New Zealand's enviable position
New Zealand's position as an agricultural producer is becoming stronger by the day as the world struggles to cope with the protein demand created by the growth in middle class wealth.
Vice-Chairman of Goldman Sachs Group, Mark Schwartz has been immersed in Asian markets since 1980 and was in NZ in early 2014. His message is simple. New Zealand has what China needs: food safety, food security and food quality. "For the foreseeable future - certainly the next two decades - I think there's going to be a tremendous demand for New Zealand products in China alone."
New Zealand's positioning advantage comes down to productivity. Efficiency gains in agriculture have been double just about any other industry in New Zealand in the 20 years to 2014. Through strategic farm investment, you can actively drive productivity.
That's why farm investment is unique relative to many other investments. Every year, management is improved, based on research and innovation. For example, by renovating pasture or breeding livestock superior genetics. These incremental productivity gains have in the past translated into increased asset value.
This is different from commercial property, where you might fit out a building or replace fixtures. In this case, you are really just investing to retain the asset's value.
Farmland Investment Performance
During the 10 years to 2014, total returns from farmland (operating profit and capital gain) have generally been superior to returns from international listed equities and bonds.
Farmland returns are weakly correlated with sharemarket returns and strongly correlated to the income derived from food commodities produced from the land.
Farmland's positive investment performance is essentially due to:
- increases in operating earnings, through rising (albeit volatile) commodity prices and improved productivity; and
- the fact farmland generally sells at prices close to its potential value, rather than a value correlated to its current 'return on capital'.
Farmland as a hedge against inflation
In the medium term (at least the 10 years up until 2014), farmland prices have risen significantly, in both real and nominal terms, underlining farmland's usefulness as an inflation hedge.
This is because the price of food and cost of farm inputs are significant contributors to the rate of inflation. As the value of food and fibre commodities inflate, farm operating earnings and land values inflate with it.
Farmland values have performed particularly strongly during periods of high inflation, such as during the late 1970's, when they also outperformed equities.