“Money is cheap,” he says. “World banks around the world have dropped interest rates, some of them down to zero.
“There is a lot of money out in the global economy sloshing around looking for a home. [Investors] are looking for somewhere to put that money. They want it to grow, they want somewhere safe. They are looking at New Zealand because we are growing. We are tapped into the Chinese and other markets where demand for food is growing.”
Penny was outlining opportunities in the agricultural sector at a Westpac organised “Farming in the Future – opportunities and challenges” session held at Morrinsville. Attended by the Minister for Primary Industries, Nathan Guy, it was the first of a series of such events to be held around the country to support farmers in drought recovery.
Penny says the excess of money in the global economy is a big opportunity but the key is to find the right investors. “We haven’t dealt with many of these investors before, we don’t know them. We need to get to know them and this is a challenge. We want people we can invest with long term,” he says.
“Another spin-off from this flow of money around the world is that the currency is high,” he says. “It is making capital equipment such as machinery really cheap. The yen is down about 30% this year against the dollar – we get a lot of machinery and other technology from Japan so there’s an opportunity to take advantage of that.”
On the challenge side, however, he says it is making us more expensive. “We are a somewhat low cost producer – over time it will make us a higher cost producer. We need to look at what that means to us – we need to look at the markets. We need to be moving up to more lucrative markets – places like South America will eventually beat us on cost.
“Food safety is going to become even more important. We are a world leader in food safety and we can take advantage of that and fend off our competitors. But we can’t take our eye of the ball – part of the premium we get for our product is this, so we need to be vigilant.”
Penny says another current trend is that carbon is cheaper – making it more economic to cut down trees. “This is partly to do with the European recession. So there’s been a pick-up in deforestation and log exports, and it is one lower cost to converting forest to pasture.”
Penny says the drought had been massive and the costs from lost production had been very high.
Westpac estimated the total costs to the economy from lost production at $2 billion. However the increased payout from Fonterra may put back about $1 billion. He estimated the milk payout would be in the ‘sixes’ this season and next, and that Fonterra would be revising it upwards at its next announcement.
Looking beyond the drought, Penny says New Zealand is well placed. Chinese milk powder consumption had grown 10% a year in the last five years and it had all come from New Zealand.
The challenge is to cement our place as number one provider of dairy to China to fend off competitive response. Latin America has big potential to grow its supply of dairy. The opportunities were still huge with China’s growth at 8% this year and an estimated 7% next year. China will account for a third of world growth until about 2020.
