The Global Price of Food Pt 1
OPINION: The global price of food has increased on average by 2.6 per cent over the last 30 years,
Using the "Rule of 72", we can calculate that food prices have doubled every 27.7 years.
In 1973 the value of milksolids to a New Zealand dairy farmer was 64 cents per kilogram, without a dividend. If you used a value today of about $6.30/kg, this means there has been an increase over the last 45 years of $5.66/kg or an increase of 12.6 cents per kilogram per year.
Over the same period there has been a compound increase in the value of New Zealand farm land of about 7.5-8 per cent. This has increased the net equity of anyone owning farmland over this period. If you took out this inflation gain, the net equity of about 80 per cent of New Zealand farmers would be close to nil - simply because the net tax paid surpluses for this 80 per cent has been close to nil.
Many New Zealand farming families now need two incomes to keep ticking along. Many spouses working off-farm who are earning $25,000 to $30,000 with hardly any expenses, no weather issues, no price issues, no asset costs and four weeks definite holiday a year are bringing in the same net income as milking another 100 cows – or the equivalent of another 1000 sheep stock units.
An article I read told me that that the world is going to have to increase its food supply by 70 per cent to meet global food needs by 2050. Yet the article mentioned little that it will be farmers that need to produce this - governments plays a fairly minor part. A few of the better articles refer to this extra food requirement also needing to involve less fertiliser, less chemicals, less environmental effects, less water use, less modified crops, less land clearing and less use of fossil fuels - if it was not for the capitalist system that will respond to all this due probably to higher prices, this whole global food increase requirement wouldn't work.
Food issues around the world are going to become more and more of a problem - not in New Zealand, but in those countries with high populations and a weak agricultural production base. When hungry people riot politicians wake up.
New Zealand farmers need to cushion themselves by nailing down their water rights, irrigation consents and irrigation takes. They should work on there being a farm water tax or levy probably within three years. Within the same timeframe they can expect an emissions tax or levy and a capital gains tax, likely similar to Australia.
They are going to read more about vertical farming - inside big buildings of four to five stories or more. I have seen them in New York and the east coast of the United States and they are impressive, effective and efficient for some horticultural vegetables. They are all about controlled temperatures, available labour, water, fertiliser, freight and freshness. Freight, labour, freshness and little land and machinery do have some pluses, but there would be no advantages for some crops.
Farmers should bank on their compliance issues increasing and farm insurance costs are likely to rise faster than inflation. Workable cyber security and insurance cover is advisable.
China is having to feed nearly 20 per cent of the world's population with less than 10 per cent of its farmland. The Chinese eat nearly three times as much meat as they did in 1990 and their consumption of milk and dairy has gone up four times in 2010 since 1995. Both trends are increasing and as long as New Zealand holds its food quality and our people's integrity together, China looks as though it will be our major market for many years to come. Food safety is a key issue for Chinese people and because of their small farms (90 per cent are less than 2.5 acres) it is hard for them to manage their own on-farm food safety issues.
It may also pay to heed what is happening overseas. The second largest construction firm in the UK (Carillion Limited) has just gone into liquidation with 43,000 employees. Sorting this out is going to be an absolute shambles as the company built many of the government schools, hospitals, prisons, military buildings, bridges and tunnels and some of these remain half built.
This is no different to Fletcher Building Limited, only it's about six times bigger. I think the interest costs for borrowing and the inflation rates in the UK have been the lowest ever which really makes the whole exercise worse because it means the problem has not been caused by high interest rates or high inflation. You and I need an over-provision surcharge on our over-provision estimate plus some real project management on any capital type development.
Back to agriculture - what is the export value of New Zealand agriculture? About $41 billion. What percentage is it of New Zealand's total exports? About 78 per cent. What percentage of New Zealand people are directly or indirectly employed in New Zealand agriculture? About 16 per cent.
What's the point here? The point is that the New Zealand people really need agriculture to remain at least at its present level of involvement and financial importance.
Pita Alexander is an accountancy and agribusiness director at Alexanders.