Bill English says corporate farmers such as Shanghai Pengxin won't last in low returns farming business; Campaign gets ugly

Bill English says corporate farmers such as Shanghai Pengxin won't last in low returns farming business; Campaign gets ugly

By Bernard Hickey

With 39 days to go until the September 20 election, here's my daily round-up of political news on Tuesday August 11, including Bill English's comment that Shanghai Pengxin is unlikely to stick around in New Zealand because asset returns on farming here were too low in the long run for corporate owners. 

Bill English told a group of business people in Hamilton last week that his personal view was that corporate farmers such as Shanghai Pengxin would eventually leave the farming business because it was a "low return on assets" business better suited to family ownership.

"My own personal view is in the long run - this applies to Kiwi as well as offshore - corporate farming entities don't survive," he was quoted as saying by Stuff.

"And I know that sort of runs against the trend, but I've seen the cycle two or three times," he said

"We've seen Tasman come and go, New Zealand Dairy Farms come and go, the Hubbard empire come and go, Solid Energy's empire has just been sold off without anyone noticing but the locals in the last few months," he said.

"These guys [Pengxin], as much as they might not be saying it, they'll come and go. The owner-operator works. The Waikato's testament to it."

'Not a good excuse'

Labour Leader David Cunliffe was quoted as saying this was an insufficient excuse for approving land sales to overseas buyers.

"Second issue is it's not a very good way to treat international investors to say, ‘You're welcome here because we know you're going to go bust'," Cunliffe was quoted as saying.

He said there had been a shift to corporate farming and repeated the need for a Capital Gains Tax.

"An issue to be considered is whether the tax structure is currently a push factor there; the lack of a capital gains tax means in the dairy industry a lot of people have been buying up the farm down the road and offsetting the interest costs of that borrowing against the cash income that they would otherwise have to declare," he said.

New schools for Auckland

Auckland-based Associate Education Minister Nikki Kaye and Prime Minister John Key announced on a visit to Ponsonby Primary School the Government planned to spend at least NZ$350 million over the next four years building nine new schools and 130 new classrooms for existing schools in the Auckland region.

Kaye said as many as eight existing schools would require redevelopment. The funds would come from a mix of the Future Investment Fund (comprising asset sale proceeds), existing baseline funding and public/private partnerships.

"We will deal with major redevelopments at Western Springs College in Western Springs, Southern Cross Campus (second stage) in Māngere East, and Sherwood Primary in Browns Bay as first cabs off the rank if we are returned to Government at the election," Kaye said.

The Government planned to build  four schools in the North Auckland area, three schools in South Auckland, and two schools in West Auckland.

Green plan for Christchurch

Canterbury list MP Eugenie Sage announced the Green Party's Christchurch policy, including plans to spend NZ$462 million establishing a single transport authority called Canterbury Transport with better public transport and safe cycling, putting a new stadium on hold and reducing pressure to sell Council assets, holding elections for ECan in 2015, and removing CERA's emergency powers.

Elsewhere, Cunliffe visited Palmerston North with local list MP Iain Lees Galloway.

They said a Labour Government would consider a local proposal to build an inland port in Palmerston North, which could be funded from Labour's NZ$200 million regional development fund.

Showdown in Kumeu

The campaign action overnight was at the Kumeu Baptist Church where John Key faced off against Laila Harre, Hone Harawira and a bunch of other local candidates in a locally organised 'debate' for the Helensville electorate.

It was clearly the biggest show in town with 50 people being locked out of the church hall packed with 300 others. But the reports and twitter streams from the meeting suggested it was something of a fizzer with the 'debating' rules forbidding candidates from mentioning each other or other parties.

John Key was reportedly the closest to being thrown out for referring to other party candidates, but the fireworks predicted by some failed to eventuate in an otherwise orderly meeting.

However, the campaign trail was anything but orderly yesterday.

Shylock comment deleted

Labour's Rangitata Candidate Steven Gibson called John Key "Shonky Johnkey Shylock" in a facebook post, but then deleted the post, apologised and said he was not aware of the comment's anti-semitic connotations. David Cunliffe said the comments showed "extremely poor judgement" and Gibson was on his "last chance."

Key dismissed the comment in his post-cabinet news conference.

"It's hardly 'Vote Positive', but again, we'll be letting that go through the keeper as well," he said.

