The government offers a big cash hand-out to keep struggling businesses going.
When the disease came to New Zealand, it established a stranglehold in the South Island. To combat the disease’s progress, the Government adopted a ‘stamp it out’ policy, the likes of which other countries had found difficult to implement.
Movement was severely curtailed, and business owners compensated for the inability to operate. As thousands of animals died, questions were raised about the tracing system used to manage movement and track the M.bovis spread.
M.bovis was identified on a South Canterbury farm in 2017, sparking what is now nearly three years of aggressive disease management. As at 22 April 2020, 29 properties were under quarantine control.
Eradication may be in sight, but this massive biosecurity challenge has come at a great cost — financially and mentally — for farmers and for rural communities.
The country is now fighting another pandemic, impacting all New Zealanders — not just those dependent on the agricultural value chain. Yet the opportunities for the primary sector emerging from the Covid-19 situation are coming into focus.
In the week ended 6 May 2020 compared with the equivalent week in 2019, total exports were down 8 per cent. However, key primary sectors still showed a positive growth in exports. For example, dairy exports increased by 19 per cent, fruit by 33 per cent and meat by 4 per cent.
As New Zealand starts to claw its way back from Covid-19, a growing tide of rural, economic and real estate commentators see the primary sector as being the bulwark for the sustainability of the country’s economy.
Even allowing for downward pressure on the milk payout, and subdued food demand from large consumers like China, New Zealand’s ability to safely feed more than 50 million people will likely haul the country through.
But this isn’t about business as usual, because we’re now facing a new normal as our country gears up to recover and thrive.
No industry is ‘lost forever’ — though some will take longer than others to recover, and they will probably not look the way they did in 2019. But if the primary sector has the weight of expectation on it, serious thought needs to be given around accelerating its growth.
As the country gets set to embark on a range of shovel-ready infrastructure projects, now is probably the time to reconsider the role of irrigation projects in prime growing areas, like Hawke’s Bay.
These projects would have a fundamental role in job and value creation. In this context, thought needs to be given around where to direct investment into the primary sector, or to divert from other industries, given its crucial role.
A second point is around talent. The primary sector workforce has radically altered, particularly in horticulture, where the largely overseas workforce is being replaced by Kiwis made jobless through downturns in tourism and forestry.
Budget 2020 allocates $19.3million over four years to help the recently unemployed to access training and work opportunities in the primary sector. This initiative aims to place at least 10,000 New Zealanders into primary sector jobs.
While those industries will grow once more, it’s likely restrictions on visitors will dampen the involvement of RSE and other workers in the primary sector over the short term. Again, this is a real opportunity to invest in many of the skills the primary sector needs, including in specialist degrees and related disciplines including the sciences and engineering.
The growth of automation, robotics, sensing and other technologies in horticulture mean these skills are needed. Fortunately Budget 2020 includes an investment of $11.4 million to grow the agritech sector.
The demand for this hasn’t been caused by Covid-19 — horticulture in particular has been crying out for skilled people for years — but it certainly has lit a fire under it.
Now is the time to look at the primary sector through a new lens and see the value it provides New Zealanders through job creation, economic and financial value, social and community cohesion, while doing so sustainably.
And the lessons the primary sector can relay and reflect following its own battles with disease incursions may well contribute to the resilience of all New Zealand.
“I’d tell them don’t just look at the profit and loss statement, also look at the balance sheet and ask yourself, is the company capitalised to make it through to the other side,” Matthew Goodson, managing director of Salt Funds Management, says.
THE (LIKELY) WINNERS
The two major supermarket owners Foodstuffs and Countdown are expected to do well out of the lockdown but neither is listed in New Zealand.
However, other companies exposed to the primary sector are enjoying fresh interest.
In that sector, listed companies – that is, companies that ordinary investors can get a slice of – include Fonterra, A2, Synlait, Scales, Seeka, T&G Global and fishing company Sanford.
Most primary sector businesses and ports are classed as essential businesses and still running in some way.
