some significant milestones over the last 10 years. Addressing its current growing pains requires an industry that is focused on proprietary branding, with high quality, high margins, a carefully managed supply-demand balance, and economies of scale in production and distribution.



ASSESSMENT

The good season continues for livestock farmers up and down the country, but the soggy end to summer has made it difficult for others. Livestock are in good condition and there is a lot of supplementary feed in storage. This should ensure good breeding conditions, setting up production for the 2012-13 farming season. The lack of sunshine hours has affected the quality and maturity of many crops. This has meant many arable farmers have struggled to get grain and seeds in the silo. Those who have harvested are reporting mixed yields and have had to dry cereals at an extra cost. The grape-growing season is running very late and indicators are pointing to a crop of 265,000 tonnes, but there is a wide range of views.

The North Island continues to have the better run. Northland is the only region to have had a normal season. Pasture conditions in every other North Island region have been reported as the best in a very long-time. Grass quality has become a common problem across all farm types, but there isn’t too much complaining. Farmers have typically been holding onto stock, for later than normal finishing. However, some meat processors have begun penalising lambs over 21.5 kilograms to try to encourage more lambs forward. Rain in January reduced pea crops as the under-side of the crop took longer to ripen. Barley and maize yields are reported to be mixed. There is some concern that maize crops have lots of leaf and little cob. Early yields have been reported as average.

In the South Island arable farmers have been at their wits’ end with the prolonged harvest. Yields for crops that have been harvested in Canterbury are reported as solid to good. For areas that have not been harvested quality remains an issue. Time will tell how the overall harvest ends up. On the plus side, grass seed contracts for next season are looking strong and dairy farmers are happy. In Southland the weather pattern is back to normal after a dry December and first half of January. Grain yields are below average and crops are becoming very difficult to harvest. Winter crops also look poor after the dry weather. Grazing prices could push higher and some farmers could truck stock to Canterbury for wintering.

DAIRY

Fonterra revised its milk payout back $0.15 per kg MS to $6.35 per kg MS. After retentions the farm-gate payout is expected to be $6.65 per kg MS for a farmer who is 100 percent share backed. Weaker in-market prices and the higher NZD, especially during the peak of the season, were cited as the main reasons. We expect that a lot of the downside this time round has been from the higher NZD, which is worth approximately $0.10 per kg MS for every 1 cent movement in the NZD/USD. North and South Island milk production continues to flow at

elevated levels. Milk production in Southland has recovered well following the dry spell in January. During the first two months of 2012 milk production was around 8.5 percent up on the previous year. Whilst growth relative to last season is expected to fall away as the autumn progresses, total milk production for the 2011-12 season is forecast to finish at least 8 percent up. Early pregnancy testing of dairy cows is showing solid in-calf rates, which bodes well for 2012-13 production.

MEAT AND FIBRE

The latest industry forecasts for lamb production in 2011-12 have been pulled back by 848,000 head (4 percent) to 19.7 million head. This is just 2.5 percent above last year’s all-time low, versus earlier expectations of a 7 percent lift. The reduction is mainly due to a smaller breeding flock than first thought, but also expectations of farmers retaining ewe lambs for future breeding. Increased ewe lamb retentions will be good for the longer-term health of the industry, but will provide meat processors with a tough season. So far lamb production in the North Island has quickened its pace since January and is now just 3.6 percent behind last year, with the discounting of heavier lambs and softening in schedule prices being the main prompts. South Island production is 4.3 percent behind last year. Industry forecasts for mutton production have also been revised down to 3 million head, a 33 percent decrease on the previous season. Year-to-date production has been tracking roughly in line with this. Beef production has diverged between the two islands. North Island production is back 17 percent on last year, whereas the South Island is up 8 percent. The difference in the North Island reflects re-stocking from prior droughts that had reduced stocking rates below carrying capacity.

HORTICULTURE AND VITICULTURE

Gold (Hort16A) kiwifruit production is forecast to drop from 30m trays to 20m trays in 2012, and to between 12 and 15m trays in 2013. Green is forecast to decline 9.5 percent to 70m trays this season due to PSA and seasonal variation. Around 2m trays of ZESPRI’s newly commercialised varieties are also expected. In the viticulture sector the key noise is the outlook for a smaller grape crop in Marlborough. The consensus is a 20 percent reduction across the whole region, but there is a wide range of views. Comments have also surfaced along the lines of “if we get a crop” – in context of very low temperatures delaying fruit maturity (brix levels are currently 16 but should be 21) potentially taking harvesting into higher frost-risk periods. Stone fruit orchards in the Hawke’s Bay have not had such a great season. Golden Queen peach production is back 40 percent, with poor pollination and a high incidence of fruit rot.

THE MONTH IN REVIEW


SUMMARY

Upward pricing pressure has emerged for livestock-aligned property. The lack of quality dairy farms has seen buyers look to purchase land that is either suitable for dairy support, or possible conversion. This has pushed up grazing and finishing prices by 10-12 percent depending on quality and location. Increased confidence levels regarding the outlook for grape prices and kiwifruit has seen a few properties sold at reasonable levels, establishing benchmarks. We don’t foresee the rural property market getting up a full head of steam. Current uncertainty in regard to foreign ownership “rules” needs immediate clarification.

COMMENT

Record-breaking seasonal conditions, offshore interest, and solid financial returns continue to add momentum to the rural property market. Upward pricing pressure is starting to emerge for quality, well-located properties as turnover has reached critical mass and sellers’ expectations have risen. Several sales of commercially sized grape

growing and kiwifruit properties have established some benchmarks for these types of properties after a very quiet spring period.

The 3-month period ended February saw 389 farms change hands, continuing an upward trend in turnover that extends back 12 months. Total turnover is still around only 75 percent of its 10-year average. However, grazing and finishing property turnover is now similar to their 10-year averages and the highest since the end of 2008. This has seen pricing pressure emerge for grazing and finishing properties.

The table and charts below show the official statistics from REINZ for the three month period ended February (i.e. December, January and February farm sales). The table is broken down into farm sales by each of the main farm types, both the number of sales during the three month period and the median price per hectare. The figures have also been seasonally adjusted and therefore the components may not necessarily add to the total. While the data is volatile, it is the best available regarding current market conditions.


Farm Sales, Median Price

0

5,000

10,000

15,000

20,000

25,000

30,000

Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

Livestock - Grazing

Sources: ANZ, National Bank, REINZ

$ per hectare (3 mth median, s.a.)

Livestock - Finishing

FARM SALES BY FARM TYPE

3-Month Seasonally AdjustedCurrent Period

Previous Period

Last Year10-Year Average

Chg. P/P

Chg. Y/Y

Chg. P/10yr

DairyNumber of Sales 50 49 42 82 Û Û Ü

Median Price ($ per ha) 33,000 32,200 35,300 27,400 Û Ü Û

Livestock – FinishingNumber of Sales 87 73 23 69 Û Û Û

Median Price ($ per ha) 23,100 21,600 9,300 11,900 Û Û Û

Livestock – GrazingNumber of Sales 219 199 101 248 Û Û Ü


HorticultureNumber of Sales 18 20 27 58 Ü Ü Ü


ArableNumber of Sales 14 14 9 19 Û Û Ü

Median Price ($ per ha) 21,700 20,000 22,800 23,900 Û Ü Ü

All Farms ex. LifestyleNumber of Sales 389 363 225 512 Û Û Ü


LifestyleNumber of Sales 1,434 1,338 1,068 1,644 Û Û Ü

Median Price 468,000 463,000 438,000 376,000 Û Û Û

Farm Sales, Median Price

0

10,000

20,000

30,000

40,000

50,000


Sources: ANZ, National Bank, REINZ

All farms ex. lifestyle

Dairy

$ per hectare (3 mth median, s.a.)



Looking at the components of the table on the previous page shows there has been a notable lift in farm sales over the last 12 months. The compounded growth in turnover over this period has been 5.8 percent per month. The median price for all farm sales has also moved higher. The compound growth in prices has been 2.1 percent per month. This newfound confidence has started to lift sellers’ expectations. However, some of the prices sellers are starting to expect seem a little over-done when cash returns are compared with cost of borrowing forecasts. We believe slightly softer returns in 2012-13, a moderation in the seasonal conditions, sensible heads across the banking sector, and the ongoing uncertainty around foreign investment in New Zealand farmland should cap prices around current levels.