Money cards for young

Elsewhere, Social Development Minister Paula Bennett and Key announced National would extend payment cards, money management, and intensive guidance to all teen parents and many 18 and 19 year old beneficiaries.

The cards cannot be used to buy alcohol or cigarettes and the teens can have NZ$50 a week "pocket money", after rent and utility bills are paid directly to suppliers.

National introduced its Youth Service approach in 2012 for 16 and 17 year olds and teen parents up to 18. The Q&A issued with the announcement said the measure would see between 2,000 and 3,000 of the currently 5,700 18 and 19 year old beneficiaries put into the scheme, with a further 1,200 19 year old sole parents moved onto the scheme.

It would cost NZ$10 million to NZ$15 million per year, based on an average cost of NZ$2,500 for each young person referred to the Youth Service, and including extra weekly bonus payments for completing budgeting and parenting courses.

Bennett pointed to the Government's measure of the long term liability of people on benefits being NZ$76 billion, with 70% of that coming from those who went onto a benefit as a teenager.

"So us investing more in them earlier and putting that sort of wrap-around support around them will undoubtedly mean they can live the sort of fulfilled and aspirational life that this government stands for," Bennett told Key's weekly post-cabinet news conference.

Sue Moroney said the "keep 'em poor" cards were no substitute for apprenticeships, which Labour would provide under its KickStart policy.

'Shameful and disappointing'

In another sign of an ugly campaign, Human Rights Commissioner Susan Devoy criticised Winston Peters' 'two wongs don't make a right' comment as "disappointing and shameful."

"Winston Peters needs to know he’s not funny. His outdated rhetoric belongs in New Zealand’s past: it has no place in New Zealand’s future," Devoy said.

Meanwhile, Laila Harre threatened legal action for defamation against John Key for his comments on TVNZ's Breakfast on Monday that a video of a burning effigy of Key was put online by Internet-Mana.

Key laughed off the threat in his post-cabinet news conference.

The campaign has gotten surprisingly ugly, surprisingly quickly. The defacement of billboards seems more widespread than previous elections this early in the campaign.

(Updated with Government announcement of more schools for Auckland, Labour's consideration of an inland port in Palmerston North and a Green plan for Christchurch)

I'll keep updating this diary throughout the day.

See all my previous election diaries here.

See the index for Interest.co.nz's special election policy comparison pages here.

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52 Comments

"We've seen Tasman come and go, New Zealand Dairy Farms come and go, the Hubbard empire come and go, Solid Energy's empire has just been sold off without anyone noticing but the locals in the last few months," he said.
 
In respect of the demise of SCF and Solid Energy certain Treasury overlords should have been publicly hung drawn and quartered for the taxpayers delectation.
 
It behoves the finance minister to be less than casual about  matters of dereliction of duty.
 

Agree - where is the Royal Commission on the loss of several $B by poor management?? Just reinforces the perception that it is not the amount of money that is lost, it is whether you are white collar and do the requisite brown nosing or not.

If you read the published reports of the SCF trial in Timaru in the last couple of weeks you will find that Treasury were alert to all the issues, but, in spite of them knowing, they decided SCF was too-big-to-fail and continued on with the bail-out arrangements

I have a short memory , did SCF not have a curator running it prior to its collapse ?
I cannot imagine Treasury would do nothing

The Auditor General had some interesting things to say about Treasury & South Canterbury Finance, which I covered here - http://www.interest.co.nz/opinion/56012/opinion-treasurys-ambulance-bott... and here - http://www.interest.co.nz/news/68934/auditor-general-says-treasury-hasnt...

I can.....political dogma on their part,
"the free market is right, it will be OK".....
"the free market is right, it will be OK".....
"the free market is right, it will be OK".....
regards

Absolutely on the button Stephen. Those comments from Bill English are somewhat odious. Yes 'dereliction of duty' at best, I would think. He should be embarrassed to even mention these failures.
I do agree long term the chinese will find it difficult to make any sort of loot from these farms. Probably why Stephensens are bailing. Lochinver is in an asshole of a place, excuse the language but it really is. I have lived there. I would have to say on the whole Shanghai Pengxin have bought a bunch of really awful farms. It will be exceptionally difficult to staff a lot of them because of their locations. Most of them suffer with high altitude, light soils, and questionable rainfall. They do have scale though. However it is widely acknowledged now that that creates management problems, which hits the bottom line.
As for the 'all will be well as they will soon be outa here' remark, well in the meantime Bill there are huge numbers of New Zealand farm workers who will remain workers not owners, which makes all of us somewhat poorer, as you have acknowledged the best way to get production is for family ownership.

