NZ Agriculture - Stay with it

OPINION: It's a curious fact that some issues directly affect New Zealand agriculture and others often have an indirect effect:

Obviously a lower dollar relative to the United States currency is overall a significant plus for farming, but it does have its coat tails.

There are other influences that shape our agriculture. For example, New Zealand is strong on agricultural science - probably the best in the world. Being an island, our biosecurity has held up reasonably well relative to some other countries. Biosecurity remains, though, a crucial ongoing issue and there is no such thing as a minor breach.

Our farmers are respected worldwide for their work ethic, their animal health actions, their output, output quality and their land ,soil and farming knowledge. Farming couples and their advisors think about what they are doing, where they are going and how they are going to get there and the rest of the country generally listens to them, most of the time.

The couples seem to get job satisfaction close to 90 per cent of the time, even when they are making farm losses. Urban people world-wide would probably struggle to get much over 50 per cent satisfaction. Job satisfaction tends to be undervalued - just ask anyone on the wrong side of this issue.

Farming couples also tend to be good at managing their cashflow partly because there is always a limited supply of it - you don't go broke if you manage your cashflow. This has to be an asset for agriculture.

Looking ahead, farming children are much better educated than their parents, another crucial issue in uncertain and changing times.

New Zealand is green mainly because of our plentiful water supply and this is a major plus that some other countries would kill for.

Governments around the world are mostly concerned with getting into power and staying there, but over the years New Zealand has been fortunate in this area - think Brexit and Trump. Political stability is worth more than its weight in gold.

So these are some of the obvious influences that for the most part work in farming's favour.

Other issues indirectly affect farming:

Take the minimum wage of $20 per hour within a few years for example. This will mean with ACC payments, holiday pay, sick pay and the like, that the gross annual minimum will be about $44,000 per year. This is perhaps $6000-$7000 higher on average than now and will rise the tide on most if not all wages paid. That's quite a cost increase for many employers.

Quite a few industries, including dairy farming and horticulture, rely on overseas casual and permanent employees. Should their availability reduce this will cause some major management problems. In the United States, there are some five to six million largely Mexican men who do the so-called 'heavy lifting' in dairy farms, feedlots, construction and other heavy industries. The US could not function without them because many people don't want to do this work.

Inflation is slowly starting to come again which will tend to do the same with interest rates. The inflation cost at the farm gate is always higher than what Wellington calculates. Both of these are somewhat indirect, but the tide has been out so long in these areas that we have tended to make decisions disregarding them.

The average house and section price in Auckland is now $1,076,000 with an average mortgage of $465,000. This is a debt to asset ratio of 42 per cent and similar ratio to dairy farming. If you work on a two income Auckland couple earning, say, a combined $130,000 per year and allow for the tax, insurance, some house repairs and maintenance, and mortgage interest cost of about 5.5 per cent, you end up with a net 'free cash' figure of about $70,000.

That means that $60,000 per year one way or the other is tied up with house ownership and represents 46 per cent of the gross earnings – or 57.5 per cent of the tax paid net earnings. A 2 per cent increase in the interest rate would represent an additional $9,300 per year. There are now many house millionaires in Auckland, but some of them may be nervous millionaires and any debt reduction looks very constrained. This is an indirect issue for NZ Agriculture, but this could be a serious problem for government in Auckland which would end up being serious for other parts of the economy as well.

The overruns on capital costs is a serious issue - all sorts of contractors and builders have had real trouble here lately. There are close to 90 liquidations in Christchurch over the last six years inside the building industry, which may not, in many cases, be due to cost overruns. The point is that anyone deep in this sector is obviously going to estimate/quote on the high side and things coming in below quote will be surprisingly few. All of this adds to the overall cost structure for New Zealand.

The government may easily run out of money but will probably increase borrowings rather than try and recover this from taxpayers. Sooner or later though, this overspending on partly non-productive areas will end up as a cost to all taxpayers.

Environmental issues also are going to be a focus of the new government. The costs of this will end up on farmers' doorsteps in the main and not on urban doorsteps. These costs will creep into the farm working expenses over the next few years and they will add nothing to farming income. If anything, they will reduce it. These policies all read well as long as somebody else is paying for them.

Lastly, surveys over the years have shown that 75 per cent of farmers are quietly confident that they are in the top 25 per cent farming quartile in ability and production and they act and make decisions on this premise. A big number though are obviously not in this category. If you can honestly accept this then the accompanying step is to listen intensely to your spouse and advisors and farm according to your real ability but still get job satisfaction and workable viability.

This is no different to running an accountancy practice. Any individual who can stand back and take a helicopter view here regarding true reality can give himself or herself and family one of the greatest indirect advantages in running any business.

Pita Alexander is an accountancy and agribusiness director at Alexanders.