Dairy prices and turnover continue to consolidate at high levels. The median seasonally adjusted price for dairy properties continues to trade in a tight range of $32,000-$34,000 per hectare. This range now extends back to autumn last year. A reported lack of quality listings is restricting turnover and further upward movement in prices for dairy properties. Recent sales have been weighted toward the traditional dairying areas of Waikato and Taranaki, where land values are higher. The North Island made up 65 percent of the total dairy sales in the period ended February 2012. So far 2012 has seen 34 dairy farms sold at an average sale value of $30,700 per hectare (or $35 per kg MS). The average farm size has been 148 hectares and the average production per hectare across all the dairy farms sold has been 878 kgs of MS.

The turnover of finishing, grazing and arable land in the three-month period ended February is just about back to its 10-year average and has nearly tripled versus the same period last year. Pricing pressure has started to emerge since the end of 2011. Average per hectare values have increased by 10-12 percent for these property types since the end of 2011. Higher prices have been achieved for quality properties that are well located. Finishing properties are leading the charge with turnover now 26 percent above its 10-year average and average prices above pre-2008 levels at $23,065 per hectare in February.

Horticultural land values have bounced back after a very lean spring. Prices since the end of 2011 have lifted from $133,000 to $184,000 per hectare. This is more in line with historical averages. Several sales of commercially sized grape- growing and kiwifruit properties has established some benchmarks. Having a recovery plan now in train for the kiwifruit sector and a lower grape crop this should continue to support (cautious) confidence. However, turnover of horticultural blocks is still only a third of its 10-year average.

The largest immediate threat on the horizon for the rural property market seems to be the ongoing political uncertainty around foreign investment in New Zealand farmland. Statistics from the Overseas Investment Office imply offshore capital has helped underpin the rural property market over the last 12 months. There were 68 applications approved for foreigners to purchase land over the last 12 months. The gross area approved to be purchased by the 68 applicants was 91,100 hectares. However, there were two large transactions, where two companies increased their existing shareholding. Excluding these two transactions 66 applications and 52,200 hectares were approved. While the “gross” area is not the exact amount of land that is transferred into foreign ownership, in many cases this capital is required to see the transaction occur. For example, a 50:50 joint venture between a New Zealand owned and foreign owned company that purchases 100 hectares means that the gross land area approved is 100 hectares, while the net land area the foreigner investor directly owns is only 50 hectares. Other sources have quoted 15,242 hectares were directly transferred into foreign ownership. Excluding the two large transactions would thus imply an approximate 23 percent stake for foreign investment in the “gross” area approved to be purchased.

This investment compares with 1,231 farms and 215,250 hectares changing hands over the last 12 months. Therefore, while foreign investment was involved in only 5.5 percent of the total farms sold, in “gross” terms it involved 24 percent of the total area to change hands. However, in net terms it was 7.1 percent.

Investors hate uncertainty, which is precisely what the Crafar farm purchase situation is providing, along with the “occupation” of private land by a protesting group. The latter has moved beyond public land or SOE land. It is rather disappointing that there seems to be a xenophobic element in the foreign ownership debate. We detailed the issues in regard to foreign ownership in our first edition of the Agri Focus in September 2010 (Rural Focus previously). There are many rules that foreigners already have to meet to purchase land in New Zealand. We are foreign investors also, and the international research shows foreign direct investment brings substantial local returns, particularly for nations with savings shortfalls. Of course we need tight rules on foreign ownership but outright restriction and xenophobic reactions don’t make sense for a country that is a) short on domestic savings b) petitioning to drop international trade barriers and c) is looking for demand upside across Asia. Sensible heads need to prevail.


ECONOMIC INDICATORS

The NZD remains the two-bit player at the international roulette table. Drivers from day to day include sovereign risk, the path for the EUR/USD and USD on a broader TWI basis, nervousness over whether China is heading for a soft or hard landing, risk sentiment and equities. What is notable is the lack of local specific factors. Generally speaking we’re in the hands of the “major” central banks, who via the expansion of their own balance sheets (quantitative easing), are undermining their local currencies.

The outlook for the NZD is bipolar: it will be either strong or stronger. The case for the latter stems from significant structural headwinds facing the USD, and the fact the NZD simply looks better than its peers. This is the central view, with a 55 percent probability. However, we also see potential for a lower EUR/USD to drag the NZD down, hence “stronger” is a low conviction view. Abstracting from near-term directional biases, we see the NZD remaining strong over the forecast period (an average of 80 cents) relative to conventional notions of fair value (which we put around 0.70 for the NZD/USD) against all pairs excluding the AUD.

Wholesale interest rates have risen over the past two months. Ironically, this has occurred despite the fact that the RBNZ revised down its projections for the 90-day bank bill rate in the March MPS, and despite softer Q4 inflation and growth numbers. Instead, markets have been influenced by global events, in particular the gradual improvement in the tone of US data and an improvement in sentiment in Europe following the Greek debt swap. We’re not reading too much into the lift, with this move “fading” of late with the realities of the world’s global economic challenges sending yields lower again.

We still expect the RBNZ to lift the OCR in December but the spirit of our interest rate assessment is very cautious. Rates will move up over the coming years, but the realities of a highly uncertain global scene suggests small and slow steps.

How the NZD performs now matters more than it has in the past for the interest rate outlook. This is because the RBNZ has explicitly tied the path of monetary policy more than usual to the exchange rate, noting at the March MPS that “sustained strength in the New Zealand dollar would reduce the need for future increases in the OCR”.

NZD Buys USD

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

ForecastNZD/USD

Sources: ANZ, National Bank, Bloomberg

EXCHANGE RATES

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

NZD/USD 0.81 0.83 0.74 Ü Û

NZD/EUR 0.61 0.63 0.53 Ü Û

NZD/GBP 0.51 0.53 0.46 Ü Û

NZD/AUD 0.77 0.78 0.73 Ü Û

NZD/JPY 67.0 65.4 60.5 Û Û

NZD/TWI 73.5 74.2 66.7 Ü Û

NZ INTEREST RATES

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

Official Cash Rate

2.50 2.50 2.50 ÙÚ ÙÚ

90 Day Bill Rate

2.73 2.75 2.69 Ü Û

1 yr 2.83 2.61 2.91 Û Ü

2 yr 3.06 2.72 3.41 Û Ü

3 yr 3.29 2.90 3.85 Û Ü

5 yr 3.75 3.32 4.58 Û Ü

10 yr 4.45 4.06 5.56 Û Ü

Effective Rural Rate

6.55 6.59 7.11 Ü Ü

Agricultural Debt ($b)

46.79 46.60 46.59 Û Û

Key NZ Interest Rates

0

2

4

6

8

10

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

ForecastPercent

OCR

10-Year

90-Day Bill

Effective Rural Rate

Sources: ANZ, National Bank, RBNZ


ECONOMIC INDICATORS

Price increases for on-farm inputs continue to run above headline inflation at 7.4 percent for the past year. The major driver has been higher store/capital stock prices as the good seasonal conditions and continued expansion of dairying have pushed up the price of all classes of livestock. This has often made trading margins very thin in the meat and fibre sector. As we revert to more normal seasonal conditions and there are softer farm gate prices, a moderation in livestock values is expected.

Elsewhere headline inflation has dropped to 1.8 percent y/y and was back –0.3 percent for the December quarter. Lower food prices provided most of the downside, but prices fell in five of the eleven CPI groups, suggesting that these were not the sole culprits. There was clear evidence of the soft retail environment weighing on prices. Large negative quarterly contributions were evident for communications (due to lower internet charges), and household contents and services. Sources of cost pressures were more restrained, but energy costs remain a key concern, with high oil prices in the spotlight. This is largely due to ongoing ructions from the continued unrest in the Middle East and tensions between Iran and the West.

Our forecasts have annual inflation skirting around the bottom of the inflation target band in mid 2012 before drifting slightly higher. The inflation outlook is expected to be dichotomised, with the high NZD suppressing above-target domestically generated inflation.