I think the chinese will make loot due to a) the vertical integration, ie NZ sourced and produced baby formulae attracts a significant premium in china I believe. b) capital gains but taht's just icing I suspect.
Its things like b) that make me think oh boy do we need a CGT.
"exceptionally difficult to staff a lot of them" interesting, in that case it maybe on purpose ie a way to import cheap chinese labour and pay minimum wages.  I have a friend from Indonesia who currently manages such a in the middle of nowhere farm.    I suspect we'll se a few hundred chinese over here with work permits in the not too distant future.
"remain workers not owners" agree.
but then I dont for a moment consider that National cares about (rural) labour except to keep it cheap.
regards
 
 
 

True. By controlling a vertical pasture-to-plate structure, via a British Virgin Islands registered parent-domiciled tax-haven, Pengxin will be able to implement aggressive transfer pricing, and enjoy full claw-back of any GST paid at the production level, and pay minimal taxes. Just guessing, but they will be most comfortable with minimal nz sourced engineered profits. And they wont have to publish their financial results so we wont be able to gnash our teeth

The Chinese Government is hell for leather trying to reduce the cost of infant formula, so I do wonder how long the premium will last.
You can blow off my comment on how difficult it is to farm these farms at a profit. But this is the basic problem. Feeding dairy cows is an expensive excercise. These farms until not so long ago were sheep and beef farms. There was a good reason for that. 
I am not sure what capital gains you are expecting to see. Are we not at peak debt yet? The properties they bought off Crafar Recievership would hardly be worth a cent more and would have sucked up millions in the last few years.
But at least the chinese money is invested in a real asset, and probably that is all they care about at present. 

Im not blowing your comment off on how difficult they are to farm, I can quite believe you. The Q is are the chinese blind to this? or do they expect to bring in substantial cheap chinese labour to mitigate the problem and achieve what they want?
"peak debt yet" for me yes, context however, what do the buyers see? BAU? never ending growth?
"invested in a real asset" indeed...and outside of china.
regards
 
 

According to my FX fundamentals course, China is about high tech information and machinery manufacture.
 The Chinese opinion of land has always been buy and hold forever, same as much of the forestry land they own.  Because of their finance structure there's not a huge cost in non-productive holdings.   They still have research stations and factories operating that have been redundant (ie the research reports finished decades ago) but becuase it keeps people busy they're just left to tick along.  As long as each person is mindfully doing their job properly that's what matters to them, they don't have the debt slavery issue that we have.

I thought the big selling point to staff working there was some decent hunting and big fat trout on hand.

Thats if you are allowed to hunt and fish out there these days. Dont the American Westervelds have it all stitched up....no access

I didn't know that. I have to admit, it would be close to 20 years since I was any where near there. Stick some deer behind a tall fence, on your land, I have no problem with exclusivity to who gets to hunt them. Deer that come off public estate land and especially trout which were bought here by the acclimatisation societies and managed by fish&game funded by license fees, and I find it a bit harder to stomach the 2 tier access to these resources.

Well thats what we have now in NZ. On radio live a week ago, some hunter was telling the story how James Cameron and some other overseas owner had that Martinborough coastal area sewn up. Traditional access points were now locked up.
Good on yer Bill and John! Cant see them ever donning a knife and rifle and heading out into the wilds. So they just dont give a damn.

Every year, on ANZAC day, I really do wonder if the dwindling numbers of returned servicemen and women become more and more bewildered with what they see happening in this country they were prepared to die for. I know I continue to become more bewildered myself (not surprised mind) and I was never asked, nor have I offered to make that sacrifice.

I can feel the ground shake as they roll in their graves. How dumb have we become!

Labour's CGT is a cautionary tale.
 
I have long held the view that, Gubmint's being the perpetually simultaneously extravagant, grasping, and impoverished beasts that they are, need mucho new Revenue....NOW.  Not when the farmer gets planted, or when the trust is finally busted.  Remember, there's all them Electiral Inducements ter pay for.
 
That leaves CGT in a pickle:  faced with the choice of a lotta revenue at a very uncertain future date, and a constant trickle starting tomorrow, which d'ya reckon a Gubmint (particularly of the spendthrift Left/Green mold (or should that be Mould?) will plump for?
 
