In 2000 exports to theUSAaccounted for 71% of our beef sales, the next five markets (South Korea,Japan,Canada,TaiwanandIndonesia) made up 18% and the rest of the world the remaining 11%. By 2011 theUSAhad fallen to 42%, the same five markets comprised 39% and the rest 19%. Over the same period the value of beef exports rose from less than $1.5 billion to over $2 billion, of which theUSAaccounts for 38%, the next five markets 35% and the rest of the world 26%. I suspect very few people outside the beef industry would have any ideaNew Zealandexporters had diversified so successfully, let alone achieved a massive value increase from offal and co-products.

New Zealand exporters could be forgiven for thinking trading with Indonesia would become a whole lot easier now the world’s fourth most populous nation has joined ASEAN, but it seems it will still be a frustrating exercise trying to do business there.

Fiona Acheson, NZ Trade Commissioner forIndonesia,MalaysiaandBrunei, stated (NZ Herald 5 January 2012) over 90% of our goods and services would have duty and tariff free access by 2015, withIndonesia’s economy running at an annual growth rate of 6% and poised to overtakeMexico,TurkeyandSouth Koreabefore then.Indonesiahas recently released its economic development master plan to 2025 which includes a goal to boost agricultural productivity, currently contributing 12% of GDP. Here Acheson sees a big opportunity to build on our position as a recognised agriculture and food security partner forIndonesia.

This is where it starts to get tricky, at least for our beef industry which on the face of it already benefits from a low tariff of 5% on exports toIndonesia. However this conceals the impact of quotas. In 2010IndonesiabecameNew Zealand’s second largest customer by tonnage and fourth largest by value for beef exports, but in 2011 quota limitations, especially during the early part of the year, cut that volume by 40%.

2012 is even more tightly constrained – whereas beef imports in 2010 totalled 120,000 tonnes, dropping to 90,000 in 2011 after an increase in the original 50,000 tonne quota, this year’s quota has been reduced to 34,000. Even though this figure will undoubtedly increase, this casts serious doubts aboutIndonesia’s reliability as a trading partner, so long as domestic politics play such a significant role in its decisions.

Offal exports toIndonesia, another important part ofNew Zealand’s export trade, are also threatened by the arbitrary introduction of restrictions. Between 2001 and 2010 offal exports toIndonesiaalmost trebled to the point where it became easily our largest market for offal products such as liver, heart and beef feet. Restrictions in 2011 saw offal exports fall by almost 5000 tonnes, still marginally ahead of South Korea, but likely to decline further this year because of limitations on certain types of offal, ostensibly for health and food safety reasons. The point made by several exporting countries is these objections are not science based, do not comply with WTO rules and discriminate unfairly between domestic and imported product.

According to high level statements from the Indonesian government, its goal is to achieve self sufficiency in a number of products including meat by 2014. The political uncertainty is exacerbated by jockeying for position in the race to becomeIndonesia’s next President at this year’s elections.

The Indonesian Meat Importers Association says the government’s decision to place this level of quota on live cattle, boxed beef and offal imports from all sources is too hasty and will fall seriously short of satisfying domestic demand. If the government persists, it will result either in liquidation of the Indonesian beef herd or prices going through the roof, neither of which is sustainable, whether in practical or political terms.

The road to diversification is still littered with potholes.

Many farmers are holding onto their stock with little prospect of being able to afford to buy replacements because of the state of the store market. Although the published schedules are closer to $4.30, current North Island prime beef prices are as high as $4.70, which reflects saleyard prices for 2 ½ year old steers as high as $2.75, equivalent to $5.50 a kilo. This is a grass market running rampant. Bull beef which has actually been tracking ahead of prime is fetching an average of $5.75-$6 a kilo in the USA, but prime beef with its many different cuts, values and markets is some way below this – this gives a pretty strong indication of where the schedule ought to be and casts serious doubts on the wisdom of paying present store prices.

With the beef kill running 30% behind last year, there is bound to be a catch up with the peak kill certain to appear in April, May and early June when the cull cows are sent to slaughter. At that point meat companies will target some substantial price reductions, so they can compensate for their loss of margin earlier in the season.