But it’s not as simple as picking a sector. For example, logging has been stopped in its tracks by the virus. “There are definitely winners and losers at this stage,” Goodson says.
Some companies are already in good positions. Dairy darling A2 Milk recently boosted its now-cornerstone shareholding in Synlait and its shares have risen 17 per cent in the last year.
Honey exporter Comvita and probiotic company Blis Technologies are both benefiting from demand for their immunity-supporting products.
However, age-old factors such as supply, demand and exchange rates still play their part. New Zealand supplies a big chunk of China’s milk powder, yet the world is currently awash with milk.
Doug Steel, a senior economist at BNZ says a fall in our dollar offers some protection.
“It helps insulate exporters from the worst of any world price weakness. In fact, at least through March, the drop in the New Zealand dollar has more than offset offshore [dairy] price weakness overall.”
As a maker of respiratory devices, Fisher & Paykel Healthcare shares are up 87 per cent over the last year.
The massive explosion in both demand and supply of ventilators may go either way for Fisher & Paykel, and the current disruption could affect its sleep apnoea business. “But on balance, FPH is a rare winner,” Goodson says.
PushPay, which provides payment services in the United States church donation market, has “conflicting drivers. Clearly church attendance is collapsing, however, some churches are really getting themselves sorted online”, he says
Entertainment and communication
With streaming services in high demand, shares in Spark, which recently sold its streaming service Lightbox to Sky TV, are up 22 per cent over the last year and fibre installer Chorus is up 10 per cent.
Conversely shares in sports-driven Sky TV are down 78 per cent.
Goodson says Spark and Chorus are companies investors often turn to in bad times for stability and consistent dividends.
“It’d be a stretch to call them winners but their defensiveness has seen a strong outperformance versus a lot of other names,” he says, whereas Sky is in an “incredibly difficult position” and sport in “a world of pain”.
As Kiwis get bored in lockdown, a few industries are emerging as “clear winners,” Jane Davis, director of workplace wellbeing firm The Flourishing Institute, says.
“These are likely to be entertainment providers, streaming organisations, app development companies, online training and online services.”
With most people forced to stay at home, you would think electricity companies would be doing pretty well.
But that would be forgetting that many industries are not operating.
“It depends on the position of each company,” Goodson says. Power to households costs much more to provide and customers are more fickle, but it earns a higher margin.
However, when things are tough overseas, electricity is one sector that largely revolves around domestic drivers like low lake levels and industrial demand.
Meridian, for instance, is a major supplier to the Tiwai aluminium smelter, which is reducing its energy use for the next six months.
Contact Energy also supplies Tiwai to a lesser degree but would be affected it there was a surplus of power in the south, which can’t be exported north until transmission lines are built in three to five years.
“Once those transmission lines are built, prices would fall all round the country. Meridian would get a higher price than what they’re currently selling it on contract for, so it’s a mixed bag for them,” Goodson says.
THE (LIKELY) LOSERS
Retailers, tourism and hospitality
As the economy steps out of lockdown, the hardest hit will likely be tourism and international education, as border restrictions may be some of the last restrictions lifted.
“The more successful New Zealand is at destroying the virus domestically, the more vulnerable, relative to the rest of the world, we become, as we will have little to no community immunity,” BNZ head of research, Stephen Toplis, says.
Goodson says it will take tourism and international education “many, many years to come back” and their absence will hurt hospitality as well.
Hospitality companies on the NZX include fast food companies Burger Fuel and Restaurant Brands. The latter has a major international backer and has been running in Australia and Hawaii without dine-in options.
“They’ll see it through but they’ll take a tremendous earnings hit, as will every retailer,” Goodson says.
On the retail front, some companies like Briscoe Group, Smith’s City and The Warehouse Group have been able to carry on in a limited way by selling essentials during the lockdown.
Others are like outdoor clothing firm Kathmandu, a company with a string of overseas stores and known brands but whose shares have toppled from around $2.50 in February to around 64 cents currently.
Goodson said it was hard to value retail properly.
“The question is, what is the shape of retail when it comes back and who has the balance sheet to get through to the other side of the abyss.”