The chart to the left measures the difference between the annual percentage change in prices received for rural outputs, and the annual percent change in costs of production (excluding labour costs and interest charges).

Overall margins were largely unchanged for the December quarter, but back 4.7 percent for the year. Output prices were up 1.7 percent for the December quarter. The livestock sectors led the charge, with other sectors weaker. Sheep and beef output prices were up 4.6 percent and dairy 3.3 percent. Horticulture and fruit-growing prices were back 3.2 percent. Softer in-market prices were offset by a weaker NZD during this quarter. The offset to the increase in output prices was higher input prices. Overall input prices were up 1.7 percent for the December quarter, with sheep and beef input prices up the most at 3.2 percent. Overall, the implied net margins for the livestock-aligned industries increased 1.4 percent. The largest declines were for horticulture and fruit growing at –4.6 percent for the December quarter, followed by fishing and aquaculture at –2.7 percent.

Farm Input Inflation Gauge

0

2

4

6

8

10

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

Annual % change

Sources: ANZ, National Bank, Statistics NZ

INFLATION GAUGES

Annual % change

Current Qtr

Last Qtr

Last Year

Chg. Q/Q

Chg. Y/Y

Consumer Price Index

1.8 4.6 4.0 Ü Ü

Farm Input 7.4 6.7 3.3 Û Û

Net Imp. Margins PPI

-4.7 -3.3 11.7 Ü Ü

Net Implied Margins PPIAg/Forestry/Fishing (Outputs - Inputs)

-15

-10

-5

0

5

10

15


Sources: ANZ, National Bank, Statistics NZ

Annual % change


KEY COMMODITIES: OVERALL INDEX AND DAIRY

The ANZ Commodity Price Index ticked up slightly in February, bucking the trend of nine months of declines since May 2011. Five commodity prices registered a rise in February, offset by a decline across eight commodities. Four commodity prices were unchanged. However, the NZD also strengthened across all our major trading partners, reaching post-float highs against the GBP and Euro. This translated into a weakening in the NZD Index, which dropped 4 percent in February to a two-year low for the series. The NZD-priced series has now fallen 17 percent from its peak in March last year. In level terms it remains high, but the combination of currency strength and easing world prices has taken its toll. Recent falls in the currency should help March’s figures.

Dairy markets have tipped in March as the increase in supply from New Zealand and other major exporters weigh. Price declines in March are reflective of the better supply situation, rather than weaker demand. New Zealand milk production will reach another all-time record this season, and Australian supply, the fourth largest exporter, has also gained momentum as the season has progressed. The growth in supply is mainly occurring in the regions that export. Overall, Australian production is forecast to finish the season up 4 percent, but month-on-month it is 5-6 percent ahead. Milder winter conditions in the Northern Hemisphere have also seen US production start the calendar very strongly, with production up 5.6 percent on last year. Across Europe, milk flows are generally increasing as spring commences. However, quota limits have curbed production in some countries recently. A new quota year will start in April, which could see milk flows increase further.

China imports of New Zealand milk powders have remained robust. Our free trade agreement (FTA) with China has again been supportive of imports and prices over the early part of the year. The FTA allows for a discounted tariff on the first 115,473 tonnes imported. The discounted tariff rate for 2012 was 5.8 percent rather than the normal 10 percent, about USD$150 per tonne on current international prices. This year the reduced tariff amount was filled in the first week of February, a full month earlier than in 2011. Milk powder products have fared better than higher milkfat products, such as cheese and anhydrous milkfat. The weakness in higher milkfat products is also reflective of increased production, particularly in the US where stocks of butter have jumped by 60 percent. However, milk prices in the US are easing back and feed prices remain strong. This should temper milk output in the future, but this will only start to occur in the back end of 2012.

ANZ Commodity Price Index

100

150

200

250

300

350

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

Index (Jan 1986=100)

World Price Index

NZD Index

Sources: ANZ, National Bank

ANZ COMMODITY INDEX

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

NZ Index 186 194 209 Ü Ü

World Index 285 285 292 Û Ü

OCEANIA DAIRY PRICE INDICATORS

USD per tonne

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

Whole Milk Powder

3,400 3,600 4,438 Ü Ü

Skim Milk Powder

3,200 3,381 3,950 Ü Ü

Butter 3,700 3,925 4,825 Ü Ü

Cheddar 3,800 4,088 4,425 Ü Ü

World Basket 3,525 3,748 4,409 Ü Ü

Dairy Products - Oceania Export Market Prices

500

1500

2500

3500

4500

5500

6500

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11

USD per tonne

Skim Milk Powder

Butter

Sources: ANZ, National Bank, USDA

Cheddar

Whole Milk Powder


KEY COMMODITIES: BEEF AND LAMB

Farm-gate prices for beef have had a definite softening tone since the end of 2011. Asian demand for NZ beef has been dismal of late, with prices in freefall. However, this market now appears to have bottomed out as buyer enquiries and traded prices increased in late March. Seasonal demand from the domestic market for prime steak cuts has also been subdued because of the less than ideal weather for barbecuing. Other culprits are the high NZD and what look to be higher meat processor margins.

The spread between in-market export and farm-gate prices has reached it highest level in a decade. While the higher NZD since the end of last year has played its part, even factoring this in the current spread looks stretched. It seems meat processors have not been chasing cattle in the North Island and are waiting for the forecast 3 percent increase in cull cows this season. Current cow slaughter is running 25 percent behind last year, largely due to the ample grass cover in the North Island and re-stocking.

On the brighter side, beef prices in the US continue to post new all-time records. As we have repeatedly pointed out, the global supply situation is set to remain tight for the next 12-18 months. With the NZD topping out, Asian prices basing, and US consumers returning to dine out it seems only a matter of time before farm-gate prices move higher.

The lamb market looks to be starting to balance itself out. It is clear that the November to January prices were out of line with in-market fundamentals. Where prices find a base for the rest of the year will be a function of what exporters require to balance their books, inventory levels and the state of European consumers.

Consumption in the UK is still tracking 13 percent behind last year, which was also softer than the year before. There are a number of reports of wholesalers with expensive inventory that they are reluctant to sell at a loss. Therefore, how the Easter trade fares will dictate the pass-through of lower-priced lamb and inventory levels heading into the our winter. This will in turn affect how quickly consumption is stabilised. Another factor in other markets is early signs of a recovery in supply from other exporters. Australian lamb exports are up 8 percent for the year to date, and the UK sheep flock is up 4 percent (they were a net exporter in 2011). The more recent lift in Australian supply has added competition to markets outside Europe, particularly China and the US.

All-in-all it seems there will be some further downside into April and May before things stabilise. Do not rule out this being below $5.30 per kg. This would cap winter schedule prices around $6.50-6.75 per kg. More adjustment is required in the North Island than the South.

Beef Indicator Prices

2.0

2.5

3.0

3.5

4.0

4.5

5.0


$ per kilogram

Sources: ANZ, National Bank, Agrifax

US Bull Beef (USD, Manufacturing 95CL)

NZ Bull Beef Farmgate (NZD, 296-320kg grade)

BEEF PRICE INDICATORS

$ per kgCurrent Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

US Bull Beef1 4.88 4.75 4.58 Û Û

NZ Bull Beef2 3.72 3.81 4.21 Ü Ü

NZ Steer2 3.71 3.80 4.24 Ü Ü

NZ Heifer2 3.76 3.87 4.23 Ü Ü1 USD, Manufacturing 95CL2 NZD, 296-320kg Grade Bull & Steer, NZD, 195-220kg Grade Heifer

Lamb Indicator Prices

0

2

4

6

8


$ per kilogram

UK Lamb Leg (£)

NZ Lamb Farmgate (17.5kg PX grade, includes 1kg pelt)


LAMB PRICE INDICATORS


Last Month

Last Year

Chg. M/M

Chg. Y/Y

NZ Lamb1 (NZD) 6.00 6.62 6.33 Ü Ü

UK Lamb Leg (£) 5.42 5.42 5.28 ÙÚ Û1 17.5kg PX grade, including 1kg pelt


KEY COMMODITIES: VENISON AND WOOL

The farm-gate price for venison has reached its seasonal lull in an orderly fashion. Following uncertain trading conditions prior to Christmas 2011, venison marketing companies are now reporting low stocks and firm order books. Initial concerns about subdued demand for venison in key European countries due to ongoing economic concerns do not appear to have come to pass.

