Opinion: Allan Barber surveys the starkly varying opinions about who should own our working dairy assets

Opinion: Allan Barber surveys the starkly varying opinions about who should own our working dairy assets

By Allan Barber

My piece last week supporting the OIO decision on the Crafar farms deal provoked a lot of comment, most of it negative (but also, interestingly, it sparked a sometimes acrimonious debate between several respondents about the Israeli – Palestinian situation. Now that was something I didn’t expect, not considering myself to be remotely competent to cover that sort of global issue).

Since my piece appeared there have been some really interesting columns by Fran O’Sullivan in the NZ Herald and Rod Oram in the Sunday Star Times which took diametrically opposing views on the same topic, O’Sullivan in support and Oram totally against. If two such respected commentators can take such different approaches, how can any single individual expect to please all the readers?

O’Sullivan believes Pengxin will add more to New Zealand than many other farm deals in recent years, while Oram is convinced foreign land acquisition’s negative effects far outweigh the positive.

They can’t both be right.

I heard Bill English saying last week that overseas investment was cyclical, meaning the proportion of land actually in foreign ownership at any one time had not changed much over the last thirty years, and corporate farm ownership didn’t perform financially long term because of the high price paid for land.

Therefore foreign corporate owners tended to sell, normally to New Zealanders, at a loss, when they realised they had overpaid.

Of course in the Pengxin case, assuming the purchase isn’t kyboshed by the judicial review currently before the court, the company intends to set up a 50% New Zealand owned processing unit to export high value products to China. This subsidiary will ensure at least half the profits earned offshore will revert to New Zealand, not be completely lost. Some will question why New Zealand shouldn’t continue to own the farms and set up a wholly owned business to export these selfsame products to China.

The reality is that Fonterra tried one way to do this in China through its investment in San Lu and got badly burnt by the melamine scandal, while the only other dairy company involved in the highly profitable Chinese market for infant milk formula is Synlait, 51% owned by Chinese company Bright Dairy because local investors weren’t prepared to take the punt of taking up the shareholding and providing funds for growth.

The only fully New Zealand owned company capable of investing in the value added end of such markets is Fonterra which spends more time doing a Telecom and moaning to the government about the impact of increasing the amount of commodity milk it must provide to new competitors than actually building its value added business. Fonterra appears to be so fixated on trying to introduce its Trading among Farmers (TAF) scheme as a means of removing the redemption risk from suppliers who leave the cooperative that it can’t focus on the really important goal – building a large and profitable trade in products which the Chinese perceive as guaranteed to be safe.

Fonterra is an enormously successful company, created little more than 10 years ago as a virtual monopoly by an exemption under the Commerce Act with specific provisions to encourage competition. In that time it has retained over 90% of milk supply and dairy production in what is New Zealand’s largest export industry.

But it has remained essentially a commodity supplier with only 10% of its trade in its added value business.

Obviously such a large industry controlled by a virtual monopoly was always going to be challenged by new start ups keen to have a share of the action. New Zealand is an open economy with a shortage of capital; therefore overseas companies would inevitably want to see if they could take a share of this country’s assets. It would be preferable not to sell our land, especially without any conditions requiring the overseas investor to invest further downstream in adding value. But a constructive way of ensuring that New Zealand keeps a share of the action is to impose the sort of condition included in the OIO decision on the Crafar farms.

That way we might see Fonterra encouraged to be a bit more adventurous in building its value added business, although this presupposes its farmer shareholders will accept the possibility of outside investment in that part of the business. This may not happen any time soon, unless the new CEO, Theo Spierings, can make it his number one priority. Dairy politics will probably make it an impossibility.

We must wait and see.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com

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5 Comments

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Stop - economic/ financial megalomania – the race to the bottom in small, beautiful New Zealand.
 
 
What annoys me most in worldwide extremely difficult times, is the megalomaniac attitude of the government/ banks to create massive economic/ financial bubbles in a small country of 4 millions people, which we don’t have control over it.
As one of a few examples: The government bailed out not only “The Crafar Farm”, but the banks as lenders, at the costs of taxpayer money also. The profiteers are then powerful foreign investors buying  massive property and farms, which can do harm to the NZfarming community and e.g. biosecurity – long term.

Walter the biggest biosecurity threat to NZ is MAFs border control incompetence!  Read Grumpy's comment on another thread re the totally inexcusable incompetentence of MAF border control of a dairy technician on re-entering NZ after being on a foot and mouth infected dairy farm in China.
 
How did the taxpayer financially bailout the Crafer Farms?  If you are referring to Landcorp taking 50/50 contracts on the farms - trust me 50/50 sharemilking can be very lucrative.

But Allan, Fonterra is not a one trick pony. "Fonterra has partnered with the five largest manufactuers of infant formula in the world providing them with semi- or fully-finished products, as well as well as including our specialist ingredients in their applications."
http://www.fonterra.com/wps/wcm/connect/24851d80487dbfbe841b8458a9b11389...
 
- But it has remained essentially a commodity supplier with only 10% of its trade in its added value business.  Allan where do you get your information?!
Facts
43% of Fonterra's share of earnings came from Standard and Premium ingredients
12% comes from Latin America
18% from Asia
25% Australia and New Zealand
2% Other
http://www.fonterra.com/wps/wcm/connect/24851d80487dbfbe841b8458a9b11389...
"Our consumer business represented 55% of normalised earnings"
..."Increasingly our focus for is on growth markets within Asia, Middle East and Latin America, while maintaining our strong market position in Australia and New Zealand."
 
Years ago Fonterra made the decision to become the supplier of choice to leading food ingredient companies, rather than take on the likes of Nestle and Kraft etc head on.
 
Allan you have said that Fonterra is 'an enormously successful company' . So why try to fix something that ain't broke?   In 2011 the German Farm Comparison Network ranked Fonterra as the world's larget milk processor.  Do not try to compare us with the likes of Synlait and other niche marketeers.
I have yet to see any robust evidence that shows outside investment will make Fonterra a better company.  A farmer at one of the farmer meetings held recently, got an ovation when they reminded the directors etc that Fonterra is owned by the farmers, not corporate head office.  If Theo Spierings makes outside investment his priority he will only be setting himself up for a turbulent time.
 

Hi Casual Observer
My figure of 10% is based on the proportion of turnover that is paid as a dividend on value added production compared with the (approximately) 90% which is covered by the payout to dairy farmer shareholders. I accept that Fonterra made a conscious decision to focus on being a supplier of ingredients to international food processors some years ago. However in my view there is still an opportunity to develop further value added business, but that will be a strategic decision for the company.
Cheers
Allan
 

Fonterra's constitution requires it to maximise it's milk price. :-)

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