Lamb schedules are also at an all time high with theNorthIslandpaying as much as $7.50 compared with a schedule high of $7.28 and theSouth Islandgoing as high as $7.65 a kilo. The average weekly lamb kill is well down on last year, particularly in theNorthIslandwhere there are no dry pockets in contrast to the far south. The North Island lamb kill is averaging about 180,000 a week with 19 chains competing for stock which means there is little prospect of a peak kill, since all the chains can be put onto a double shift.

Therefore, as much as meat companies would love to see the lamb price come down, there isn’t much likelihood of this happening. In fact recently Silver Fern Farms took 20 cents out of its schedule, only to have to put it back up again the following week.

The old nightmare of procurement wars seems to be rearing its head once again which means eventually something has to give. This inevitably means the strong will survive and the weak are left struggling. This raises the old chestnut of capacity rationalisation, the unwritten elephant in the room in the Red Meat Sector Strategy. 2012 won’t be a decisive year in this respect, but it may start to make the industry’s future a bit clearer.

Here’s an excerpt:

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On the basis of published information, SFF had its first good year since the bitterly contestedRichmondacquisition andAllianceexperienced its worst result since 2007. However these bare facts don’t fully explain the relative situations, nor do they indicate a permanent deterioration byAlliance.

SFF’s improved result produced an operating pre-tax profit of $34 million, a major turnaround from the previous year’s loss of $8.5 million, although it includes $42.3 million of sundry income in the revenue line. This is made up of several items including $19 million of foreign exchange gains, $6.2 million of gains on the disposal of assets from Te Aroha, classified as incurred in the normal course of business, and sundry items of $15.6 million which include storage and rental income from vacant properties and receipts under the PGW contract.

The bottom line profit is further clouded by the inclusion of $12.2 million of gain over book value from the insurance payout. However the full reinstatement budget for the Te Aroha plant is nearly $60 million of which $20 million was spent last year with another $28.2 million committed at balance date.

Alliancesuffered massively from the spring storms in its two main catchment areas, Southland and lowerNorthIsland, estimated by CEO Grant Cuff to have cost the company between $10-20 million. Under the circumstances the operating result and pool payment are considered reasonable. He also made the point companies with substantial beef businesses suffered less from the storms because young cattle were not as badly affected as lambs.

It is possible, if not entirely reliable, to assess the competitive performance positions of ANZCO and AFFCO, the third and fourth largest processors both with turnover in excess of $1 billion annually, from a combination of past performance and information in the public arena.

The word from AFFCO’s supplier meetings suggests the 2011 profit was a bit lower than last year’s $21 million, but still respectable, although 2010 included an equity accounted loss by Open Country Dairy. However future performance will benefit from the substantial investment in upgrading its Malvern plant to full export certified multi species capability. This continues the trend to capital investment in plant improvement which has been a feature of AFFCO’s operation since Talley’s took control. Another feature has been greater efficiency as a consequence of an increasing number of the workforce going onto individual employment agreements.

In contrast ANZCO’s 2010 reported after tax profit was substantially down on its average performance since 2000 and indicated it had lost its position as the leading meat industry performer, a position it had held for much of the century’s first decade. The reasons for the lock out at the company’s CMP Marton plant reinforce the view ANZCO believes its wage rate structure needs attention, if it is to improve performance to keep pace with the rest of the industry. It won’t be possible until the end of March to see ANZCO’s annual accounts to assess its performance relative to its competitors.

Blue Sky Meats has a March financial year and publishes its annual result in July, but its 2011 result was satisfactory and much better than the previous year. Blue Sky took a decision to source store lambs for finishing to offset the impact of the storms, anticipating firm market prices which turned out to be justified by events. It also should be notedAllianceis 15 times the size of Blue Sky and a programme of that type could not have been implemented on such a large scale.

There are three main themes mentioned by the processors which characterise the 2011/12 season: firstly, the slow start and the prospect of a more normal season with a defined peak, secondly the need to maintain balance sheet strength, and thirdly cautious optimism about market prices.

