Allan Barber discovers the Crown divesting Pamu would be far from straightforward

My musings a few weeks ago about the justification for selling Pamu to raise $2 billion attracted interest from the SOE in question and resulted in a detailed interview with CEO Mark Leslie. Unsurprisingly he is in favour of the government retaining ownership of the crown-owned farming organisation, and he provided some compelling reasons to support the status quo.

First a bit of history. By 1886 the government of the day recognised the central importance of agriculture to the development of the country’s economy, as settlers sought land to build farms. It asked the Department of Lands and Survey to lease or sell land to enable farming and over the next 100 years more than 20,000 farms were established.

Schemes supported pioneers, returned soldiers and young farmers, later through a ballot system. By the mid-1970s the Crown’s focus was changing to the recognition of historic land loss and it began the process of returning land to iwi and hapu to meet Treaty of Waitangi claims. Former Lands and Survey farms became part of this transition involving carefully managing land subject to Treaty settlement negotiations.

In 1987 Landcorp Farming was established as an SOE with the mandate to transform land, enhance natural capital and earn a financial return for New Zealand, while supporting the Crown’s treaty obligations.

Landcorp now trading as Pamu currently has, either under Crown ownership, lease or management arrangements, 112 properties covering some 360,000 hectares having sold or transferred ownership of over 20,000 farms during its 140 years as steward of half the country’s farmland.

Leslie makes the point the present farm portfolio is not necessarily what a buyer would necessarily choose to spend $2 billion to acquire. More than half the land is class 6 and 7 land, while leased land by the Taupo-Rotorua highway which used to be in forestry is at the most 15 years into dairy conversion. Soil condition has not yet recovered to allow optimum productivity.

An important factor is Pamu’s capacity to take a whole of portfolio perspective rather than treating each farm separately. In this way one farm can specialise in breeding with lambs being transferred to another farm for finishing. This capacity provides the opportunity to improve the organisation’s overall performance.

In response to my question about how well Pamu’s performance compares to a set of industry benchmarks, Leslie says he is confident the livestock farms compare well, based on comparisons between its own farms as well as data Pamu sources from Beef + Lamb and agricultural consultants.

The Canterbury dairy farms and the organic dairy Moutoa complex outside Palmerston North perform very well, but there are significant opportunities for improvement on the West Coast and particularly the Taupo dairy farms where the grass growth is still poor.

Given the scale, size and profile of the land under Pamu’s control, Leslie envisages about 15% of the pastoral land being in forestry. The objective is to make logical decisions about what land should be devoted to livestock and commercial forestry and what should be retired to protect the broader ecosystems.  A percentage of the farmland is already protected by QE2 covenant.

The question whether Pamu should be retained or sold obviously depends on the perspective of the government of the day, but Leslie agrees the financial performance is a non-negotiable, requiring a dividend to the Crown and growing the business.

But a sale of the business would not be entirely straightforward because many of the South Island properties would be subject to a first right of refusal under a Treaty settlement, while others are already potentially part of a settlement negotiation.

Rangitaiki Station, east of Taupo, is Pamu’s largest property at 9,500 hectares with 85,000 sheep, cattle and deer and is valued at about $100 million. As a result it would not be an easy sale process. Its size ideally demands it be sold as a single unit which may cause problems, especially if an overseas buyer were to be the highest bidder. National interest may dictate that it should remain in New Zealand ownership. Conversely breaking the property up into smaller units would be uneconomic.

Other factors to be considered in an evaluation of Pamu’s sale or retention include the effect on partnerships with science providers and iwi, the role of New Zealand Inc in maintaining food security, apprenticeships and share farming opportunities to encourage the next generation of farmers.

Linked to the last point is a recent Rabobank report which pointed to the large number of farms expected to come up for sale in New Zealand in the near future because of the average farmer age.  Trying to sell another 100 or so farms would not be easy in that market.

Leslie convinced me Pamu is carrying out its mandate to be a responsible steward of the Crown’s farms, delivering dividends while gradually improving the condition of the land and meeting the Crown’s Treaty obligations. It is hard to see how disposal of these assets would achieve the same outcomes.