Financial markets and an array of other economic variables have been whipsawed around lately. The main reason has been geopolitics across a number of key regions. For New Zealand all eyes are on the battle royale between global trade heavy weights, China and the United States. The back and forth of whether a trade deal is to be negotiated or not, followed by tit-for-tat trade barriers to try to soften each other up has seen whippy price action in financial markets.
More recently this political uncertainty and repeated blows to confidence has started to weigh on global business activity/investment and economic momentum. Central bankers are responding, but their punch is somewhat limited with interest rates zero bound, in turn leading to more talk of unconventional monetary policy.
While that is the gloomy side of the story, many in the New Zealand primary sector have benefited significantly from the stimulatory financial conditions (lower borrowing rates and NZD), restricted market access for US agricultural products into China and Asia's continued insatiable demand for high value food & beverage products.
Virtually all of New Zealand's major primary sectors have seen a marked lift in exports to China since Donald Trump was elected US president in November 2016. While the level of market concentration raises strategic concerns (i.e. what happens if China stops buying?) it has to be remembered China has paid the bills for dairy farmers in recent years and provided many horticultural enterprises with record returns.
Share of New Zealand primary export earnings from China
Source: MyFarm, ANZ, Statistics NZ.
In terms of concentration of exports destined for the Chinese export market, in fact NZ horticulture has the lowest overall exposure at 17.5%. But dig a little deeper and there is variation. China is a very important market for cherries, SunGoldTM kiwifruit, RockitTM apples, some higher value conventional apples and manuka honey. But it is currently less important for avocados, wine and hops.
As long as China continues buying, the earnings backdrop looks positive for most primary sectors. So far the geopolitical breeze has been mild – not so cold that it has materially impacted on consumer spending in China, or so warm that China has committed to buying more US agricultural products. But the current cooler breeze certainty looks to be having more of an impact, and could derail things. The historical experiences of the wool, dairy and forestry sectors all attest to the ups and downs of whether China is in or out of the market.
The market position of many horticultural crops is somewhat different to the likes of the wool, dairy and forestry sectors. Most propositions are based around product uniqueness with trademarked intellectual property; strong brands, quality, food safety, first class service and the New Zealand story coupled with strong business relationships, world class production systems and supply chain capabilities. It is these competitive advantages that will help buffer the impacts of the political breeze either turning too cold or hot.
This article was written by Con Williams, Head of Investment Research, MyFarm Investments. (Email Con@myfarm.co.nz)