Agricultural Economics (Positive+Negative)
Let's get the negatives out of the way first. We need $105 - $115 for each head of lamb otherwise there is a risk that sheep numbers will drop further.
New Zealand has come down over 35 years from 71 million sheep to 28 million and on this basis with less lamb to sell you would hope that values would increase sharply but this hasn't really happened.
In the cropping sector it is hard to know what to grow that will be profitable and less conventional crops have a habit of involving more risk.
If we look at wool the cost of shearing and shearing related expenses is getting up near 30 - 35 per cent of a farmer's wool income – a combination of creeping costs and static income.
Dairying has come off two very difficult years. Any number of dairy farming couples will have encountered a cash loss of about $2 per kilogram of milk solids over this period which will take their businesses probably three to four years to return to so called normal. Their balance sheets have taken a hammering.
Sorry if I'm sounding gloomy, but if we look offshore, United States President Donald Trump is proving a master of uncertainty and disruption. Making America great again is going to cause friction all over the ship.
The US and its angel investors, new venture start-ups and Silicon Valley are spending much more than the New Zealand Government on research trying to develop milk and meat substitutes. When someone is spending perhaps $10 million per week on something even though much of it may not come to anything some of it is bound to stick.
Almond milk is that something that has grown from nothing and is growing at a tremendous rate. The first non-meat hamburger is said to have cost $350,000 but now blind tests are proving that it is competitive. If someone such as McDonalds took it up as a part of their offerings it's hard to see how this would help us.
The US has about five million sheep and 92 million cattle and a dairy industry about four times bigger than New Zealand. All of its dairy cows are inside but the system is quite cost efficient and feed is the number one cost. Three severe droughts in the US past 10 years has resulted in fluctuating cattle slaughtering and the rebuilding of herds and this has an effect around the world on beef prices.
New Zealand is still borrowing money from the US because we don't save enough for our own borrowers. If they increase their interest rates we will feel this. They are big dairy exporters and their interest rates will spill over into longer term fixed rates for us. They also have 19 beef cattle for every man, woman and child in New Zealand and if they start selling large numbers of cattle in a drought we will feel that. The US is a barometer for our agricultural industry.
A wall of high tech science will enter the world over the next 5-10 years and some of this will help us and some won't. We have been slow with GM science and many of our older farmers will struggle to cope with more and more change.
Longer term interest rates appear to be on the rise and an increase from 5 per cent to 6 per cent would add about 30 cents/kg of milksolids to dairy farmer costs. Our annual health insurance costs are rising at about 12-15 per cent compounding each year. These costs will likely double in six years or less.
Big irrigation dams are good storage can work financially for dairying and cropping but the economics for sheep and beef are largely unviable except for a small land area. The Government needs to take a 25 per cent cornerstone shareholding in new irrigation projects and sell their share down gradually over the following 15 years.
It continues to worry me that not enough farmers have taken on board the concept of having at least 10 per cent of their gross income in financial reserves. Future business volatility will demand this sooner or later.
That's the negatives out of the way and let's look at some positives. Low interest rates over the past eight years have been a life saver. Horticulture is doing well and has deserved it.
Any business person who gets through a low business cycle and survives with the business intact is always the better for this even if they don't agree at the time. New Zealand has been lucky with John Key, Bill English and their team – Australia has not done as well in this department and Europe is still struggling. Compared with us the US is politically in something of a war zone.
New Zealand is starting to face up to its national superannuation cost which is presently about $13 billion a year which is about 16 per cent of Government core revenue. For 65-year-olds there is no asset test and no income tax test. Inflation is starting to show again, our tourism industry is solid and we are gradually starting to think about business product quality rather than quantity. Australia is still taking about 20 per cent of our exports, our unemployment rate is about 5.2 per cent and our average weekly earnings are about $1130.
About 71,333 immigrants think New Zealand is a good place to live. Our minimum wage is now $15.75 per hour and there are only about seven countries where this figure exceeds US$10 per hour – in the US it's US$7.25. along with Denmark we are apparently the least corrupt countries in the world. Furthermore, we can drink our own tap water - a luxury in other countries.
Dairy farmers should be able to better than balance their cash flow this season after two poor years. With losses carried forward from those years there should be little income tax to pay over the next one to two years.
Yes, we have some water issues but we are a favoured nation in regards to fresh water. In other countries there will be wars about water within the next 10 years.
My guess is that the coming Budget will lower income tax payments for individuals, companies and maybe trusts, probably from April 1, next year. At a net income of $60,000 an individual currently pays about $11,020 per year – an average tax rate of 18.37 per cent.
Yes, we also have a housing problem in Auckland but with most of the 71,333 immigrants staying there this problem is hardly surprising.
The positives I feel outweigh the negatives but don't turn the light off.
Pita Alexander is an accountancy and agribusiness director at Alexanders