New Zealand’s economy has remained resilient through the Covid-19 pandemic, in large part thanks to strong global demand for our primary products. But how easy is it for investors to get a slice of that through the sharemarket?
“It is important for the agriculture sector to be represented on the NZX,” says Forsyth Barr senior analyst Chelsea Leadbetter. “The sector is a significant part of the New Zealand economy, one where we have shown global leadership, and one that is likely to continue to play a vital role.”
Agriculture, forestry, fishing, mining, and food and wood processing together account for about 11.6 per cent of New Zealand’s GDP, according to ANZ. The contribution is bigger when services reliant on primary industries are included, like accounting, law, banking and transport.
The benchmark S&P/NZX 50 Index includes five agri companies – niche milk marketer The a2 Milk Company, Fonterra Shareholders’ Fund, which gives investors access to the dairy co-operative’s dividends, fishing company Sanford, agribusiness Scales and milk processor Synlait Milk. They represent about 5 per cent of the benchmark’s capitalisation, but reached as high as 15 per cent when A2 Milk shares were at their peak.
The broader market outside the benchmark offers investment in honey, wine, seafood, horticulture, rural services, farming, animal genetics and wool. These companies are either not large enough or liquid enough to be included in the NZX 50, which limits their appeal for big institutional investors such as KiwiSaver funds.
Leadbetter says the dairy sector, the country’s largest export commodity group, is well represented on the NZX. However A2 Milk is over-represented and Fonterra under-represented relative to their influence on the economy.
Fonterra and fellow listed dairy company Synlait Milk together make up about 85 per cent of New Zealand milk collections. Of the other big dairy companies, Tatua is a co-operative, Open Country Dairy is owned by the Talley family, Chinese dairy company Yili Group owns Oceania Dairy and took over former co-operative Westland Milk Products in 2019, and Miraka is owned by Maori trusts and Vietnamese company Vinamilk.
Investors can also get exposure to future dairy prices through the dairy derivatives market NZX developed in 2010.
But some important sectors are absent from public markets.
New Zealand exports meat to 120 places around the world, and it is our second-largest commodity export, but there are no listed meat companies although agricultural services company PGG Wrightson offers some exposure to the sector.
Leadbetter notes that many agricultural businesses have a co-operative structure, which means they are owned and run by their members or suppliers, which can make listing on the market more difficult.
Of the larger companies, Silver Fern Farms is half owned by its farmer shareholders under a co-operative structure, and half by China’s Shanghai Maling, Alliance is a wholly-owned farmer co-operative, and Anzco is owned by Japan’s Itoham.
Meat company Affco was previously listed on the sharemarket, but was taken private by the Talley family in 2010. Its period on the bourse was tumultuous, having listed in 1995 at 50 cents a share, its shares fell as low as 15 cents before the Talley takeover offer for 37 cents.
Poultry company Tegel listed in 2016 at $1.55 a share and failed to thrive. It was taken private by Philippines poultry company Bounty Fresh Foods in 2018 for $1.23 a share.
Logs and wood are the country’s third-largest commodity export, but there are no listed forestry companies.
Carter Holt Harvey was taken private by richlister Graeme Hart in 2006, and the break-up of the former Fletcher Challenge empire has left just construction and building supplies firm Fletcher Building and tree genetics company ArborGen listed on the bourse.
One of the last remnants of the former Fletcher Forests, ArborGen has a range of nurseries producing seedlings for the timber and agriculture industries. However its future on the NZX is uncertain. ArborGen disclosed in June that it had received a bid for the company, and while it thought the offer was too low, it said it would undertake a strategic review on its future options.
Still, investors can get some exposure to forestry through listed port companies who benefit from log exports, including Port of Tauranga, Napier Port and South Port.
Horticulture is a growing sector for the country and represented on the NZX through an array of listed businesses. Scales is predominantly an apples business, while Seeka is exposed to kiwifruit, avocado and kiwiberry, and T&G Global grows and exports a wide range of produce including apples, grapes, berries, lemons, mandarins and oranges.
Zespri, the world’s largest marketer of kiwifruit, is a co-operative owned by its growers.
