Jason Young says we should channel Chinese investment into areas that benefit local development

Jason Young says we should channel Chinese investment into areas that benefit local development
If Fonterra owns vertically integrated farms in China, why are we anxious when Chinese companies do the same here?

By Jason Young*

The debate in New Zealand on our agricultural investment relationship with China is understandably focused on Chinese investment in arable New Zealand land and food processing facilities.

Most recently, Federated Farmers raised concerns that Chinese interests may be seeking to build vertically integrated companies to service the Chinese market.

Shanghai Pengxin’s purchase of Crafar Farms and potential purchase of Lochinver Station has been the catalyst for two public debates on foreign ownership, both close to national elections.

Leading Chinese agricultural companies such as Bright Dairy, Yili and Mengniu have made large investments in dairy processing facilities here.

On the other side of the coin, the largest and most ambitious New Zealand investment in Chinese agriculture has been led by Fonterra, a top global producer of dairy product and New Zealand’s largest company.

Fonterra recently finished construction of their first hub of five farms in Hebei Province. They have secured the rights to build their second hub of farms in Shanxi Province with the goal of producing 1 billion litres of milk in China by 2018. This is an ambitious goal considering their current collection of 22 billion litres of milk annually.

Last month Fonterra also announced the signing of a deal with US-based Abbott to develop their third dairy hub in China. At that time Fonterra’s chief executive, Theo Spierings stated ‘Farming hubs are a key part of our strategy to be a more integrated dairy business in Greater China’.

Fonterra is obviously an important part of the New Zealand economy and the opportunity to expand in China is good news for the long-term development of the company.

Sustainable growth in the New Zealand dairy industry is limited due to environmental constraints and the need for economic diversity in the New Zealand economy.

Investing in production in the developing China market is one way, therefore, to build on New Zealand’s expertise in the dairy industry. This is the case even though this has required some changes in Fonterra’s operations, such as moving to feedlot farming due to cold winter conditions and managing farms, which are traditionally managed by shareholder farmers in New Zealand.

Just as investment in New Zealand’s agricultural sector is a privilege granted by the state on the basis of overall benefit to the New Zealand economy, investment in China’s dairy sector is guided by a desire to stimulate development in that sector, to improve food safety compliance and to develop a technologically advanced industry.

In China, hundreds of millions of rural people still rely on agriculture for at least part of their household income through crop sales or labouring and farming is predominantly still in small lots.

Fonterra are part of a larger move toward commercial, larger-scale and professionally managed farming systems in China.

As would be expected, there is no shortage of debate about foreign investment in China’s rural sector, about the bundling of household leases into long-term commercial subleases for investors, or about the role of foreign investors in local development.

However, the knee jerk reaction that has driven some of the public debate in New Zealand has not driven Chinese central or local government policy, nor has it created local opposition to Fonterra’s activities.

During my own time in Hebei last year I found a willingness on the part of locals to view Fonterra’s investment as an opportunity to develop the local economy and a desire for more economic cooperation with New Zealand agribusinesses.

People remained open to economic engagement with New Zealand with one important proviso, that investment was in their long-term development interests and that local farmers had a role in the broader economic activities.

The opening of China and other markets has created major export opportunities for our agricultural producers. Fonterra and other New Zealand agribusinesses have expanded their operations significantly by investing in Chinese farming.

Attempts to bar Chinese companies from investing strategically in New Zealand agriculture for their economic benefit and security of supply, do not sit comfortably on this other side of the coin.

Instead, like the Chinese approach to foreign investment, we should aim to channel investment into areas that benefit local development and to view investment as part of the broader agribusiness relationship.

As Mencius noted more than two millennia ago ‘one cannot take both the fish and the bear paw at the same time’ (鱼与熊掌不可兼得).

By attempting to take both, or to have it both ways, we run the risk of gaining neither.

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Jason Young is a Lecturer in Political Science and International Relations and a Research Fellow at the New Zealand Contemporary China Research Centre in Victoria University of Wellington.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Fonterra are part of a larger move toward commercial, larger-scale and professionally managed farming systems in China.
 
As would be expected, there is no shortage of debate about foreign investment in China’s rural sector, about the bundling of household leases into long-term commercial subleases for investors, or about the role of foreign investors in local development.
 
No outright sales?
 
Who benefits from Fonterra's efforts - the co-op based farmers or those registered as owners of this division of the company? Are they all NZer's or otherwise -surely not the same Chinese who own the leased land?

Perhaps this reaction is more than just kneejerk. When young nzers are priced out of farming our own lands the population knows it. We arent stupid.
The Chinese are learning from Fonterras farms, they will get access to top genetics, and systems. What do we get from Landcorp sharemilking for the Chinese? You cant teach a NZ dairy farmer much. They are pretty damn good at what they do.  

The mistake, surely, is to think of Fonterra as an 'NZ company' in any strategic sense.  It is a multinational, and thinks like one.  NZ is a paddock and a processor to it, and, as Belle mentions, a breeding and IP generator.  These are all simply resources to be applied where the returns stack up.  To change this, change the Board and the CEO.....and perhaps even the company culture.  A 5-10 year job....
 
Another point to consider, thinking through Belle's comment about " young nzers are priced out of farming our own lands" is the one I made a few days back:  
Dairy, considered in terms of :

  • P/E ratios,
  • carrying capacity of the land (absent the Euro barns/robots/feedlot configuration which is surely coming), and
  • systems needed to satisfice the competing needs of banks, producers, and RC's

is quite likely to be nearing (or even, at) the top of the S-curve which characterises any period of growth.
 
This alone explains the 'pricing-out' aspect:  ECON101 is telling anyone interested that dairy conversion is no longer a sure thing. 
So, perhaps, those eager youngsters should be looking for - er - Greener Pastures?

Yep agree - the Chinese can't have it both ways. NZers are keen for investment in NZ, just not selling land.

Amount of Chineese land owned by Fonterra 0ha.  Part of the deal with selling milk to china involves helping them develop their own dairy industry.  So they can shit on us when it suits them.  Just like the cherries, kiwifruit etc.  glhf

New Zealand was happier selling Crafar farms to the Chinese when our economy was a rising rockstar. Now it looks likely the bubble has burst, i think the benefits are much less obvious, and we should be changing our stance on it.