Lamb, sheep and cattle numbers to the works are well behind last year, 23% in both islands in the case of lamb, but the numbers are on the ground and will come out later to provide good plant throughput. Grass growth has delayed the emergence of cull cows and the cold spring has slowed weight gain for prime cattle and lambs. The urgent need for meat companies, if they are to achieve the level of profits essential to balance sheet strength, is to make sure procurement cost, especially for sheepmeat, is more closely aligned with the market.

The third factor will be how well market prices hold up in the face of global uncertainty. There is reasonable confidence about the beef price in North America and Asia, while lamb demand is expected to sustain a schedule of at least $6.50, close to $120 a lamb. Under the circumstances, all participants should be satisfied, if not exactly dancing with joy.

On the one hand I have been taken to task by Graham Cooke, Aotearoa Branch Secretary, for my failure to recognise accurately the nature of the ongoing dispute at CMP’s Marton plant – it’s not a strike, but a lockout – but no reference to the questions I raised. But on the other, I have received a copy of the Aotearoa Branch’s September management accounts which effectively cover the 12 month period 2010/11. The accounts were posted on AFFCO’s Feilding plant notice board or circulated to union members under the headline ‘Where are your union fees going?’ with a suggestion the union has some questions to answer.

These accounts absolutely confirm the point of my previous column – the branch figures are not consolidated into the national union’s accounts as legally required.

This will also be the case with the other branches of the national NZMWU. Therefore in practice there are substantial organisations, some or all with revenues well in excess of $1 million annually, which are not reporting their financial details to the Companies Office. For example Aotearoa branch received member contributions of $1.299 million and other income of $78.7k in its recent financial year, posting an end of year surplus of $111k. The capitation fee paid to the national union, in other words the fee per union member, appears as a one line expense item of $239.7k. Operating expenses for the branch totalled $1.267 million.

None of this is intended to suggest there is anything untoward in the Aotearoa branch management accounts which are prepared by reputable chartered accountants. The problem is solely with the lack of disclosure of its financial affairs by the NZMWU national union including all its branches. It’s certain the branches report separately to their individual membership bases which would give union members the opportunity to query how their union fees are being used.

This should mean the management reports made available to the union members at AFFCO Manawatu contain no surprises and it’s quite possible their union doesn’t have any questions to answer. After all the Aotearoa branch represents workers at 50 separate sites throughout the North Island requiring a significant overhead structure to service. However members may wish to query annual salaries of $374k, vehicle expenses of $62k and various other significant executive related expense items.

The other item of interest is the net asset figure of $1 million, although this is not much different from the net asset position reported in the 2005 annual report before the Aotearoa union became a branch of the national union. In that year, assets mostly consisted of a term deposit which earned nearly $60k of interest on which tax was payable. In last year’s NZMWU accounts, the national union as a whole reported a similar level of current assets with only $24k of interest received and $6.5k tax. Clearly interest rates are now much lower than six years ago, but the obvious question is whether the failure to consolidate branch assets and interest income is leading to non-reporting and consequently income tax avoidance.

Graham Cooke’s reply accuses me and my 1980s AFFCO colleagues (I joined AFFCO in 1992) of “continuing to strategise and develop the demise of this union” within AFFCO and South Pacific Meats, calling my previous column “a load of hogs..t.” I would like to assure Graham I personally have never tried to bring about his union’s demise, because I am fully supportive of employees’ rights to union representation if they desire it. But I am also strongly of the opinion a union, like any other incorporated society which charges fees to its members in return for provision of services or facilities, has an obligation to comply with all its legal obligations.

The simplest way to clear up this particular situation would be for the NZMWU and its auditors to review their financial reporting practice and advise how they believe it meets the stipulations of the Incorporated Societies Act (1908) and Generally Accepted Accounting Practice.

Footnote

As referred to earlier, I mistakenly referred to the lockout at CMP Marton as a strike, for which I apologise unreservedly to the affected workforce and union representatives.