Wine is the country’s fourth-biggest export group, and listed companies include Delegat’s Group and Foley Wines. Montana Wines, New Zealand’s largest wine producer, was taken private in 2001 by Allied Domecq.
Seafood is the eighth-largest export commodity. Sanford is one of the oldest listed companies on the NZX, having listed in 1924, and holds about 20 per cent of New Zealand’s commercial fishing quota by volume. By contrast, NZ King Salmon, the world’s largest aquaculture producer of King Salmon, is a more recent arrival, having listed in 2016.
Big fishing companies outside of the sharemarket include the Talley family business and Sealord, half owned by Māori through Aotearoa Fisheries and Japanese company Nissui.
Leadbetter says New Zealand has traditionally focussed on producing high-quality, premium agriculture products which have been in demand globally.
However most companies have some exposure to seasonal risk, given their reliance on key growing and harvest periods.
“This can create earnings volatility from year to year and can influence short-term performance,” she says.
Covid-19 has thrown up additional challenges for food companies, particularly those exposed to cafes and restaurants or who relied on grey market daigou traders to ship their products to customers.
One of the most volatile agri companies is A2 Milk, which has seen its share price rise from 80 cents in October 2015 to nearly $21 in July last year and under $6 more recently. The company, which sells A2 dairy products has suffered as its daigou trade to China for infant formula was disrupted by the pandemic.
Fonterra Shareholders’ Fund has also struggled to gain traction with external investors due to a complex listing structure which is currently under review and poor historical performance which is being addressed by new management and strategy.
Nikko Asset Management portfolio manager Michael De Cesare says while the Fonterra fund started off well, it did not live up to expectations.
The units listed in November 2012 at $5.50 and are now trading under $4.
De Cesare says he would like to see more companies come to market which have an innovative take on traditional sectors or have promising brands.
He cites manuka honey company Comvita, niche milk marketer A2 Milk, Ora King producer NZ King Salmon and ‘super-premium’ winemaker Delegat’s Group, whose flagship brand is Oyster Bay.
The companies are “a shining example of value over volume,” De Cesare said.
“We are a smart country, full of intelligent people from marketing to product innovation to the more technical sides so it would be good to see more emerging companies and listed companies which have taken a truly innovative approach,” he said.
“You don’t have to play the big volume game. We are sending enough pallets or trays of bulk commodity type products to different parts of the world. I would like us to use our intellect more, as we have shown that we have been able to, and I think that would add a lot more value over the long term.”
De Cesare notes New Zealand has a counter hemisphere competitive advantage, as well as good quality seasons and advanced technology and systems.
“New Zealand is inherent with those competitive advantages as well as quite a compelling provenance story. Maybe it gets talked about too much, but the clean and green image still carries weight and has value.”
De Cesare says greater diversification of listed agricultural companies would enable him to invest more widely and better endure some of the volatility that comes from seasonal risks in the sector, for example if a hailstorm hurts the apple crop or wet, windy weather dents honey production.
He says the sharemarket offers companies access to capital to grow and fulfil their ambitions, and their success then flows down through KiwiSaver to smaller ‘mum and dad’ investors.
“These are the companies we should want to be supporting and encouraging them to be ambitious,” he says. “You want our best industries well represented because that’s where we have an edge.”
New Zealand has many emerging innovative agri companies including First Light, Spring Sheep Milk, Boring Oat Milk, Rockit apples, The New Zealand Merino Company, and Leaft Foods.
NZX has partnered with investment platform Syndex to support smaller companies such as these access capital to expand. A recent listing on the NZX via this platform was New Zealand Rural Land Co which joined the bourse in December 2020 after raising $75 million in an initial public offering. The company aims to become a large-scale owner of New Zealand rural land, with its initial investments in dairy land.
Other investment options outside the NZX include the Unlisted Securities Market USX or primary sector investor MyFarm.
NZX head of insight Julia Jones notes that unlike tech companies, it can take a long time for ag companies to grow.
“Many New Zealand investors would love to be able to tap into the ag and food space,” she says. “However it’s not always easy. Ag is a slow burner. We will continue chipping away at it.”