European venison prices are reported to be on a par with this time last year, which bodes well for prices running up in the traditional manner as the game consumption season approaches. Assisting returns are increasing sales to non-euro markets. Exports to Canada and the UK are well up on previous years, and while the USD remains weak, steady increases in prices on the US Wholesale market over recent years have allowed NZ FOB pricing to remain robust. Confidence seems to be slowly returning to the US economy – so restaurant demand is showing signs of recovery, which will be positive for venison sales.

The weak euro is obviously eroding the returns to kiwi deer farmers – but with the national average published schedule sitting around $7.00 per kg, returns for deer farming remain near historical highs for this time of the year. Production has also received a big boost this year, a combination of both excellent grass conditions over much of the country, and steps farmers are taking to improve deer growth rates coming to fruition.

Surprisingly, wool markets have started to stabilise after slipping 10-20 percent (depending on micron) since their peak in June last year. Poor economic growth prospects in some of the main wool-consuming countries, especially Europe and Japan, remain a clear downside risk. The European situation has not gone away. The ECB can alleviate short-term liquidity issues across the banking system, but the fundamental problems of excessive leverage, government insolvency and macro inflexibility require a different policy prescription. On the upside, China is a growing market for woollen apparel, with around half its imported raw wool processed into woollen products for domestic consumption. Solid economic growth in China is providing support.

The price competitiveness of wool with cotton and synthetics also remains an issue, and caps wool prices at current levels. Synthetic fibres will remain elevated due to higher oil prices. However, wool’s competitiveness with cotton is set to weaken further. Cotton prices are forecast to move lower due to an increase in global stocks to 28 weeks, up from 21.

Venison Indicator Prices

0

2

4

6

8

10


$ per kilogram


Euro Bone-in Haunch (€)

NZ Venison Farmgate (NZD, 60kg Stag grade)

VENISON PRICE INDICATORS


Last Month

Last Year

Chg. M/M

Chg. Y/Y

NZ Venison1 6.86 7.13 7.04 Ü Ü

Euro Bone-in Haunch (€) 6.60 6.68 6.60 Ü ÙÚ

1 60kg Stag AP grade

Wool Indicator Prices (Clean)

0

3

6

9

12

15

18


US$ per kilogram

Sources: ANZ, National Bank, Beef + Lamb NZ, Wool Services International

Strong Wool (>35m)

Fine Wool (<24m)

Mid Wool (24-31m)

CLEAN WOOL INDICATOR PRICES


Last Month

Last Year

Chg. M/M

Chg. Y/Y

NZ Fine Wool (>24m)

18.55 18.55 NA ÙÚ Ü

NZ Mid Wool (24-31m)

9.23 9.23 NA ÙÚ Ü

NZ Strong Wool (>32m)

5.12 5.00 6.18 Û Ü

USD Fine Wool (>24m)

15.03 15.47 NA Ü Ü

USD Mid Wool (24-31m)

7.48 7.70 NA Ü Ü

USD Strong Wool (>32m)

4.14 4.17 4.59 Ü Ü


KEY COMMODITIES: GRAIN AND FERTILISER

Where international grain prices head will provide a lead to where domestic prices end up. In the corn and wheat market a lot now rests on a three-month period when US corn yields will be determined. Barring US yields falling below 150bu/ac, corn prices should ease over the coming 12 months. Our forecasts for US corn plantings, at 94 million acres, is the same as the USDA (+2.3% y/y), but our projected yield of 154bu/ac is significantly lower. The USDA has used a 20-year trend yield early in the forecasting cycle. For 2012, this equates to 161bu/ac. How realistic is such a figure? US corn producers have only achieved an average yield of 160bu/ac twice in the last 10 years. US corn yields seem to be hitting a ceiling, especially now the adoption of genetically modified corn has run its course. Lower global wheat production is forecast in 2012-13, resulting in the first major deficit in five years. Despite this, wheat is destined to remain in limbo, with the price action of corn to dictate. Wheat stocks have improved enough over the last four years to insulate against any moderate supply shocks. Soybean prices have moved up courtesy of heat-stressed crops in the three major producers: the US, Brazil and Argentina. Global stocks will fall to a 2-year low in 2011-12, equivalent to 11 weeks of supply.

Domestically the harvest has been late and very slow due to the wet weather over much of the country. Most autumn-planted crops have delivered good results, but the spring crops seem to have suffered as they have tried to mature. Weak local demand, lower international prices and below-average quality are likely to see domestic prices remain under pressure into the spring. Below-average yields should ensure inventory levels are not out of hand though.

The underlying softer tone in commodity markets and the continued gloomy tone for global growth have kept the pressure on most fertiliser prices. However, as the year progresses and the market nears the Northern Hemisphere spring planting period, buyers are likely to re-enter the market – especially if the corn acreage being talked about in the US is to be delivered. This could also happen earlier than expected due to milder winter conditions in the US lending support to early planting. High inventory levels reported earlier in the year now also look like they have been reduced, leaving the pipeline clear. Other possible upside factors continue to be the unrest in the Middle East which could disrupt supply, and the fact China has imposed taxes of 110 percent on exports of phosphates and urea to keep a lid on domestic prices. However, phosphate supplies from Russia, Saudi Arabia and Russia seem to be sufficient, and new urea manufacturing capacity is expected to soon come on line in Algeria and Qatar.

CBOT Future Grain & Oilseed Indicator Prices

0

400

800

1200

1600


US cents per bushel


Soy

Corn

Wheat

GRAIN & OILSEED PRICE INDICATORS

USD cents per bushel

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

Wheat 6.4 6.6 7.6 Ü Ü

Soy 13.7 13.1 14.1 Û Ü

Corn 6.6 6.6 6.9 Û Ü

Australian Hard Wheat1 266 267 348 Ü Ü

1 NZD per tonne

FERTILISER PRICE INDICATORS

USD per tonne

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

DAP 517 530 606 Ü Ü

Urea 383 368 300 Û Û

Fertiliser Indicator Prices

0

200

400

600

800

1000

1200

1400


USD per tonne

DAP

Baltic Urea


.


KEY COMMODITIES: HORTICULTURE

In the viticulture sector the key noise is the outlook for a lower grape crop in Marlborough. Consensus is a 20 percent reduction across the whole region, but there is a wide range of views. Outcomes of lower production forecasts to date include:

• An apparent step-up in buyer enquiry for vineyards.

• Numerous instances of uncontracted fruit being offered medium-term (1-5 yrs) contracts with established wine companies.

• A 15-20 percent step up in the base price being negotiated for bulk wine for the secondary market with settlement this winter/spring.

• An increase in wine companies seeking extra fruit for 1 year from growers they had recently terminated contracts with.

• Widespread push back by growers against wine companies’ price offers for fruit from the 2012 vintage.

• Behaviour of wine companies implying they have contractual commitments to supply bulk wine that they are now concerned they cannot fill.

• Previously advised yield caps by wine companies for the 2012 vintage are now being verbally waived.

ZESPRI have announced higher returns for the 2011-12 season. Average Green fruit and service payments have increased by 16 cents per tray to $7.04 per tray, largely due to an improvement in offshore fruit loss. Green Organic average returns are forecast to be up 5 cents to $8.67 per tray due mainly to lower costs. The Gold forecast is lifted by 36 cents to $11.83 per tray, largely due to higher than anticipated returns in China and stronger end-of-season pricing in Hong Kong and Southeast Asia.

The supply of kiwifruit for the different varieties will be the biggest determinant of orchard-gate pricing over the next 5+ years. The forecast decrease in Gold (Hort16A) volumes will bring price tension and allow ZESPRI to sell to higher-returning markets (i.e. reduced volumes will mean less fruit has to be pushed into low-returning markets). The lower volumes will also shorten the selling season, reducing fruit loss and providing pricing tension for packhouse services because of over-capacity. As Green volumes are more slowly reduced the same effects on pricing will also be prevalent, but not to the same extent, because Green is more of a commodity.