NZMWU is legally obliged to post its annual accounts by the end of April for the preceding 12 month period and these accounts must consolidate the annual balance sheets and profit and loss statements for theCanterbury, Otago/Southland, Wanganui and Aotearoa branches.

Until 2005 Aotearoa branch was separately registered as an incorporated society which reported annually to the Registrar of Incorporated Societies. In its last annual report before it disbanded and joined NZMWU as a branch of the main union, it reported total contributions of $1.26 million, expenses of $1.2 million and total assets of just under $1.2 million including term deposits of $961k.

In 2010, the most recent year for which accounts are available, NZMWU reported equivalent figures of $712k contributions or capitation fees, $656k expenses and total assets of $1.026 million. Aotearoa branch alone contributed capitation fees of $271.4k, although it is understood the membership pre-merger comprised more than just meat workers.

So on the face of it, reduced union membership and classification changes have resulted in a 78% reduction of Aotearoa’s contributions and yet there have been no significant changes in staff levels employed by the branch to carry out its responsibilities to its members. The alternative view suggests the bulk of branch income and expenditure is not being reported as legally required. The reported fee per member was $51 per year for 2009 and 2010 which appears substantially less than the meat company deductions paid to the branches and certainly lower than Aotearoa’s receipts in 2005.

The official legal position has been obtained from the Ministry of Economic Development which administers the annual reporting by incorporated societies to the Registrar in accordance with the 1908Incorporated Societies Act. The annual filing must be accompanied by a signed certificate which certifies the approval of the annual financial statement by members of the society at a general meeting. These statements do not have to be audited. However the members must have the opportunity to view and question them and may also elect not to approve the statements, if they are deficient or fail to disclose relevant information.

Where a society has unregistered branches as part of its structure, each branch must supply full financial details for inclusion in the statement submitted to the Registrar. This procedure must follow the rules of the society at all times. But it is in following this procedure where there seem to be serious gaps in NZMWU’s practice.

The financial reporting by NZMWU appears to breach the obligations of generally accepted accounting practice (GAAP) in spite of the signed auditor’s statement which states exactly the opposite for the most recent year’s accounts. Unless union membership of the Aotearoa branch has dropped by almost 80% in six years which seems most unlikely, particularly when there has been no equivalent reduction in overhead structure, there seems to be no other logical explanation.

Attempts to obtain an explanation from National Secretary Dave Eastlake andAucklandbased secretary of Aotearoa branch Graham Cooke have not achieved a formal response, while a phone call to the auditors,Christchurchbased Beck & Associates, encountered a point blank refusal to discuss the matter. To be fairEastlakephoned last week to say he was fully occupied on other union issues, such as the picket lines at CMP Marton, and couldn’t meet the deadline for this column. However he reiterated the previously stated view the union had received advice; it was satisfied it was meeting all its reporting obligations and was unwilling or unable to explain the apparent discrepancy between reported capitation fees and union member payments, as deducted from wages and paid by the meat companies to the local branch.

The major question is what is to be gained by concealing annual revenue in this way, whether intentionally or not. A possible conclusion is preservation of jobs and perks for the officials whose roles must be threatened by the increasing proportion of meat workers on individual employment agreements (IEA).

The situation at CMP illustrates how much the industrial relations landscape has changed since the introduction of the Employment Relations Act, enabling companies to negotiate both IEAs and collective agreements with their workforce. Less than 20 years ago it was still possible for the union to bring a company to a complete halt, holding a pistol to the company’s head until a deal had been negotiated. Today, as the situation at CMP Marton demonstrates, a combination of union and non-union labour means plants don’t have to close during industrial action. Workers on IEAs can keep working and earning money, while the unionised workforce is stuck outside on the picket lines.

Union officials will argue they are protecting workers’ jobs by insisting on preservation of terms and conditions. Realistically in a plant where half the workforce may be on IEAs and prepared to work under the terms of those agreements, it seems counterproductive to go out on strike. It is tempting to think officials may be looking after their own interests more than those of their members, when they encourage strike action, instead of being prepared to negotiate terms and conditions which suit the company’s desired cost base.

