State-owned farmer to sharply reduce scale of forestry-to-dairy conversions at Wairakei Estates; cites financial and environmental reasons

State-owned farmer to sharply reduce scale of forestry-to-dairy conversions at Wairakei Estates; cites financial and environmental reasons

By Bernard Hickey

New Zealand's largest corporate farmer has announced it will sharply scale back its plans to convert thousands of hectares of forest near Taupo into dairy farms because of financial and environmental concerns.

State-owned Landcorp formally launched a review of its plans for leased forestry land at Wairakei Estate last year, citing the low dairy payout, the heavy capital requirements for the conversions and environmental concerns about nitrate leaching into the Waikato River catchment.

Chief Executive Steve Carden said Landcorp would now only increase its dairy herds on the Wairakei Estate from around 17,000 cows currently to between 22,000 to 23,000, rather than the originally planned increase to 38,000 to 40,000. He said Landcorp has originally planned to invest a total of up to NZ$285 million in converting the 14,500 hectare Wairakei Estate, but would now invest closer to NZ$255 million. It has already invested around NZ$120 million and the new plans to invest a further NZ$135 million over the next four to five years would be funded from existing cashflow and by increasing bank debt.

Carden said this would increase Landcorp's debt gearing from around 13-14% currently to around 16-17% by 2020, assuming a dairy payout of NZ$6/kg.

The decision was being closely watched by the dairy industry, farmers down-stream, bankers, environmentalists and the Government. See our previous articles here and here.

Environmentalists and some farmers downstream have argued the extra conversions would generate heavy new nitrate leaching into the Waikato River system, potentially restricting farmers downstream under future regimes where nutrient leaching was capped, and causing long-term environmental damage.

Landcorp issued an announcement early on Tuesday saying it had decided to significantly reduce the scale of further forestry-to-dairy conversions on the 14,500 hectare Wairakei Estate, which it leases from Wairakei Pastoral Ltd. Landcorp has already converted 13 farms with 17,000 cows over 6,400 hectares. It said the new plan would reduce the total cost by NZ$25-35 million.

"We've had some concerns about the Wairakei development in terms of the original plan for 38,000 to 40,000 cows. We're now looking at under the new revised land use plan at more like 21,000 to 23,000, which is around a 45% reduction in cows," Carden told Interest.co.nz.

Landcorp would also internalise its dairy support on the Estate, rather than use farms outside Wairakei, and would build covered pads for wintering cows and to shade cows in summer. It would also build two more sheep milking farms on the Estate, he said.

"The net effect of that is a significant reduction in the amount of nutrient reduction that is occuring from the Estate," he said.

The revised plans would reduce expected nitrate leaching by 45% from the original plan, and Landcorp's plans for better fertiliser application and covered wintering pads would reduce leaching by 35% from today's levels.

"We've taken a rigorous approach to what is the highest and best use of the land and determining the cost of the different uses we could put the land to -- what generates the highest return and delivers the best environmental outcome," he said.

"I still think there's room for some traditional expansion of bovine dairy, but certainly not to the same extent we had originally planned. When you look at the investment in terms of cow barns, precision application of fertiliser, we're looking to substantially drive down on our existing footprint of land our nutrient leaching rates."

Carden denied that Landcorp's decision would have been different if current payouts of around NZ$4-5 kg had been higher, saying Landcorp began reviewing the plans 18 months ago when payout expectations were higher.

"What we're trying to do as a company is move away from the volatility that the dairy sector is providing and will continue into the future -- whether that's high payouts or low payouts," he said.

"We still have a fairly optimistic outloook of where the dairy payout will be in the long term. This is a 45 year investment development so we take a very long term view on land use and dairy payout levels."

The dairy conversions would make up around 60-65% of the total land use, while dairy support would make up 17-18%.

'Days of expanding dairy footprint over'

Carden said Landcorp was now finding it difficult to find land for dairy conversion that was both economically and environmentally sustainable.

"It's a struggle for everyone. The days of New Zealand continuing to expand its dairy footprint are largely coming to a close. The more marginal land -- of which the land around the central plateau is one -- is increasingly looking unviable for large scale dairy conversions," he said.