Investors have punished tourism-related stocks like Tourism Holdings, which dropped like a stone from $2.64, touched 55 cents and recovered to around $1.15.
Millennium & Copthorne Hotels quickly switched from forecasting interim revenue of $24 million to an annual loss.
And aviation is truly up in the air. Air New Zealand and Auckland International Airport shares have pummelled as passenger numbers evaporated.
Housing does not have a big direct presence on the NZX, but it’s there, with Fletcher Building and several retirement village providers exposed to the housing market.
Blue-chip Ryman shares, which were close to $16 at the start of March, dived to $6.64 before rebounding to about $11.
Key to this, according to Goodson, will be the unemployment rate. House prices are tipped to fall between 3 and 10 per cent, as immigration falls away and banks become credit-constrained.
He says if housing was to revert back to 2014 levels, prices would sink 30 per cent. “So I think a critical question for the economy … is how bad does the housing market get.”
And there are other external factors which individual companies can do little about.
A net 43 per cent of businesses in ANZ’s business outlook this week think their exports will decline. A net 8 per cent of businesses think they will be lowering prices. “If that ain’t sign of deflation, nothing is,” Toplis says.
However, an economy without mass deaths will have definite advantages. Toplis is forecasting waves of the virus will potentially seeing businesses operating differently in different regions.
Wiping out the virus would be a “remarkable outcome … if every player in the economy – households, business and the government – plays their part, and we have a lot of luck.”
OPINION: Tourism Minister Kelvin Davis said last year that tourism was New Zealand’s “largest export earner”, contributing $39 billion to the economy each year and directly employing more than 200,000 people.
Obviously, Covid-19 has upended the tourism sector, so Davis was left with no choice but to announce earlier this week that he has tasked Tourism New Zealand to lead a programme that includes the Ministry of Business, Innovation and Employment, the Department of Conservation, and industry parties to “reimagine the way we govern tourism, how we market domestically and internationally, who we market to, and how we manage visitors when they arrive on our shores”.
Another major sector upended because of Covid-19 is international education. According to the Tertiary Education Commission, international education “contributes $5.1b to the economy and is the country’s fourth largest export earner” – it also supports about 50,000 jobs.
Undoubtedly, our universities and other education providers are worried the cash cow has dried up. Will we see the same number of full fee-paying international students on our campuses post-Covid-19?
Lake Wanaka Tourism general manager James Helmore says the economic outlook is bleak.
The New York Times reported that with travel bans and “anger rising among Chinese students and parents at the West’s permissive attitude toward public health, enrolment could plummet in the coming years”.
So, are two of our major export earners out of the game? It seems that could be the case.
Last week, Infrastructure and Regional Economic Development Minister Shane Jones said tourism and international education would no longer be major industries for New Zealand.
He’s right – it might take years for both sectors to bounce back if they bounce back. Also, let’s not forget that businesses and workers who indirectly rely on our tourism and international education sectors will also be affetced.
And just like that, it’s doom and gloom, well, for tourism and international education at least. Further, if we are to believe the recent OECD report about the effect of Covid-19 on economic activity, then New Zealand’s economy is likely to suffer more than most in the OECD.
Although, to be fair, the OECD report did not consider efforts such as the Government’s wage subsidy. So, where to from here?
Sometimes the most obvious answers are right in front of you. In New Zealand’s case, that would be our primary industries of agriculture, horticulture, forestry, and seafood.
The latest forecasts predict the primary sector’s combined export revenue will reach $46.5b for the year ending in June – that’s with Covid-19 taken into account, although that figure should still be treated with caution.
Taihape farmer Daniel Mickleson is concerned that proposed water quality standards could put his farm out of business.
Suffice to say, we are heavily dependent upon our primary sector. In other words, from here on in, it will be the primary sector that’s putting kai on the table.
There’s also the potential to be putting actual kai on tables around the world if the chief economist of the UN Food and Agriculture Organisation is right about a possible global food shortage.
Accordingly, the Government needs to let go of its ideological biases, reset, and do all it can to encourage and grow our primary industries.
