Download December 2010 It seems that most years, the subject of `VOLATILITY

December 2010
It seems that most years, the subject of ‘VOLATILITY’ and ‘RISK MANAGEMENT’ come
up in the Christmas newsletter!
We, as professionals and farmers, practice farm management. It is the art of integrating
the management of risk, along with good use of our base resources into biological farming
systems capable of generating a profit in an environmentally sustainable manner.
In their simplest form, those resources are soil, water, fertiliser, plants, animals, and
human resources.
Every action we take has a reaction in some other part of the system.
2010 has once again reminded us of the power of nature, and how management of risk,
whether it be climatic, market, or financial, is so critical to our
wellbeing.
Five things to be thankful for:
1
We have avoided the worst of the global economic crisis – while impacting on
demand for our products the crisis impact on credit availability has been much less
severe in New Zealand. It is fortunate timing that output is reduced at the same
time as demand is reduced.
2
While our secondary finance options are severely damaged, our mainstream trading
bank system has survived well.
That position contrasts to countries like Ireland, where dependence on EU capital
injections and very loose credit acted like a drug to the economy – giving the patient
a ‘high’, but eventually forcing it on to severe withdrawal symptoms.
3
The quality of our structural engineers : I understand many overseas nations are
envious of how well our buildings have withstood an earthquake of massive
proportions.
4
Our temperate, maritime climate : despite us considering to be an unpredictable
climate, the scale of variation pales into insignificance relative to continental
climates.
Our westerly trade winds generally blow, creating western rain and eastern river
and
subterranean
flow for irrigation,
environmental needs.
renewable energy,
recreational and
5
Our inclusive compassionate society, and ability to work with and for each other, as
evidenced by disasters like the earthquake and Pike River, and in particular, the
attributes shown by our young people in such circumstances.
Five Challenges
1
Building our ‘farming’ brand! By that, I mean, what do people in town think of when
they talk about farmers and farming?
-
guys in black singlets and redbands?
-
pigs in sow crates?
-
cows walking through streams?
or
-
intelligent, degree educated young men and women
applying their management skills to research based science?
-
naturally reared, contented animals producing safe food?
or
-
aesthetically pleasing, safe rural environment to buffer our cities.
-
New Zealand is now the third most urbanised country in the world! We have
to work hard at building our image and hence BRAND.
2
Building our understanding of how rural New Zealand can be multifunctional in
output.
-
increasingly, we are seeing evidence of that in our water resources, where the
need for irrigation water for food production can be integrated with renewable
energy, recreation, biodiversity and other environmental outputs.
-
similar principles can apply in other parts of our rural economy, where
renewable energy, recreation, diversity, and other uses can be integrated into
our farming systems.
3
Making better use of our science resources to leverage productivity gains in food,
fibre, and energy output.
We are seeing early signs of such a change, promoted by the Government’s
science adviser, Sir Peter Gluckman, the CRI taskforce, and backed by enhanced
communication between our CRI’s and universities.
4
Ensuring our relative isolation stays a new positive economic influence through
rigorous implementation of biosecurity standards.
2
Our so called, “clean, green safe” brand is at stake! Recent introductions such as
the varroa mite in bees, PSA in kiwifruit, and clover root weevil, should not only
underline the need for vigilance, but the potential impact of exotic disease in
ruminant animals in a country whose agricultural system is based on such animals.
5
Leveraging our global trade influence in milk, lamb, venison, velvet, kiwifruit, Merino
wool, apples, herbage and vegetable seed, where we supply a significant proportion
of traded product.
To do so, we need:
-
soundly based, international trade platforms. (We are fortunate New Zealand
has such international influence and recognition in this area.)
-
a strategy for each industry to leverage its influence to extract returns for New
Zealand farmers.
Some of our industries listed above have more defined
strategies than others! It is unclear to me, for example, whether the apple
industry has one!
-
People and a structure capable of delivering the strategy. One type of structure
does not fit all those examples, but harnessing top human capability is a
common need.
Looking Ahead: Five Implications and Opportunities
1
If New Zealand is a more pleasant, less climatically extreme place to live, with lower
energy costs, clean, plentiful water and a safe rural environment, then it is natural to
assume our population growth, mainly through immigration, will exceed global
average growth rates. Our “share” of a 9 billion population in 2050 is roughly 6.25
million people.