I'd suggest CGT on unrealised gains/revaluation reserves is the go for this sorry crew....read yer balance sheet and weep.

Actually a CGT or not having one gives the business the opportunity to minimalise tax today by taking on huge debt which means tax gets offset?
Put in a CGT and hey presto no reason to load up debt with the hopes of a future capital gain tax free.
regards
 

You need to check on the  Tax Administration Act and get your facts straight
If you claim interest losses as an offset on an income- generating asset you have bought , and you sell for  more than the purchase price,  the IRD claws back the amount offset .
Its a zero sum game.

Does that apply to negative-gearing on investment properties?

If you sell for more than the depreciated book value on an asset, won't IRD also come looking to recover tax on that difference?

Yes , correct they do , but I did not want to complicate my response to the chattering classes by outlining it

Yez'all a'talkin' about Sales.
Realised Gains.
Taxed, sure.
When Sale happens.
 
I is talking about tax on Unrealised gains.
 
Just like fer foreign shares.
 
Big difference, especially as Unrealised does not depend on a Sale......

It's not actually mucho new revenue they need - rather it's just reinstating past tax settings in recognition of the fact that trickle-down theory was a crock.  

Its time for some introspection over this issue of foreign investment , because its lost its balance and has become emotionally charged .
We cant tell everyone to Pi$$ Off from NZ  , and we need to consider some facts about foreign investment  :-
1) We need the money , and because we have little or no savings , we have shockingly weak Capital Markets  ( You can blame this on decades of leftwing Labour Governments who taxed us all into near  poverty on an ill-convecived socialist re-dsitribution to the unproductive "poor " policy)
2) Foreign Investment is like migration , we have an open door policy ( with some rules) and you cannot change the rules on a whim , markets get grumpy when you do things they dont excpect
3) Our banks have thrived under foreign ownership , and were dead and bust under Kiwi ownership
4) The rules for overseas investors were not written by the National Party or the National Government , they have been in place for ages .
5) This is not a done deal , and anyone can apply to the OIO to buy Kiwi land under the Rules
6) Why would Aussies be exempt , do we have a 'whites only "  foreign investment policy ?
7) We have major multinational Companies here employing thousands of Kiwis such as  COSCO , Microsoft ,Woolworths (Countdown)  BP , Mobil , Caltex,  Ogilvy, Mc Donalds , Burger King, Bayer , Pfizer, Seek  Coca Cola , Bunnings , Masterfoods , Unilelver , Nestle, Cadbury , Smith and Nephew , 3M , GE , Ford , BMW , Toyota , GM/Holden, and hundreds of Asian businesses to name just  a few .
If we had a closed door policy we might as well be North Korea
 

Just close the door on our farmland. It is our wealth. The playing field is not even. They print money at their whim. And we accept that 'money'. Fools

I agree ,NZ land should be owned by citizens , or residents , or locally domiciled Companies .
 I dont think this nonsense should go on , but we cannot knee jerk the issue , and close the door tommorow morning

Boatman - the best most balanced and sensible posting I've seen on this site regarding the subject.  Well done

Unfortunately, not much has changed in NZ over the years.This letter to the editor was retrieved from a Wellington, New Zealand paper by my father back in the 60's to the best of his knowledge.

nice one ... wrinkly £10 poms ... elderly wrinklies

Sell all our land to overseas investors then bring in a land tax. So we can get all our taxes cut to zero

Winstone make a joke about a Chinese name "Wong"
What if he had made a joke about an English name "Dick" or "Fanny"
 

i think this misses the point. Strategically the Chinese are playing a different game, its called securing food supply...

The Crafar farms controversially sold to Chinese investors have lost more than $1 million during the first year under new ownership.
 
http://www.stuff.co.nz/business/farming/dairy/9464748/Pengxins-Crafar-fa...

The chinese built a couple of homes on one of the ex crafar properties. Ticky tacky. Shocking
The local maori corporation has built about a dozen homes in the last 10 years. Beautiful homes.
The other local maori entity, tried to buy their lands back from the Crafar recievership and then the Chinese. To  be turned down again. I wonder what sort of homes they would have built.

That's because landcorp is running it. Wait till they get more land and bring in the cheap labour. See if they'll sell it back to us then Bill.

