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Where to next for the Crafar farms?

Where to next for the Crafar farms?
Crafar farm foreign ownership

Shanghai Pengxin is a hair’s-breadth away from taking ownership of the Crafar Farms, with its local subsidiary already advertising for management positions. Assuming the Michael Fay-led consortium can’t halt proceedings, what will things look like down on the (Chinese-backed, Landcorp-run) farm? Owen Poland reports.

For many sharemilkers, the start of the new dairy season represents a fresh start on a new property. Unfortunately for the nation’s biggest sharemilker, it’s been denied that opportunity – this year anyway. 

Rather than taking over management of the Crafar farms on behalf of Shanghai Pengxin as expected on June 1st, Landcorp has been left looking over the fence. Faced with a further legal challenge against the Government’s decision to approve Shanghai Pengxin’s ownership in late April, the receivers were forced to re-appoint the existing sharemilkers for another season. 

Yet again, the Crafar Farms Independent Purchase Group (CFIPG) claims that Shanghai Pengxin fails the test of business experience and acumen relevant to overseas investment. But the company’s New Zealand spokesman, Cedric Allan, is dismissive of legal manoeuvring by the so-called Fay consortium. 

 “They’ve never put an offer in, it’s just talk,” he says.

 Assuming, that is, that these well-heeled Chinese investors eventually win the day with their $200 million-plus bid, Shanghai Pengxin still faces an uphill battle winning the hearts and minds of ordinary New Zealanders about the merits of foreign ownership. 

Rumours abound that the Crafar properties will be worked by cheap Chinese labour crammed into Waikato warehouses, and that the real motive is to seize control of Fonterra. 

To Cedric Allan, the ‘yellow peril’ doomsday scenario lacks any real perspective. After all, he notes, the Crafar farms represent only 16 of more than 10,000 dairy units. Less than two per cent of farmland is owned by foreign interests, compared to 70 per cent of our wine industry and more than 80 per cent of our forests. And, as a Fonterra supplier, Shanghai Pengxin’s five million shares would represent only 0.34 per cent of its total stock.

 “And if the Chinese are queuing up to buy into our dairy industry,” he adds, “why has it taken Carter Holt Harvey two years to offload its state-of-the-art farms in the Waikato?” 

Allan says it would also pay naysayers to bear in mind a story – a “salutary reminder” – that illustrates that the New Zealand dairy industry have been shaped by many energetic and clever immigrants: Chew Chong, the Chinese scrap metal dealer, recognised in New Zealand’s Business Hall of Fame, who opened one of New Zealand’s first dairy factories, introduced refrigeration, ‘invented’ the pound of butter and exported the first butter to Britain in 1884. 

Well and good, but what’s the Shanghai Pengxin game-plan? Simple, says Allan: “We just want the milk.” 

His Chinese clients recognise the rapidly rising value of dairy products in China and want access to trusted products from New Zealand. Rather than relying on other suppliers, they see ownership of the Crafar properties as a means of securing a long term supply of milk that they know they can get every year regardless of politics; regardless of other people’s business decisions. 

Beyond that, it’s all about adding value. Selling skim milk powder milk – as Fonterra does – for $3.35 a kilo is all very well, but Shanghai Pengxin would prefer to make infant formula, cheese, ice cream, yoghurt and UHT milk which sells in China for closer to $30 per kilo. 

“Everyone in their heart of hearts knows this is what the whole New Zealand industry should be doing,” says Allan, adding that “if we’re successful with that, then that creates a wonderful opportunity for other New Zealand suppliers”. 

In the short term, amicable discussions are being held with Fonterra about Shanghai Pengxin’s processing requirements. The Chinese owners also think they could be “very helpful” to Fonterra as it expands its dairy interests in China. Using brand names like Nature Pure and Pure 100, Shanghai Pengxin has allocated $100m to market its Kiwi-made products and they’re keen to conduct some test marketing by getting UHT milk, for example, onto Chinese supermarket shelves as soon as possible.

To that end, Shanghai Pengxin’s local subsidiary, Milk New Zealand Corporation Limited (whose shares are held in trust by the Auckland accounting firm of Gilligan Sheppard) has started recruiting for a General Manager and Business Development Manager to develop, manufacture, market and export high quality New Zealand dairy and other food products to fast-growing Chinese and other Asian markets.

 Long term plans could involve purpose-built facilities in a 50/50 partnership with local investors, and talks are also being held with Miraka Limited, the relatively new Maori-owned milk business with state-of-the-art processing facilities in Taupo. If Miraka couldn’t process the volumes required, Cedric says Shanghai Pengxin could – theoretically – form a joint venture company and lend it the money to expand. 

“One way or another, a New Zealand processing partner is going to be enriched.” 

However the future of the Crafar farms under Chinese ownership remains unclear. Landcorp will manage the disposal and acquisition of land and chief executive Chris Kelly says one of its roles is to recommend a rationalisation of the 8,000 ha of farms “once it gets to know them”. 

With 16 properties scattered between Hamilton and Bulls, some land sales or swaps are highly likely. For instance, the three dry stock units might be converted to dairying and Landcorp could winter animals off on its existing Wairakei leasehold farms. Over time, the Crafar farms would be centrally managed and amalgamated with Landcorp’s Wairakei businesses on an ‘arms-length’ basis. 

Both Landcorp and Shanghai Pengxin maintain they’re “sensitive” to iwi concerns, particularly around two Bennydale farms which are subject to a Treaty of Waitangi claim. These could be swapped for other properties. After all, says Allan, “they’re going to be our neighbours for a long time.” 

Despite having receiver-appointed sharemilkers, Landcorp will have a major influence over farm management when – and if – Shanghai Pengxin gains control. Existing business plans might be “tweaked” and sharemilkers will be given some help and advice on running the farms and capital development. A condition of the Chinese purchase is that $16 million must be spent over the first three years upgrading properties which have seen little investment since going into receivership in October 2009. 

The first priority will be to ensure they meet resource consent requirements, especially regarding effluent disposal. After that, it will be a matter of spending significant amounts on re-grassing, fertilising, re-fencing and water in order to increase the carrying capacity. 

The aim for the first three years is to boost stock numbers from 14,000 to 16,000 and, in turn, lift production from 5 to 5.5 million kg of milk solids. Landcorp will manage the farms as part of a 50/50 joint venture with Shanghai Pengxin, which should produce annual returns of $4 to 5 million for the SOE.

 Unlike most sharemilking agreements, the modified deal has been incentivised and a formula established to ensure that Landcorp benefits when dairy payouts fluctuate. 

Interestingly, the joint venture company which Landcorp created in partnership with Wairakei Pastoral to launch its failed bid for the Crafar farms last year is about to get new legs. 

Under new carbon offset rules in the amended Emissions Trading Scheme (ETS), Chris Kelly says that Kiwi Pastoral Limited could resume the conversion of Waikarei forestry land which could lead to further integration with Shanghai Pengxin. 

“That’s a discussion we’ve yet to have with Shanghai Pengxin, but it’s certainly likely.”

 It’s undeniable that those already against the sale of the Crafar farms to Shanghai Pengxin would be displeased with an expansion of the company’s interests in New Zealand, but to its New Zealand spokesman, as you would expect, there will only be good things that come from China’s on-going interest in local resources. 

“You could put a five per cent cap on the overseas sale of farmland, which guarantees that 95 per cent will always remain in New Zealand hands,” proposes Allan. “The only downside, I reckon, would be a depression in farm values once that cap has been reached because there won’t be overseas buyers for a farm!”

This story originally appeared in Primary magazine. Click here to subscribe.