Rural governance essentials

Ahead of our new Rural Governance Essentials course we talked about governance challenges and opportunities for the sector with ASB General Manager for Rural Ben Speedy and Rural Corporate Relationship Manager Ainslie Templeton. Ainslie will be joining the upcoming course for a fireside chat. 

Why is good governance critical to the rural sector?

Ainslie: Good governance is critical in the rural sector, especially here in Aotearoa New Zealand. What we find among our customers is the majority of farm owners wear multiple hats within governance. They can be directors, shareholders, management, employees – or all of the above. Often the vast majority of a family’s assets - whether that be land, machinery or stock - are tied up in the farm, which has been passed through generations. Like any business, good governance and sound guidance can be the difference between a farming business thriving or not.

Ben: Businesses need to put effort into finding the right mix of expertise when establishing a governance structure or choosing new external directors. As we think about how we navigate the future, it is important that farmers seek expertise to help guide the business in the desired direction, for example seeking out people with knowledge of sustainable practices or people and culture expertise to help navigate labour challenges. In the primary sector we are seeing change coming at us fast – particularly environmental change and it can be difficult to take a high level, long term view while also navigating the day to day of running a farm. By incorporating independent and diverse thinking, farmers can better identify and manage future risks and opportunities.

What challenges are you seeing in the sector?

Ben: We can't deny climate change is one of the most critical issues facing our economy and communities. When speaking to customers it’s clear that the appetite is there; the drive to be on the right side of history is in Kiwis' DNA. We've seen it through demand for our environmental loans (low interest loans targeted specifically to help fund on-farm environmental improvements).

Besides legislative changes affecting the rural sector, there's also a changing tide of consumer expectations when it comes to both environmental and financial sustainability. This means there’s opportunity to look for innovative solutions perhaps not yet discovered.

It was really encouraging speaking with customers at Fieldays earlier this year and hearing about the range of on-farm environmental projects underway. Customers in Waikato for example are looking at investing in fencing off deteriorating native bush patches and replanting with native trees.

Some further challenges we’re seeing in the industry include labour, mental health and wellbeing, succession and rising costs.  A governance mindset ensures these types of issues are key considerations in every business decision, and brings curiosity and outside thinking to solving problems and identifying opportunities.

Where are the opportunities in the sector for the future?

Ben: The primary sector has always been vital to New Zealand’s prosperity – and it always will be. In recent years, strengthened balance sheets have given the industry confidence which has created even more activity. The ongoing resilience of the primary sector has helped support the broader New Zealand economy through the COVID-19 pandemic, too. In fact, the ASB Commodities Index (a weighted index of New Zealand's major commodity exports) hit its highest monthly averages ever in March, April and May this year, and the ASB Economics team is forecasting a solid $7.90kgms milk price for the 2021/2022 season.

Our team recently conducted research with farmers from all over New Zealand and across industries to understand what's on the horizon for them. We spoke to more than 400 farmers and found:

• One in four farmers is very confident about the future of farming
• 60% have succession planning on their minds
• 60% were considering adjusting their farming practises to further cater to changing customer demands or supply premiums.

So while environmental practises might require on farm uplift, there are opportunities available to farmers and growers who lean into those changes.

Ainslie: Another area we’re seeing change and opportunity is through diversification – both on and off the farm. Much like property investors diversify their portfolio to help hedge their finances and income streams, farmers can too - both for the now and into retirement. We’re working with customers as they look for additional revenue streams through things like mixed land use and emerging technologies.

Diversifying is not without risk, but we’ve seen how it can really pay off for farmers too.

What importance does the bank place on ESG factors when making lending decisions?

Ben: When we’re working with clients on lending and future on-farm projects, there are a range of areas we focus on. In addition to the numbers stacking up, for example, we will look at the business strategy and the customer’s personal goals. Working through these areas with our customers gives us confidence, clarity and understanding of why they are doing what they’re doing and how they’re going to go about it. Sound environmental understanding and initiatives are increasingly important too. While many local farmers and growers are already good custodians of the land, there's still work to do and it's critically important we are not complacent about ensuring Kiwi farmers and growers are prepared for the level of investment needed to maintain – and exceed - appropriate environmental standards. Caring for the land and the impact to future generations will give us the license to remain relevant in global markets. 

Ainslie: It’s also important for customers to have sound health, safety and wellbeing policies, processes and reporting. It is important legislation is adhered to and care for people and animals is a priority. We do our best in ensuring customers meet legislation and do what we can to help. These processes show us the foundation of a business is focused on doing the right thing as well as achieving financial outcomes.