"The financials make it challenging by virtue of both the volatility in dairy returns and dairy farm prices still remaining very high. The environmental piece is probably the most challenging and what we're trying to do with this land use change is be proactive about where we see the environmental restrictions going and consumer expectatations going, and trying to get ahead of them."

Carden said the Waikato Regional Council's  'Healthy Rivers' plan was now up for debate and scrutiny.

"It's going to get harder to do large scale dairy conversions and to continue to do status quo dairy operations without some significant nutrient restrictions going forward, and we want to make sure we're ahead of that," he said.

Landcorp would focus now on growing the value of its dairy output, rather than just volume. He said Landcorp was exploring organic milk production and had already started building an A2 herd.

"These are niche opportunities where we think we can, with our partners, get a premium over time. That's more sustainable long term for the country than simply putting 5% more additional cows onto the footprint," he said.

Landcorp reported last year its total debt stood at  NZ$361.8 million as at June 30, 2015, including bank borrowings of NZ$210.7 million -- up from from NZ$172.4 million in 2013/14. Last week Landcorp reported a net operating loss of NZ$8.9 million for the six months to December 30 and forecast a full year net operating loss of between NZ$8 million and NZ$12 million.

Land owner and ecologist welcome move

Landcorp entered a 40 year leasehold deal in 2004 with Auckland property developers Ross Green, Mark Wyborn and Trevor Farmer, who bought the land from Fletcher Challenge Forests in 2003. Landcorp, which pays for the sheds, races, fences and houses on the land, has already spent NZ$120 million converting 13 dairy farms on the estate and originally had plans for as many as 39 farms, which would have made it the biggest dairy farm operation in the Southern Hemisphere.

Green was quoted in the Landcorp statement as saying he supported the new plans.

Mike Joy, a fresh-water ecologist at Massey University and a prominent critic of forestry-to-dairy conversions, is on Landcorp's Environmental Reference Group.

He was quoted as saying the decision was a significant win for the environment.

"It is pleasing to see them proactively changing tack on the development to significantly reduce its environmental footprint," Joy said.

Federated Farmers President William Rolleston said he was pleased Landcorp was proactively reducing its nutrient pressure on the broader Waikato catchment. Waikato farmers last year questioned whether a moratorium was needed on the central plateau conversions.

"Landcorp has taken the initiative here and should be applauded for their efforts and aspirations,” he said.

Landcorp said that under the new plan the land leased from Wairakei Estate would be used for dairy (irrigated and dryland), dairy support and sheep milking. Other potential uses were also being investigated, it said.

Green reaction

Green Party Water spokeswoman Catherine Delahunty described the decision as a brave one by Landcorp and a victory for environmental campaigners, including those 8,000 people who signed a petition presented to Parliament calling on Landcorp to abandon its conversion plans.

“The next step would be to abandon all plans to increase dairying on the Wairakei estate. We’re sure that the price of dairy solids slumping also contributed to Landcorp’s decision," Delahunty said.

(Updated with Green reaction, interview with Landcorp CEO Steve Carden)

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While the decision is laudable, I am not so sure of their motivations. They have probably been given the hard word about operating at a loss, rather than having any motivations about carbon foot prints and the ecology. But no matter how they got there, this is a good decision, albeit a little late.

"no matter how they got there" - the how should make a great case study, including the use of PR.

Landcorp Farming is rejecting a suggestion by Finance Minister Bill English that low dairy prices may prompt the state-owned farmer to scale back dairy farm conversions. Mr English told The Nation programme yesterday that Landcorp is having a "good hard look" at the 26,000ha Wairakei Estate north of Taupo and is "a bit uncomfortable with" the project.

But Landcorp chief executive Steven Carden says the project is unlikely to be halted by short-term price fluctuations. "We constantly review how we can make best use of the land across all our 140 farms around the country in terms of economic and environmental factors," Mr Carden told BusinessDesk. "That's not impacted by a low or high payout. These are long-term developments and we look at the long-term payout expectations."

Read more: http://www.newshub.co.nz/nznews/landcorp-rejects-suggestions-from-englis...

and
The Finance Minister's forecasting tough financial times ahead for state owned farming company Landcorp. The SOE returned a $4.9 million net profit last year, down from the $30 million it made the previous year. Finance Minister Bill English has told Parliament Landcorp's returns are likely to drop further.