A good place to start would be to deregulate anything that hinders production for farmers, growers, foresters and fishers. For example, farmers face significant compliance costs to ensure they’re meeting requirements from the Zero Carbon Bill to freshwater management policies.
Last year, Stuff reported some farmers were choosing to exit the industry rather than pay for compliance costs. I don’t blame them for leaving – farmers have regularly faced the wrath of a holier-than-thou public who demand sustainability but are happy to fly to Bali.
Speaking of deregulation, now is a good time to have that wider conversation given the economic crisis.
The Guscotts are raising beef and lamb for export to the US on land that has been in the family for several generations.
With unemployment set to increase, deregulation across the board will assist low-income families because they spend a significant amount of their income on heavily regulated goods and services.
Also, more small businesses will be able to survive this crisis as the cost of compliance is higher for small-to-medium-sized businesses.
Obviously, it makes sense that any programme that removes unnecessary constraints on business can only stimulate and grow the economy – and that’s what we need for post-Covid-19.
Using the Government’s modus operandi, let’s hope it establishes yet another committee, but this time to “reimagine” business without unnecessary constraints, for the sake of us all.
Steve Elers is a senior lecturer at Massey University, who writes a weekly column for Stuff on social and cultural issues. His views are his own and do not represent Massey University.
The extent of the cuts is unclear, but a number of sources have confirmed to Stuff they have heard about the losses.
It is understood middle management positions are more likely to go than processing plant workers.
A Fonterra spokeswoman acknowledged there would be cuts but would not say how many. “We have been open with employees that with a new strategy comes a new structure. Our new strategy is about being more focused, prioritising New Zealand milk, and being closer to our customers.
“That means we will be changing our organisational structure to support our new strategy. It is premature to speculate on where in the organisation these changes may occur or how many roles may be impacted,” she said.
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Dairy Workers’ Union secretary Chris Flatt said milk would not stop coming, and workers were needed to process it.
The last time the dairy giant shed a large number of jobs was in 2015 when 750 staff were laid off. At the time it said the downsizing would bring about $100 million of savings.
Worldwide, New Zealand’s largest company has about 22,000 staff.
Of those being paid over $100,000, 4035 are based in New Zealand and 1729 are overseas.
A source who Stuff has agreed not to name said Fonterra chairman John Monaghan had phoned him to tell him a large number of jobs would be shed. The farmer had earlier placed feedback on the Fonterra app.
The Waikato farmer said while it was good to see Fonterra addressing its problems, people at the top should be answerable for the situation it was in.
“Still no-one’s been held accountable.”
The company could blame former chief executive Theo Spierings, who has been replaced by Miles Hurrell, he said. “But John Monaghan was on the board and I confronted him, and he said ‘but we’ve got Miles on board now’.
“Miles is being put up as the saviour, but there’s no accountability on the board. They backed Theo, they gave him free licence,” the farmer said.
Fonterra shareholder and DairyNZ director Jacqueline Rowarth said the cuts were appropriate.
“They’ve lost billions of farmer assets. In meetings we’ve been asking how they have been valuing Beingmate so highly and asking for data since 2012 on which companies overseas were doing what – we’ve never had it.
“They’ve gone on saying everything is fine, but we’ve never thought that. At meetings I’ve been shouted at and told variously by [former chairman John] Wilson and Monaghan ‘you’re not to say any of this in public’,” Rowarth said.
Fonterra senior management and the board were due to go on investor roadshows next week, but Rowarth said she had now received notice the meetings were to be postponed.
She envisaged Fonterra’s consumer and foodservice business might have the biggest staff cuts.
“The whole China thing is a debacle, so if they’re getting out of China then people there could go. They’ve taken on vast numbers of people to do good stuff overseas and they haven’t been able to do that,” Rowarth said.
ASB analyst Nathan Penny said he did not know of any figures, but Fonterra was looking to save money and one place they would focus on was wages and salaries.
“So maybe there’s substance to the rumours, it wouldn’t surprise me.”
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