At a 2% increase, our population would approximate 10M in 2050. At 3%, it would
be close to 15M.
We currently produce enough food for in excess of 22M people, and are hence an
export driven economy. Assuming a 2% growth in productivity (a big ask), we
could feed 48M people, but roughly 1/3 of those would be in New Zealand, a
position closer to other countries like Australia.
3
Such population dynamics have huge implications for how we sell our food, who to,
our town-country relationships, our infrastructure and supply chains.
2
New Zealand competitive advantages:
-
production of protein. Our major proteins have been on a major price uptrend
for 20 years, (see table 1.)
Table 1
Major Protein Price Trends
Nz Cents per Kg
Venison
900
800
700
600
500
400
300
200
100
0
Dairy
Lamb
Wool
Beef
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011e
Year
As the wealth of a nation increases, its protein consumption increases at a
faster rate than carbohydrate.
Hence we see milk protein rise in price first, followed by plant protein, followed
by meat protein.
I remain very confident of all those markets, but remind those who have lost
confidence in meat, that we are at the front end of a global constriction in
traded red meat. In other words, we might have to sell less for more!
3
A nursery for the world!
Our position at 40o south, with a maritime climate, positions us perfectly for
production of herbage and vegetable seeds. We already produce a major proportion
of the worlds ryegrass, clover, carrot, radish, red beet seeds, with
potential to grow.
4
Canterbury, with its ability to control soil moisture, ideal soils, infrastructure, and
human capability, is ideally suited to the role.
We have the opportunity to continue to collaborate with other nurseries such as
Denmark and Oregon/Washington State. We are out of season for them, and have
a different risk profile.
4
Fresh vegetables
Technology gains around transport of fresh foods, and the large growth in south
east Asia puts us firmly in a position to grow a greater proportion of fresh rather
than processed food. Such crops will be integrated into our arable rotations, with
possibilities even for integration into dairy farm systems!
Most New Zealand land that has a controlled water application system and is near
transport, could see that opportunity develop over the next 40 years.
5
Information technology and its application to precision agriculture and water
As our knowledge of IT platforms (watch out for “Ruralzone”, the Gen –I initiative)
and IT systems explodes, their application to the way we farm, integrate production,
transport, process and market will also explode. Transparency of communication
with regulators and consumers will also improve considerably.
That transparency will make it hard to hide!, but much easier to shorten the value
chain – something we should aspire to!
The developing platforms and IT systems have particular application to management
of water, the environment and efficient resource use. With such potential, we need
smart young brains to apply it!
5
CONCLUSIONS:
1
The opportunities outweigh the threats!
2
The threats can be turned into potential opportunities for New Zealand.
3
Human capability is a critical component to application of the opportunities – hence
quality of education and research is increasingly important.
4
No market trends travel in a straight line, but are buffeted by short term external
factors. When making strategic decisions with intergenerational consequences, do
your homework rigorously, think carefully, and do your best to think of the 35 year
trends.
I know of very few agricultural investments with high short term returns.
5
Some of those perceived big short term gains evaporate when the risk factor is
profiled!
6
Those succeeding in all parts of the supply chain show similar characteristics
-
discipline in work ethic and decision making
-
ability to manage risk
-
ability to maintain positive cashflow
-
good communication skills
-
ability to see other perspectives
-
ability to mould a team around them
The Basics Never Change!
6
Thank you for allowing us to be part of your families and your business’ in 2010. We look
forward to being of assistance to you in 2011.
Andy Macfarlane
-
Strategy, governance, water, farming systems &
economics
Jeremy Savage
-
Dairy farm systems and benchmarking
Nicky Hyslop
-
Sheep, beef & deer, farming
monitoring, irrigation governance
Hugh Eaton
-
Valuer, supervision, sheep & beef, farming
systems & monitoring
Peter Bradley
-
Sheep, beef and deer farming systems & large
scale farming operations
Anton Nicholls
-
Mixed arable farm systems & agronomy
Julian Gaffaney
-
Mixed arable
benchmarking
Mark Everest
-
Water engineering and waste management
systems, sheep, beef & deer systems
Christine Bellringer &
Diane Lobb
-
Farm accounts administration
Tricia Macfarlane, Kathryn
Lilley, Barb MacGregor
-
Office and adviser support
&
dairy
farm
systems,
systems,
7