The New Zealand pipfruit crop has been estimated at 16.67 million cartons, back 1 percent on last year. The traditional varieties of Royal Gala and Braeburn are back 3 and 18 percent respectively. Fuji and Jazz are up 10 and 11 percent respectively.

Kiwifruit Indicator Price

0

1

2

3

4

5


USD per tonne

Sources: ANZ, National Bank, Zentrale Markt- und Preisberichtstelle

HORTICULTURE PRICE INDICATORS

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

Kiwifruit (USD per kg)

2.3 2.3 2.2 Û Û

Apples (Weighted Index)

180 180 172 ÙÚ Û

Wine (USD per litre)

5.5 5.5 5.3 Ü Û

Apple Indicator Price Index

50

100

150

200

250

300


Weighted price index

Sources: ANZ, National Bank, Zentrale Markt- und Preisberichtstelle

Wine Indicator Price

4

5

6

7

8


USD per litre

Sources: ANZ, National Bank, NZ Winegrowers.


KEY COMMODITIES: OIL AND FREIGHT

Political tensions between Iran and the West over its nuclear programme continue to support oil prices at high levels. Iran supplies approximately 5 percent of global oil and is the fourth-largest oil producer behind Russia, Saudi Arabia and the US. More recently, the US and UK have agreed to release some of their strategic oil reserves to help alleviate the shorter-term supply picture as the US heads into its high consumption period – summer. Outside Iran, the greatest risks to supply in 2012 will be posed by the politics and domestic unity of countries in the Middle East and North African region, specifically Iraq, Sudan, Syria, Libya and Nigeria.

We are forecasting global demand growth to ease slightly from 1.7 to 1.5 percent. Slower growth in China and Europe will offset better demand in the US. Heightened euro-denominated oil prices, together with austerity measures, will curb European appetite, while a slow start and increased energy efficiency measures should limit stronger Chinese growth. The US, the biggest oil market, could surprise on the upside, with improving economic prospects, However, the risk will be a further supply-driven oil price spike, which would curtail our global demand outlook. For the record, we are forecasting WTI to be US$107 per barrel in 2012, up 13 percent on 2011. We expect a further 8 percent increase to US$115 per barrel in 2013 as demand picks up further. We expect the Brent to WTI spread to remain stubbornly wide, and therefore expect Brent to increase by similar amounts.

The Baltic Freight Index has recovered slightly from its 3-year low in January, but the overall index is still down significantly since last year. However, this is unlikely to give accurate signals about world economic conditions. The supply of ships continues to increase, pushing up shipping capacity. An example is the Valemax ships have just started shipping recently. To put some context around what this means: these ships are 365m long and double the capacity of the Capesize carrier (the next largest bulk carrier). The good news is this will make freight costs cheaper for our major export industries.

Crude Oil Indicator Price (WTI)

0

25

50

75

100

125

150


USD per barrel


OTHER COST INDICATORS

Current Month

Last Month

Last Year

Chg. M/M

Chg. Y/Y

Crude Oil1 106 107 107 Ü Ü

Ocean Freight2 902 750 1,530 Û Ü1 USD per barrel, grade WTI2 Baltic Dry Index

Ocean Freight (Baltic Dry Index)

0

2,000

4,000

6,000

8,000

10,000

12,000




SUMMARY

The NZ economy continues to navigate a complex web of structural and cyclical impulses. In such an environment one sees volatility, a subdued trend rate of growth, mixed economic signals, and polarised performance within sectors. This picture will continue for some time, with upside rebound potential capped by the realities of balance sheet restoration. Globally, liquidity injections have removed systemic risks but have not altered the basic prognosis that deleveraging involves growth being sacrificed in the West.

The outlook for NZ continues to be dominated by the interaction of five shocks: a wobbly global scene; fixing the national balance sheet (deleveraging); rebalancing – a shift from a spending-centric growth to a model that is dominated by investment and exports; a positive income shock from commodity prices and Mother Nature; and seismic events.

We’re seeing continued tensions across economic indicators, which reflects the effective “butting of heads” as cyclical and structural forces clash. Net on net New Zealand continues to show a degree of resilience, though growth is modest. However, indicators are becoming increasingly polarised and the mix of growth – with clear signs of a property market pickup – is far from ideal.

Achieving a better balance to growth is an economic necessity and priority. Unfortunately this process is being hampered. The strong NZD is obstructing a full-blown export recovery; Christchurch needs to be rebuilt; and historically low interest rates, while appropriate given global risks, are tilting incentives away from saving and investment in productive assets, and reigniting the property market. Nonetheless, some progress is being made. The household debt to income ratio is down from 154 to 144 percent of GDP. Farmers’ land value to net cash earnings ratio has improved. Meat and fibre farmers’ ratio was 28 in 2010-11 versus the 20-year average of 41, and the dairy ratio was around 12, versus the 20-year average of 22. The dairy ratio will give some back this year, but meat and fibre is forecast to improve slightly. The Government is doing its bit to boost national saving. Despite the high NZD, some price signals, such as the NZD/AUD, are stimulating export performance.

Domestic economic signals are still mixed. Job ads suggest the labour market is tepid. Building activity remains weak. Credit growth is soft. However, the housing market has put in a solid six months, and business investment is lifting. Mother Nature has supported a strong season

for the main agricultural sectors, especially dairy. The pattern of mixed signals is expected to continue, reflecting the effective headbutting of structural and cyclical forces. Momentum across the economy is modest in early 2012, but we expect better undertones from mid-year.

A broadening recovery in housing and the rural property market is emerging, reflecting lower interest rates, solid financial conditions and natural disaster frictions. A recovery in the property market has us alert to potential inflationary consequences, but given that deleveraging is still driving a wedge between the property market and consumer spending, there is little immediate cause for concern on the RBNZ’s part. We will closely watch the credit aggregates for signs of a property market induced boost, which would be a precursor to a property market induced pick-up in consumer spending. With a large proportion of debt on floating rates, the RBNZ have considerable traction available to them and can afford to be patient. There are also no warning signs on the consumer sentiment front. Consumer confidence remains in a holding pattern, with no real trend apparent over the last nine months.

The global backdrop remains challenging. Offshore, the dataflow out of the US has generally been improving and ECB actions have eased markets’ systemic concerns regarding European banks. Both are encouraging. China is moving from a gallop to a canter as authorities try to rebalance their economy. The Chinese Premier has lowered the economic growth target for GDP to 7.5 percent per annum – the first decrease in 8 years. The rebalancing of the Chinese economy away from an export/investment model to consumption making up a higher proportion of growth is the opposite of what needs to be achieved in New Zealand. This won’t happen overnight, but a more consumer-centric growth model will be positive for our soft commodities.

A quick look at the fundamentals (excessive debt – notably across sovereigns, and excess consumption in the West being met by excess savings in the East) reveals structural challenges. Structural reform in some key nations, especially peripheral economies of Europe, will assist, but many of the changes required involve decisive leadership and tough choices. We are sceptical the tough choices will be made and suspect there will be more of a “muddle through” dynamic. The only true healing dynamic following a decade plus of consumer and property driven excess is the passage of time.

ECONOMIC BACKDROP


SUMMARY

Recent developments such as the release of softer Q4 GDP data and the mild reduction in the dairy payout have been consistent with the RBNZ’s main message – that it is in no hurry to lift the OCR. However, financial markets have been less sanguine, and NZ interest rates have moved up sharply in response to higher global interest rates, and an improvement in sentiment following the Greek debt swap. But challenges lie ahead, and with markets pricing in a much more rapid rise in the OCR than the RBNZ projects, borrowers still have time on their side.

OUR VIEW

New Zealand wholesale interest rates have increased significantly since our last edition in late January. This largely reflects the success the European Central Bank has had via their LTRO program giving banks ample access to liquidity. This has seen offshore credit markets improve and reversed the “flight to safety” that drove markets late last year. The net impact of better functioning credit markets but a lift in wholesale interest rates (from extreme lows) has broadly left borrowing rates unchanged.