Perhaps Bill could explain his position to this guy.
This guy was in the papers a couple of months ago as a successful young dairy farmer, buying his first farm. He had saved his dough from his first days farming at around 17, he was now in his late 20s? and completed the purchase on a 400 (thereabouts) cow farm down the south island. When he first started looking last year they were reasonbly priced, however things went exponential last season and he couldnt compete and kept missing out on farms. At last he scored a farm by paying over the odds. I believe he paid 6 million. He was comfortable with that though, and he was budgeting on a payout of $7.00. He was also quite comfortable with that. Ahem.
These are the people of our future, their work will pay our hospital bills, and pension. Who is looking out for them and making sure they can be owners of their own businesses? Without a debt that is crippling? Bill English seems to think it is a joke. Ah she'll be right. 

In some respects you have to have some sympathy for him
But and this is a big BUT, why were the banks prepared to lend out against a milk price of $7.00 or more? They should consider the risk of much lower levels and either lend accordingly or be forced to take it on the chin if the borrowing is proven excessive. Why not force them to include a risk insurance in any borrowing above an accepted maximumat say $5.50?

Basel - you need to be careful in assuming what the banks use as their budgeting rate for dairy farmers. I'm aware of a couple who's status quo rate is closer to $6 than $7.  Admittedly, even $6 does seem high at current auction prices but the banks have to use some number and the extent of the current fall is far greater than most forecast but its still yet to be proven where it will average over the dairy year. There is a balance between making things too tough so that your young dairy farmer will never be able to buy his own farm, and too loose than puts both him and the banks at excessive risk in a bad period.
 
And if you want banks to take it on the chin if they lend to you inappropriately, expect a credit cruch and certainly no lending to such farmers. Frankly the borrower who should, and does, make the bulk of the profit from a lending transaction has the greatest responsibility, and rightfully should shoulder the bulk of the risk. But its very tough out there, as it is for youngesters looking to buy their first houses

BBII - no apologies - no sympathy for anyone buying a farm budgeting on $7. Last year or any other.

Oh dear.  Let's get out the ciggy packet and start scribbling.
400 coos = say 160K KgMS
At say $6.50 total payout, there's $1.04M revenue, plus some slinks, bobbies, gate sales and odds and sods assuming a bit of natural increase, say $1.05M
FWE assuming a bit of supplement at say $4.75 = $760K
Interest at 6% on $6m = $360K
Hmmmm.  $1050K - $760K - $360K = $70K coloured red.
Before drawings.  No principal repaid.
Let's hope the off-farm job holds up....but, glass half full, ya can always Eat the culls...
But speaking as a soon-to-be Tax Consumer, this farm ain't gonna pay any Tax for the foreseeable future, eh?

Ahem waymad.....Unless you had other assets you were leveraging, you wouldn't get a $6m loan on a 400cow farm - that's at or close to 100% financing - depending on where you are buying. A farm sold near us for $6.1m - top end of scale for our area - approx 420cows.
 
Banks will usually only lend up to 50% of l&b value for dairy farms - there is flexibility for things like  other property owned (leveraging) and track record of farming an finances. 

the $6m is the capital.  you should be getting earnings based on that asset.

Sorry, CO, ciggy packet was too small.
 
But the notion of opportunity cost is in there regardless.

  • the owner equity part should expect a pre-tax return at least equivalent to that from a bank (because, else, keeping it in the bank would be more rational)
  • the financed part will require direct interest payment

 
so the entire $6m has an implied (opportunity) and a direct interest cost, and I conflated those to make a point.

keeping it in the bank would be more rational Yes it may be. MOTH and I have often discussed this in our own situation.  More rational maybe, but no where near as much fun. ;-)  It's not always just about the dollar returns. :-)
 
 

FYI Updated with Government announcement of more schools for Auckland, Labour's consideration of an inland port in Palmerston North and a Green plan for Christchurch
cheers
Bernard

Sooo, let me see if I've got this right, then. We sell off our assets to foreigners so we can build new schools for all the immigrants. Makes perfect sense to me (snigger)

English is wrong.  Vertical intergration *targets* low cost supply chain.    The biggest bang for the cheapest buck, make the profit upchain, control the quality and price of supply.
basic business.

Yes Raegun - I get the impression the only new activity we get from immigration is new schools, more roads and more or expanded hospitals. Is that how an economy is supposed to work? If so then if we could set off a seismic event every now and then we would be quids in.

Do we need to start fracking Rangitoto Island or something then?