"Landcorp's one of New Zealand's largest dairy farmers, and as dairy prices have dropped considerably in the last 12 months or so, we'd expect Landcorp's probably going to make negative returns for at least the next year."

English has indicated land sales could be on the cards for the financially pressured state owned farming company. He said the Government won't sell Landcorp, but points out the SOE buys and sells farms all the time.

http://www.newstalkzb.co.nz/news/business/tough-times-ahead-for-landcorp/

Remember Solid Energy.

Landcorp bet the farm and lost, their costs of production must be over $6.50 a kg, %1 of Fonterra supply.
Great salaries and lots of new Toyotas just the profits didn't eventuate. All that sour land on the west coast they flipped and converted, all that marginal land with no where to go.

Dairy is in big trouble, have a read

http://www.milkproducerscouncil.org/updates/030416.pdf

Anyone who has ever had their eye on a Landcorp property (and been told by mgt that corporate policy said no sale) had better email Bill directly.

Thinking about a Hilux or two.
Imagine the cost of those conversions and the borrowing. I suspect after Solid Energy , no way in hell was Billy E going to sign the document giving them government backing, and the banks would have been shaking their heads, while having the fingers crossed under the table for all the credit they have already given.

Landcorp, 140 Farms, 80,000 cows,158,518 hectares, 715 full time employees,79,000 cattle,225,478 hectares leased or sharemilked, 568,400 sheep, 110,000 deer

Updated with details of interview with CEO Steve Carden. Landcorp is still planning to invest a further NZ$135 million at Wairakei to add another 5,000 cows, build new barns and build 2 new sheep milking farms. Will increase Landcorp's debt gearing from 13-14% to 16-16%.

cheers

Bernard

Couldn't break the contract, got to keep going. They are being forced to spread the risk over all their farms, bad business, especially when they only make a %1 return in a good year anyway. Now they will end up in deep trouble as they are forced to cut spending on better investments.

...is it not true that Landcorp has only continued to exist as a land bank for treaty claims. How many staff would they actually need if they did just that...as oppsoed to trying to be clever?

Fonterra needs to cut its supply by about 1/3

This will come from nobody continuing with PKE or grain and going to all grass/crop diets which are around 10-15c vs the supplements at 20c plus feed out cost

Lower stocking rates will mean better fed cows on pasture and better efficiency, less capital tied up in herd and labour, plus herd health improve

In turn Fonterra will be able to use this opportunity to switch to Grass Fed milk company overnight

1/3 might not be enough, look at that link above to California dairy producers, massive supply coming out of the EU and States. How many cows did we have 10 years ago? Today we have 6.2 mil and that rapid growth has forced Fonterra to spend and spend. Now it's all debt.
I don't think production will fall as much as you think, a lot of well fed happy cows will turn on the production, production decreases coming into line with demand will take time. The weak will fail and they are mostly big, almost corporate,the corporate guys and Landcorp.
The EU increased production by 2.7 billion litres last year we only produce 2.1 billion litres.

What would you propose happens with the shares that are no longer tied to production?
Fonterra will fall over if production drops by much.
http://www.interest.co.nz/rural-news/80310/keith-woodford-assesses-fonte...

So where will this slack be picked up for the agri-export long range forecasts that are going to return us to prosperity?

take the 12.5 billion drop in farmer payouts which could get worse, X 7 for effect on economy due to multiplier effect. We only have 230 billion GDP, thats a decent sized hole by anyones thinking.
Take a bit of turning around.

That's been my question too. Answer, Auckland house buyers are going to borrow it. Simple really.

15,000 hectares , from the latest I've seen on Canterbury conversions, it's costing $26,000 a hectare.
All that land out of Taupo is so poor, it needs irrigation too.
I drove in and had a look when they first begun spent an hour looking around till some security guy un ceremoniously threw me out.
Poor soil hardly any topsoil, the trees getting mulched lots of big expensive gear, new houses, new sheds, new water the land had nothing, it was in pines in the first place because it couldn't carry sheep.

All those 80,000 cows, burning the best part of $1000 a head. This not the last we will hear from Landcorp.
Someone needs to be held to account for this massive abuse of hardworking Kiwis.