The main problem may be the age and history of today’s meat workers union leaders, many of whom have been in their positions since the 1980s. Unless the NZMWU rejuvenates its leaders and its methods of operation, such as transparency of financial reporting so members know how their contributions are being spent, the union may struggle to survive in the employment relations landscape of the 21^st century.

Individual processors are intent on getting themselves fitter, with decisions focused on better configuration of their existing plants, leading to some interesting initiatives. The most notable announcements this year are Silver Fern Farms’ rebuild of Te Aroha, acquisition of Wallace’s Waitoa plant, the recent purchase of Frasertown Meats and announcement of seven day processing at Waitotara, and the closure of Alliance’s Sockburn plant at the end of the 2012 season.

According to CEO Keith Cooper, SFF’s initiatives are not about capacity increases, more about providing the right type and size of processing facilities to meet local requirements. This signals a move away from multi shift operations to which stock must be trucked long distances, provoking supplier dissatisfaction, and replacing them with small footprint local sites. To a query about the likely capacity available when Te Aroha comes on stream next year, Cooper says the plant’s cost model does not require double shifting to be economical. In his view the double shift model is becoming outdated, although I’m sure at the peak of the season Te Aroha will be capable of double shifts, if needed.

The purchase of Waitoa, not far from Te Aroha, and Frasertown are strategically interesting, because these plants will provide SFF with greater presence at local level to attract new suppliers. However there does not appear to be any intention to change staff numbers or cost structures in the early stages.

In contrast the announced closure of Sockburn is entirely driven by efficiency improvements through fewer Alliance sites with more production capacity being created at Mataura and Pukeuri. Grant Cuff, Alliance CEO, told me this realignment of capacity was the result of a careful study of the options available which showed clearly the lower cost structure to be gained from the change. This indicates Sockburn’s closure was inevitable and begs the question why the decision took so long to reach, unless it was out of consideration for the Canterbury region.

One company that already appears to have its plant configuration well aligned with the industry’s livestock dynamics is AFFCO whose North Island plants are mostly multi species with a small footprint, far removed from the dinosaurs of less than 20 years ago. Its two South Island plants are small units designed specifically for the purpose. The company is proud of its investment in recent years, spending well in excess of its depreciation rate on building and machinery upgrades. Chairman Sam Lewis questions how long it will be possible to continue maintaining old plants on large sites as distinct from carrying out a substantial rebuild on a reduced footprint.

It may be premature to examine whether the present wave of processing capacity changes are likely to contribute to the Red Meat Sector Strategy’s (RMSS) goal of achieving informed, aligned behaviour change across the sector. But it is logical for processor decisions to be dictated by their own bottom lines and generally what is good for the processor is also good for the industry.

Keith Cooper’s press release following the purchase of Frasertown made the point about the consolidation of exporters in the international market place which resulted from the aggregation of the processing base, emphasising the “theoretical recommendations of RMSS would ultimately be driven by commercial decisions in relation to aggregation”. However aggregation of exporters and processors was specifically not an area RMSS was concerned to address and this will remain a commercial matter for meat companies.

The first report by the Sector Coordination Group strategy implementation report summarises the present state of cooperation, notably the NZ Lamb Company in North America, ovine automation involving nine companies, some smaller in market collaboration initiatives and the MIA Renderers Group research project, all of which preceded the RMSS. The future action list includes an online auction system for lower value cuts, engagement with the stock and station industry, historical cost benchmarking, transparency of market pricing signals, and leveraging of industry data.

This list alone will not deliver dramatic sector behavioural change, but hopefully it will be instrumental in building trust between participants that will assist the process. If this is combined with more consolidation, the RMSS may start to achieve its goal.

The most obvious challenge will be the ageing of the population in first world countries, because older people eat less and require more single portion meat cuts. A significant statistic was the forecast decline inJapan’s population from 128 million today, of whom 20% are over 65 years of age, to 100 million by 2050, with 36% over 65. As this trend is replicated in theUSAandEurope, our traditional markets for red meat will of necessity be progressively replaced by new markets, some of which we are already servicing and others still to emerge.