The RBNZ is taking a cautious position, reflecting the uncertain environment we are in. In fact, the RBNZ’s 90 day interest rate projections are consistent with just 100bps of OCR increases over the next 3 years. This looks a bit light to us (we think around 150bps is more likely) but we agree with the spirit of the message: challenges lie ahead and this means interest rates are not likely to be heading up rapidly.

Global nuances are dominating. This is somewhat understandable given the role global developments have played in recent history. However, things do start to look a bit scratchy when local interest rates respond with more vigour to soft Chinese data than to local GDP data that came in half as strong as expected. The point is, whatever your view, in this environment we need to appreciate the impact of offshore events, as they will dictate when and how fast the RBNZ moves. And in that regard, it is worth adding that the level of nervousness surrounding the European sovereign debt crisis seems to be picking up. Greece got its debt swap away, but it isn’t out of the woods, and the focus has shifted to Spain (again!). Local considerations are not irrelevant; they are simply being superceded.

Another thing to consider is the behaviour of the NZD. Although it did come off in mid March, it remains lofty. If it remains in the 80+ cent range against the USD, and prices for key export commodities continue to drift lower, things could start to get tricky for the RBNZ. It certainly adds to the argument that OCR increases could be some time away.

It’s not one way traffic, and improvements in the housing market (and rural property market) are getting attention and suggesting interest rates are too low. The general consensus is that interest rates will rise, and with a relatively narrow gap between the floating rate and 2 year borrowing rate, many rural borrowers are asking is now a good time to fix? Sadly, there’s no simple answer, as everyone’s circumstances will differ. However, broadly speaking, we do believe we are in a rising interest rate environment. But this in itself is not a good enough reason to fix. What matters is how much higher you think interest rates will go. This is because there is (and has for some time been) a premium to be paid for fixing. Indeed, longer term fixed rates are higher than the floating rate.

If you are considering fixing, it is worth thinking about the premium involved (i.e. how much more you are willing to pay). It would also pay to consider the risk factors. How would your business look if, for example, we saw another meltdown in Europe, or if Chinese growth slows, which is the latest fear? In our view, the trick is to choose a mix of fixed and floating that gives a good mix of protection and flexibility.

Rural Lending Rates assuming a 3% margin

Breakeven rates in

Term Currentin

6mthsin 1yr in 2 yrs in 3 yrs

Floating 5.75%

6 months 5.75% 5.86% 6.20% 6.70% 7.21%

1 year 5.81% 6.03% 6.33% 6.83% 7.34%

2 years 6.07% 6.30% 6.58% 7.09% 7.58%

3 years 6.32% 6.56% 6.83% 7.33%

4 years 6.58% 6.82% 7.08%

5 years 6.83%

When comparing different fixed terms, it may also pay to consider breakevens. For example, if you want to fix for 2 years, how does that compare to fixing for 1 year? As the table above (which assumes a flat 3 percent margin) shows, if the 1 year rate in 1 year is below 6.33 percent, you’d be better off fixing for 1 year now, and rolling it in 1 year. That’s quite a rise compared to the current 1 year rate of 5.81 percent. In other words, the market is “pricing in” a generalised rise in rates. This is presumably what borrowers are wishing to avoid by fixing, yet there is no escaping it.

In the current environment, we prefer to have a mix of strategies on board, with some fixed and some floating. Timing matters too. With plenty of good news priced in, we would prefer to await slightly lower levels before fixing in any volume. But equally, interest rates are generally on the rise. We also need to acknowledge that fixed rates like the 3 year are only 0.5 percent above all-time lows, and certainty does have its benefits.

BORROWING STRATEGY


SUMMARY

New Zealand is uniquely placed in the world in many ways, not in the least because of our rich resource endowment. The World Bank has estimated the wealth of nations; New Zealand comes in at 20th of 152 countries for total wealth per capita, and 8th for natural capital (above Australia!). Arguably more importantly in a world of diminishing resources, we top the list for ‘renewable’ natural capital per capita. With one of the largest exclusive economic zones in the world, a temperate climate, plentiful water and fertile land, it is easy to see why. Combine this with increasing amounts of cross-border trade in food in the Asia-Pacific region over the coming decades and our expertise in all facets of the food supply chain; and it is clear that many exciting opportunities beckon. Yet having large renewable endowments does not guarantee success. You need a supportive legal and economic framework, attitudes and institutions to unlock them sensibly. Therein lies the challenge.

NEW ZEALAND UNIQUELY PLACED

We often think New Zealand is doing it tough, down here in our far-flung corner of the world. But we should perhaps be a little more grateful for our geography and geology. The World Bank has estimated the wealth of nations in US$ per capita terms. New Zealand stacks up pretty well: 20th of 152 countries for total wealth per capita; and 8th for natural capital (subsoil assets, timber resources, non-timber forest resources, protected areas, crop land, and pasture land). The top seven for natural capital are all oil-producing nations, with Kuwait, Brunei and the UAE the top three. Australia – often labelled the “lucky country” owing to its mineral riches, ranks number eleventh on the natural capital list.

New Zealand tops the list for ‘renewable’ natural capital per capita; which is arguably the more important measure in a world of diminishing non-renewable resources. These resources are timber, non-timber forest resources, protected areas, crop land and pasture land. This is not by a little bit either. The chart at the bottom left shows New Zealand is a whopping 50 percent wealthier in renewable natural capital per capita compared with the next country on the list, Tonga, and nearly nine times wealthier than the global average.

One could argue the World Bank may have gotten a bit over-enthusiastic about the economic value of our “protected areas” (39 percent of our renewable natural capital). The capital values of the protected areas are measured as the opportunity cost of the foregone agriculture. A large proportion of these protected areas are places such as the South Island high country. Areas such as these are largely unsuitable for intensive agriculture, apart from a few Merinos. Therefore, this might overstate New Zealand’s renewable endowment somewhat. However, even if the protected areas are excluded for New Zealand, we’re still number 1 and five times better off when compared with the global average. Strictly speaking, excluding our “protected areas”, puts us just behind Tonga, but “protected areas” make up a massive 86 percent of their renewable capital, so if we’re going to discount New Zealand’s protected areas we should probably discount theirs somewhat too.

New Zealand’s endowment is heavily agriculture focused. It is dominated by land. Crop and pasture land make up half of our assessed natural capital. On a per capita basis this is double the next two countries on the list, Belize and Australia. Furthermore, it is eight times greater than the global average. It is unclear to what extent the sea frontage in our exclusive economic zone has been captured in the measurement of natural capital. Our total exclusive economic zone is the 5th largest of all countries. Fish stocks are not included in the analysis, and when you add in the potential for aquaculture around our coastal areas, there is a lot of further upside potential.


Leading the renewable resources pack

0

10,000

20,000

30,000

40,000

50,000

Top 10: NZ, Tonga, Canada, Belize, Guyana, Australia, Finland,

Guatemala, Ecuador, Sweden

US$ per capita

Source: The World Bank "The Changing Wealth of Nations" 2010

Bottom 10: Togo, Kuwait, Maldives, Cape Verde,

Trinidad/Tobago, Bahrain, Lesotho, St. Lucia, Hong Kong,

Singapore


The food challenge for the world is a something of an unknown. Every farmer is well aware that biologically you can only get so much out of a hectare of pasture or cropland. There are natural biological constraints here. The supply curve in the chart to the right looks even steeper when you consider things such as urban creep and biofuel production swallowing productive land, water scarcity, a more volatile climate, government intervention, and the list goes on. Of course, there have been many productivity gains, such as biotech crops, new fertilisers, new production systems and the like. But by most measures, the growth in yields for established food-producing regions and industries is now starting to diminish. In many cases not enough has been reinvested back into agriculture over the last 20 years to flatten the food supply curve. Overlay forecast population growth into 2050, the strong lift in real incomes in emerging countries, urbanisation, modernisation of emerging countries’ food industries and the shift to higher protein and fat diets; well you get the picture – the trend in soft commodity prices is up. The steeper the supply curve, the greater the impact of a given increase in demand on prices.

