This autumn, New Zealand has been affected by two ex-tropical cyclones – Cyclone Debbie and Cyclone Cook.
According to New Zealand’s National Institute of Water and Atmospheric Research (NIWA), northern New Zealand is hit by an average of just over one of these storms each year.
The personal and economic impacts of these extreme weather events are wide reaching. Those who remember ex-tropical cyclone Bola in March 1988 will not need reminding of this.
Economically, the agricultural sector is particularly impacted by extreme weather events. Loss of crops, disruption of harvests and the impact of flooding on grass and land can hit the sector hard.
Agriculture is a sector of great importance to the economy and personal investors in New Zealand. Agriculture, forestry and fishing activities contributed 5.9 per cent of New Zealand’s GDP in 2016. This proportion is relatively high compared to other G20 developed countries, according to data compiled by the World Bank.
Source: World Bank, 2015 data
The NZX features a number of listed agricultural companies. These include Fonterra and Synlait (dairy producers), Scales (an apple grower), Comvita (a honey producer), New Zealand King Salmon and Sanford (seafood producers) and Delegat (a wine producer).
There has been much conjecture in recent years regarding the impact of global warming on the frequency of extreme weather events. While that debate is beyond the remit of this article, two ex-tropical cyclones hitting New Zealand so far this year is above NIWA’s calculated average. This has lead us to wonder – are New Zealand’s listed agriculture companies able to cope with relatively frequent extreme weather events?
In short, yes. The use of technology, sophisticated harvesting and management techniques, as well as geographic diversification, have helped protect earnings from the impact of extreme weather in several cases.
For example, the directors of Scales were quick to confirm that ex-tropical Cyclone Cook had a minimal impact on the Horticulture Division subsidiary’s 2017 apple harvest. This is despite the high winds and heavy rain experienced in the Hawkes Bay. The geographic spread of orchards, as well as technological improvements in the pack house that enable a better assessment of the damage (or lack thereof) to each apple, mean less stock is lost in the event of extreme rainfall or frost.
Delegat has also geographically diversified, and it now has grapes in Hawkes Bay and Australia. Different climatic conditions meant Delegat’s Hawkes Bay grapes were harvested before those in Marlborough this season, and prior to the recent ex-cyclones. In addition, Delegat has installed weather monitoring units that protect the grapes from frost via wind machines that are activated by temperature changes. The use of sophisticated canopy management techniques improves light and air flow to the fruit, reducing susceptibility to rot and fungus. Technology in the winery also optimises quality and maximises volume.
Of course, these strategies are not impenetrable. The more severe or prolonged the weather event, the more difficult it is for the agricultural company to protect its assets and earnings. An event occurring two years consecutively can be devastating, as the company may have depleted its inventory and have little left to call upon. This risk is reflected in the price-to-earnings multiple at which shares in these companies trade.
Having said this, New Zealand is at the forefront of innovation in agricultural technology and techniques. Continued innovation is vital in any industry; it can reduce risk, drive investment growth and improve efficiency to the benefit of volatility and returns. While no one can control the weather, the agricultural sector is well positioned to benefit.
Disclosure of interest: Milford Funds Ltd. holds shares in Scales, Sanford and Delegat on behalf of clients.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.