Weak dairy prices in New Zealand have piqued the interest of the NZ$28 billion ($20 billion; €17 billion) NZ Super Fund, while its timberland exposure has also increased over the past year. Increasing the fund’s stake in Kaingaroa Timberlands to 42 percent made the NZ$1.4 billion property the super’s largest single asset. However, the fund is reluctant to take any chances as it mulls further exposure in both asset classes, head of international direct investment Nigel Gormly tells Agri Investor.
Why did you make such a significant investment in Kaingaroa?
One of the key attractive elements of our timber investments is the diversification that it provides. There is a natural limit to how much timber exposure that you want, partly because the diversification benefits start to decrease as you get more of it.
We have a small overseas investment in Australia, but Kaingaroa Timberlands is significantly larger and our main investment. Finding another opportunity like that would be difficult. It’s very efficient in terms of growing trees due to favourable climatic conditions, flat terrain and pumice soils that allow year-round harvesting. It also has the infrastructure for road and rail transport with a deep water export port nearby and is supported by a well-developed processing industry with sawmills and pulp mills in close proximity, so from that point of view, it’s a great investment.
How much more exposure to timber can you tolerate and are there strict limits on how much you’re prepared to invest?
There isn’t a fixed target for how much exposure we want in these agricultural investments. If returns were to increase dramatically on timber, then obviously we would look to get more, even though the diversification benefits start to decrease over time. The hurdle to further exposure always gets higher as you get more of any particular type of asset. That’s the key for any of our investments: the more you get of something the more confident you need to be in it and the more attractive the returns need to be.
With the NZ dairy sector struggling, will NZ Super be looking to acquire more farmland assets?
We’re certainly interested in acquiring more farms. It’s just a question of seeing how the current situation plays out. Rural land has a range of investment drivers such as long-term commodity price trends, macro themes such as emerging Asia and clean green food, scope for adding value through active management, and as a long-term hedge against inflation. Food prices have trended down in real terms historically due to strong productivity growth in the agriculture sector, however, returns to farming or farmland have not trended down. We can all see what has happened to dairy prices but we are only going to step in where we see the returns as being attractive. We’ve made a recent investment but there hasn’t been a flood of opportunities to date.
We’re generally interested in buying assets when they become cheaper and selling them when they’re more expensive. So, our interest would obviously increase if the value of farms were to decrease, but dairy farm values have held up remarkably well. At a global level, gains in productivity have offset declines in prices, generating a positive real return from owning farmland. Commodity futures do not give us access to these trends because their duration is too short and there is no futures market in many of the soft food commodities. Obviously, there’s a diversification aspect to it as well for us. We have the capability to invest more in the sector if the right opportunity becomes available, which we would do working with our partner, dairy farm manager and consultancy, FarmRight.
Many international pension funds look at agriculture as a diversifier. What is your motivation for exposure in this asset class?
A lot of our agriculture exposure is driven by commodity prices and that flows through to agricultural land values. So, that is a function of return that you don’t really see in, say, the commercial real estate sector. Obviously, there’s a diversification aspect to it as well for us.
– Information was added about the Kaingaroa Timberlands property and NZ Super Fund’s farmland investment strategy.