A steep secular rise in food prices could be devastating for poor countries, especially those who import a large proportion of their food and/or spend a large share of personal income on food. Many of these countries are in the Middle East, Asia and South America. These emerging countries often spend 30 to 40 percent of their disposable income on food. Such countries could experience a sharp decline in GDP growth, a surge

in CPI inflation (think what previous oil shocks have delivered), worsening fiscal finances, higher interest rates, depreciating currency and widening credit spreads. Or worse still, social unrest. This is often in contrast with developed countries where only 10 to 20 percent of disposable income is spent on food. For New Zealand, who has an abundance of renewable resources (especially land and sea area) and exports a large proportion of our food, we are likely to see the converse to many of these emerging countries. The bottom line is that we need to be mindful of demand dynamics both in terms of actual demand, but also physical affordability.

Australia is often referred to as the lucky country, which is true, but mythical in a relative sense to New Zealand. We are just as blessed, if not more. We are US$13,000 per person better off

in the natural capital stakes and nearly US$30,000 better off on a renewable capital basis. We do not capture the heady heights of the top seven for natural capital at US$126,000 per person. However, these countries are all oil producers and are very short on renewable capital. You can only sell off the family jewels once. In a world of diminishing resources the focus will eventually turn to substitutes and sustainable renewable resources. When you look at our Asian neighbours, we are well placed to help them with their dilemma of being short in this area.

Disposable income spent on food

0

5

10

15

20

25

30

35

40

45

50

US

Sin

gapore UK

Canada

Sw

itze

rland

Aust

ria

Germ

any

Aust

ralia

Neth

erl

ands

Denm

ark

Bahra

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rab

Mala

ysi

aIr

ela

nd

Sw

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France

Kuw

ait

Spain

Belg

ium

Finla

nd

Italy

South

Kore

aN

orw

ay

Japan

New

Zeala

nd

Port

ugal

Isra

el

Slo

venia

Gre

ece

Colo

mbia

Slo

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Uru

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Cze

ch R

epublic

Arg

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Iran

Chile

South

Afr

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Chin

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Mexic

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Taiw

an

Bra

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Pola

nd

Cro

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Hungary

Thaila

nd

Boliv

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Peru

Russ

iaV

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Rom

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Tunis

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Indonesi

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Egypt

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Kenya

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Cam

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Sources: ANZ, National Bank, USDA

% of DI spent on food

Developed Emerging


The food challenge with limited resources

Positive demand shock: Population growth, strong lift in real incomes in emerging countries, urbanisation, modernisation of food industry and shift to higher protein & fat diets

Quantity

Pri

ce

P1

Q1

Supply side constraints: Less arable

land per capita, increasing

water scarcity, lower growth in

crop yields, extreme

weather events, government intervention and biofuel production

P2

P3

Q2 Q3


WEALTH BREAKDOWN FOR SELECTED COUNTRIES (US$/CAPITA)

EconomyTotal

Wealth

Produced

Capital

Natural

Capital

Renewable

Capital

FTA

Status

New Zealand 414,113 76,281 52,979 49,304 N/A

Canada 538,697 89,811 36,924 24,280 No

Australia 518,805 111,671 39,979 19,651 Yes

Norway 861,797 183,078 110,162 10,456 No

Saudi Arabia 146,105 33,000 97,012 10,392 Pending

United States 734,195 100,075 13,822 10,344 Pending

Switzerland 736,795 165,561 9,411 9,411 No

Thailand 37,765 9,711 7,810 7,172 Yes

Indonesia 19,769 3,968 4,926 3,453 Yes

Philippines 19,698 2,745 3,468 3,329 Yes

China 19,234 6,017 4,013 3,209 Yes

UK 662,624 84,861 6,263 3,178 No

South Africa 86,199 11,087 5,723 3,128 No

UAE 349,698 72,873 120,989 2,878 Pending

Vietnam 9,374 1,851 3,630 2,746 Yes

Korea, Rep 248,180 58,636 2,642 2,616 Pending

India 10,539 1,980 2,704 2,351 Pending

Japan 548,751 135,866 2,094 2,047 No

Hong Kong 360,981 77,653 10 10 Yes

Singapore 300,975 81,405 2 2 Yes

Sources: ANZ, National Bank, The World Bank “The Changing Wealth of

Nations” 2010.

Indeed, looking at the ASEAN trading block and the other big players such as China and India, you can see they are well short of renewable capital. This is why they are looking at agri investments all over the globe. New Zealand’s opportunity is not just in the sale and trade of premium agri-products; it is also our expertise and services related to the different parts of the food supply chain. There will be more cross-border trade of food in the coming decades, especially in the Asia-Pacific region. We have been exporting for a very long time, from

the bottom of the Southern Ocean to the top of the Northern Hemisphere. We need to back ourselves in this; we are world class in a number of facets along the agribusiness supply chain, and in the delivery of perishable products to far away markets. Other countries will need such expertise and services.

The last column of the table is also significant. New Zealand has been pursuing free trade agreements with gusto. Refer to our feature article in the March 2011 Agri Focus. We now have a number of FTAs with key countries in the Asia-Pacific region, as well as others in train. Collectively, we have a picture of one nation being “long” natural capital, huge parts of Asia being “short”, and FTAs breaking down barriers and driving connectivity. These dynamics make for a perfect match to drive up cross-border trade between us and Asia. The FTAs are the keys that unlock the door ahead of many of our competitors and help us capture the benefits of more cross-border trade in food and other products and services.

Yet there are also tensions. Unlocking our renewable endowment is not easy. You wouldn’t want one area of strategic excellence, such as aquaculture (or the publicised coal reserves), to undermine another such as tourism, so sensible regulatory heads are required. Moreover, having a large natural endowment does not guarantee success for a nation. Indeed, it has historically tended to invite corruption and foreign exploitation. You need the legal and economic framework, attitudes and institutions to unlock them sensibly.

Witness Congo and Switzerland. The latter has a lower natural resource endowment, but is far richer. Put simply, having the right stuff gives you a head-start. Just like successful businesses need something in their offering that is “different” (whether that be brand, relationships, or a better service proposition), the same applies for a nation. The rebalancing of the New Zealand economy away from a spend-centric model to a more balanced growth model means we will need to sensibly use our renewable endowments. It is critical we embrace the opportunities that are offered, for the more you pull an income-generating lever – and our natural endowment represents a huge lever to pull – the less pressure there is for austerity to pay back the years of living beyond our means.


Natural & renewable capital per capita

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Averagenatural

capital fortop 7

Australia Highincome

World Lowincome

Natural capital

Renewable natural capital

US$ per capita

Source: The World Bank "The Changing Wealth of Nations" 2010

New Zealand


KEY TABLES AND FORECASTS

ACTUAL FORECAST (END MONTH)

FX RATES Jan-12 Feb-12 30-Mar Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

NZD/USD 0.827 0.851 0.817 0.85 0.86 0.86 0.89 0.90 0.90 0.90

NZD/AUD 0.778 0.782 0.787 0.77 0.78 0.78 0.81 0.82 0.82 0.82

NZD/EUR 0.632 0.642 0.614 0.63 0.64 0.63 0.65 0.66 0.66 0.67

NZD/JPY 63.06 64.37 67.35 63.8 61.9 61.9 64.1 63.0 63.0 63.0

NZD/GBP 0.525 0.538 0.512 0.54 0.54 0.53 0.55 0.55 0.55 0.55

NZ TWI 72.8 74.2 72.8 73.5 73.9 73.5 76.0 76.6 76.6 76.9

ACTUAL FORECAST (END MONTH)

INTEREST RATES

Jan-12 Feb-12 30-Mar Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

NZ OCR 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.25 3.25 3.50

NZ 90 day bill 2.79 2.76 2.75 2.70 2.80 2.80 3.20 3.50 3.50 3.90

NZ 10-yr bond 3.86 4.08 4.11 4.20 4.10 4.20 4.20 4.10 4.10 4.20

US Fed Funds 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

US 3-mth 0.54 0.48 0.47 0.45 0.35 0.35 0.35 0.35 0.35 0.35

AU Cash Rate 4.25 4.25 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00

AU 3-mth 4.34 4.48 4.36 4.20 4.20 4.20 4.20 4.20 4.20 4.10

ECONOMIC INDICATORS

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

GDP (% q/q) 0.3 0.5 0.5 0.6 0.8 0.9 0.9 0.8 0.7 0.6

GDP (% y/y) 1.8 1.6 2.1 2.0 2.4 2.8 3.2 3.4 3.3 3.0

CPI (% q/q) –0.3 0.6 0.6 0.8 0.3 0.6 0.6 0.9 0.4 0.6

CPI (% y/y) 1.8 1.6 1.2 1.6 2.3 2.4 2.4 2.5 2.5 2.6

Employment (% q/q)