Landcorp got sold a pup

As my Aussie mate tells me, it was all ,'come in spinner'.

Got an email from Duncan Coull this morning. Took me a while to work out who he is, turns out he's from that pretty much anonymous organisation called the Fonterra shareholders council, been a while. It was quite long and really said absolutely nothing of substance. Would have been more realistic to say
RUN, WERE ALL GONNA DIE.
Did note that as opposed to anything they or Fonterra sent out twelve months ago there was no use made of the word cooperative which would have appeared at least 20 times last year.

If Duncan and his fellow councilors did more to challenge the board and executive, along with safeguarding long-term cooperative principles I would have confidence. But regurgitating what he reads in the media in his own words, gives me no confidence whatsoever.

A friend told me that the deal with Landcorp was a better deal than when we sold Telecom or NZ rail.
They got those forests for 7k a hectare and the taxpayer is going to convert them all into dairy farms for them, so while the trees were young and growing and earning nothing but costing to prune and manage, Landcorp leased the land ripped out the trees and converted to dairy, everything was new absolutely no improvements, the first ten years I would think was a free lease, then they pay market rates, but those trees were 15 years off milling, then sometime in the future they get all this dairy land back, but Landcorps aim was to stay as long term tenants.
Now they re committed to develop the rest of the land, what the hell do they intend to farm on it, if they could, I'm sure the best option would be to leave it in trees and mill them and then develop, still not a great option? Hard to believe, someone needs to held to account.

http://www.nzherald.co.nz/brian-gaynor/news/article.cfm?a_id=14&objectid...

http://www.nzjf.org/free_issues/NZJF49_1_2004/BB7544B4-D66C-4BB2-BCAE-05...

http://www.sharechat.co.nz/article/16ac8417/dead-money-complicates-fores...

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=3589549

Good insight Aj. Landcorp has been an empire building scandal for long time. I experienced getting blown out of the market by them on a number of occasions when I was looking at farms 10yrs ago.

As per rastus's comment, I have heard Bill English admit to a private function the Landcorp are a land bank for treaty settlements. Fair enough but why did the govt allow it to do all the empire building stuff along the way? Its not often I agree with ACT but I think they are right to call for its sale. Of course ACT would want it to go to the highest bidder foreign or not. I would prefer to see it split off into smaller blocks and targeted to allow entry for young farmers to get a start in their farming careers.

Land banking will go out the door as farms are sold to cover losses. The CEO is on 500k a year,most of Landcorps profits come from land sales, the actual farms return less than half a percent. It takes 100,000 mill of land just to pay the CEO.
So the days of it being a land bank have gone, now it's all part of a leveraged business that needs to cash up assets to shore up the gigantic hole in its books.

I dont understand what the benefit was to Landcorp. To lease cutover seems a braindead move. Then to be required to convert it, build houses and cowsheds, put in bores and pumps and troughs and water reticulation. Turn sour pumice into fertile pasture. Then give it back. Yip a winner.

Well said Belle,
Of course their predecessor, Lands and Survey, carried out that process but possibly not on leased land.
How did they get so confused and who was the minister that allowed it?

Lands and Survey had a mission on. They broke in huge swathes of NZ. The land was the Crowns and they got young farmers into their own farms. In the early 80s the govt got paid pretty well for the land. This Wairakei Pastoral always looked like a pup. A toy for the underemployed. A reason for the players to exist, and extend their paypackets. As farms went back to maori it must have seemed like the perfect opportunity. It must be the perfect nightmare now. And as they make plans for the future I see they are betting on a $6 payout. Not too many banks seem that game. I admire their positive attitude in such dire times. I dont think Bill is buying it though. Looking at their figures their bank borrowings are only to june 15, I bet it looks a lot worse now.

Thank you,
It was the last great station development, but naturally, the most marginal.
Makes sense.
Vaguely reminiscent of the Ministry of Works that was so out of control they closed it down....as I remember.

Maybe Landcorp could develop organic farms. Organic milk powder is $14,000 per tonne.
http://www.stuff.co.nz/business/farming/76628312/Fonterra-to-pay-organic...

It is logical

Confident predictions about dairy prices in the future are ringing rather hollow currently, have been hearing them for a while...