0.1 0.3 0.2 0.2 0.2 0.3 0.4 0.4 0.4 0.3

Employment (% y/y)

1.6 0.7 0.8 0.8 0.8 0.9 1.1 1.3 1.5 1.6

Unemployment Rate (% sa)

6.3 6.3 6.3 6.3 6.2 6.2 6.2 6.1 6.0 5.9

Current Account (% GDP)

–4.0 –4.2 –4.2 –4.0 –4.1 –4.2 –4.4 –4.5 –4.7 –4.8

Terms of Trade (% q/q)

–1.4 –0.9 –0.6 –0.4 –0.2 –0.2 –0.1 –0.2 –0.1 0.0

Terms of Trade (% y/y)

1.1 –0.6 –3.4 –3.2 –2.0 –1.4 –0.9 –0.6 –0.5 –0.3

Figures in bold are forecasts. Quarter–on–Quarter yoy: Year–on–Year


NZ’S TOP EXPORT MARKETS FOR THE 12 MONTHS ENDED JANUARY 2012

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Sheepmeat 2,982 9 204 302 68 5 571 318 57 46 15 43 1 6 100 173 119 11Beef 2,035 18 13 781 185 164 38 23 132 15 93 49 38 42 6 7 40 128 21Other Meat 454 31 11 23 41 27 30 69 2 3 14 7 16 2 2 8 31 5Milk Powder 7,126 85 1,827 12 22 18 77 187 348 266 232 56 293 255 303 10 357 504Butter 2,533 98 219 116 32 28 30 69 63 61 52 20 75 51 123 9 27 41 3Cheese 1,381 255 74 7 325 116 43 36 26 49 9 19 53 15 38 25 19 12Whey/Casein 1,809 65 213 758 204 48 4 123 4 13 20 30 51 7 25 2 21 2 30 6Kiwifruit 1,074 63 90 29 301 76 229 3 75 12 8 9 29 1 6 1 2 4Apples 371 43 46 51 16 26 10 5 9 25 21 53 6 11Other Fruit/Vege 665 316 3 36 163 23 3 4 1 14 13 2 9 6 1 14 2 1Wine 1,159 368 23 236 12 2 302 7 1 1 2 1 14 19 1 1 28 65 6Wool 939 95 416 24 20 2 64 43 42 11 6 1 8 10 1 4 1Skins/Hides 571 18 194 3 7 21 6 1 24 2 9 37 7Logs 1,728 1,027 177 310 192 13 3Sawn Timber 1,091 329 128 158 96 49 2 3 6 35 15 26 6 1 50 33 16 3 1 8Fibreboard/Plywood 384 68 26 15 199 3 4 8 21 1 6 1 2 1Wood Pulp 669 71 197 98 93 13 24 24 86 12 8 30Fish/Seafood 1,501 275 274 160 125 41 14 24 1 8 9 2 36 164 6 29 2 8 13 4Crude Oil 2,382 2,332 23Aluminium 1,239 95 30 71 663 120 56 21 2 1 3 1 11 2 87 4Remainder 16,046 6,301 1,092 1,264 706 532 360 159 524 184 265 173 309 320 207 228 73 159 205 84 5TOTAL 48,140 10,892 6,060 4,038 3,469 1,675 1,541 1,053 958 895 887 851 822 819 771 723 695 633 611 568 529

NZ MERCHANDISE EXPORTS ANNUAL CHANGE BETWEEN THE 12 MONTHS ENDED JANUARY 2012 AND A 12 MONTH SPAN A YEAR EARLIER

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Sheepmeat 276 -4 80 34 10 2 -22 84 -1 -17 2 -13 2 82 17 -3Beef 56 3 4 13 -27 13 9 8 15 2 -66 6 -2 7 -1 -3 17 18 3Other Meat 19 13 4 4 4 -3 -2 -12 1 -2 1 1 -1 10 2Milk Powder 1,278 17 191 9 -1 16 14 42 62 64 -6 29 28 -6 78 9 134 74Butter 337 10 109 29 27 7 -55 4 17 10 9 2 -14 10 12 9 14 3Cheese -38 -64 6 -11 37 9 8 -2 -4 -5 6 -1 -1 -1 3 -8 1 5Whey/Casein 299 10 85 140 -17 11 1 43 -1 5 9 -1 11 4 3 -1 -1 1 2 2Kiwifruit 73 10 18 -2 3 12 10 1 12 2 3 6 1 1 -2 1Apples 31 -17 6 3 7 4 4 1 2 8 2 1Other Fruit/Vege 92 63 3 35 4 -2 1 -2 -14 1 -4 7 -2Wine 79 39 9 1 1 1 5 2 -1 1 4 5 2 2Wool 198 121 5 5 1 10 12 -5 1 4 3 -2 1 1Skins/Hides 118 1 92 -3 2 4 4 -7 -1 1 -3Logs 291 221 19 19 36 2 -2 -4Sawn Timber -84 -11 -26 -32 4 5 2 2 1 13 4 -14 -13 -1 -2Fibreboard/Plywood 35 -8 -1 43 -1 -2 -1 2 3 2 -3 -1Wood Pulp -26 -14 -1 -1 1 10 -7 -2 -16 11 -2 -5Fish/Seafood 55 -12 90 -15 -4 2 -18 1 -5 1 1 2 -72 3 17 1 3 1Crude Oil 407 524 -50 -7 -65Aluminium 29 -22 5 8 25 9 8 -8 5 -1 -1 -4 -2 34 -4 -1Remainder 933 288 135 67 14 112 11 5 62 -14 48 -54 31 15 22 57 8 -16 60 8 -7TOTAL 4,459 850 1,137 233 131 231 36 138 55 51 111 -59 58 -27 64 21 70 141 109 140 73

NZ MERCHANDISE EXPORTS ANNUAL CHANGE BETWEEN THE 3 MONTHS ENDED JANUARY 2012 AND A 3 MONTH SPAN A YEAR EARLIER

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Sheepmeat -96 -1 15 -18 -28 9 -4 -17 2 -1 2 5 -5 -1Beef -49 1 1 -18 -3 -12 -3 1 -3 1 -23 3 -1 1 -1 3 7Other Meat -4 6 1 2 -2 -2 -1 -4 1 -1Milk Powder 550 5 134 2 2 4 11 16 22 29 7 13 -8 1 5 50 112Butter 88 6 23 23 -1 20 -8 5 6 2 -6 -3 -10 7 1 -4Cheese 32 -3 4 -3 8 12 -2 -3 1 1 2 -1 -1 2Whey/Casein 141 6 27 68 -5 5 7 2 2 4 -5 1 2 -1 1 6Kiwifruit 29 4 15 7 1 1 1 1 1Apples 1Other Fruit/Vege 41 25 -1 2 15 2 1 -2 -1 1 1 -1Wine 28 14 2 -4 1 9 -1 3 1Wool 37 17 3 3 3 -3 2 -1Skins/Hides 20 29 -1 1 -2 1Logs -60 -55 2 -10 4 -1Sawn Timber -6 -1 -6 -1 -1 -1 1 -2 -4 1 1 2 6 -2 2Fibreboard/Plywood 8 -1 -3 -1 11 -1 -1 2 1 -2Wood Pulp -26 -2 -20 3 2 1 -1 -2 -7 2 -1 -3Fish/Seafood 35 -3 5 5 -1 -1 -6 -1 1 8 22 2 5 1 1Crude Oil 85 108 -7 -17Aluminium -16 -1 -4 9 -7 -5 -2 -1 -1 2Remainder 1,439 363 320 82 154 39 -10 11 88 -3 48 -36 15 58 42 16 -1 -4 44 50 109TOTAL 2,276 522 500 132 216 19 -24 23 114 -3 62 -26 21 86 61 -12 -5 16 56 100 220

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