The United Nation’s report, World Population Ageing 1950-2050, says this trend is irreversible and by 2050 more than half the world’s population will be aged over 60 which has enormous implications for economies as a whole and all aspects of consumption.

Colin James made the point the world is urbanising with the largest 600 cities already producing 50% of global GDP, but within 10 years 150 of these cities will have been replaced substantially by growing cities in Asia, notably China and India. While this will be positive for meat consumption, with GIRA projecting an increase of 40 million tonnes by 2020, a third of which will be inChina, beef and sheepmeat will be constrained by supply. The challenge for red meat will not be to find markets for what is produced, but to ensure the maximum value added by producing appropriate portions cut, packaged and presented to suit the highest paying customer groups.

GIRA’s Richard Brown was confident consumers would bear price rises in spite of the fact retailers were very resistant to price increases, while Mike Burrell, CEO of NZ Aquaculture, blamed internal competition in the seafood industry for keeping prices down for many years. This is no different from the red meat industry which has long been accused with some justification of the same mutual throat cutting behaviour. This is the challenge for producers and exporters: to work together as an industry to provide the products consumers want and are prepared to pay for without using price as the sole basis of competition.

The Meat Industry Association’s (MIA) Annual Report highlights changes inNew Zealand’s product market mix which suggests exporters are starting to get the message. For instance, last year for the first time ever, beef exports to North America fell below 50% of total exports with the shortfall being picked up by North Asia, which saw increases in export values toKoreabecause of an outbreak of FMD,JapanandTaiwan, and higher shipments of high quality beef toEurope. Beef exports account for just over $2 billion, compared with sheepmeat which earned $2.9 billion.

Sheepmeat exports are diversifying too, although the EU still dominates, especially at the high value end. Over the 10 year period since 2001, the value of sheepmeat shipments has increased by nearly $1 billion annually; of this sum EU takes 55% by value and 44% by volume with nearly 40% by value in chilled form, representing more than two thirds of total chilled exports. In contrast exports toChina, which increased by 42% in volume terms and $60 million by value, consist almost entirely of frozen product. Other major sheepmeat markets include North America, the second largest by value, Middle East,South East Asiaand the Pacific.

A big challenge forNew Zealandin future will be to satisfy its higher value markets’ changing consumer tastes, as the populations age, while developing a larger base of rich, sophisticated customers in the higher growth markets, such asChinaandIndia. Policy challenges will also include negotiating access to or Free Trade Agreements with new markets. In the next 30 years a major potential market with a younger, growing population must surely beAfricawhich is scarcely yet on our radar.

700 words

As a footnote I owe an apology for an error last week to Federated Farmers which was represented at the Red Meat Sector Conference by Tim Mackintosh and Lyn Neeson from the Meat & Fibre executive, as well as two other council members. Incidentally Tim reckons there is a need for Beef & Lamb NZ, assisted by Federated Farmers, to develop some achievable goals concerning on farm performance and supplier loyalty with a progress report to be taken to next year’s conference. This would demonstrate farmer commitment to the sector strategy to meat processors.

There was a very democratic sharing of duties between the respective chairmen, Bill Falconer and Mike Petersen, who presented a united front to the delegates and they succeeded in leading an excellently sponsored conference with the participation of a wide range of industry participants. The disappointment was the heavy weighting of processors and exporters compared with farmers who were almost, if not totally, limited to B&LNZ board and council members; perhaps this wasn’t surprising, considering the seasonal pressures and cost of attendance. But the absence of anybody from Federated Farmers at this historic gathering was a bit surprising.

In his opening remarks MIA chairman, Bill Falconer, made the point implementation of the sector strategy was up to farmers and meat processors, not B&LNZ and MIA, but it was the role of the coordination group to push implementation and maintain focus on the strategic themes of aligned procurement, sector best practice and in market coordination.

There now appears to be an acceptance the Fonterra and Zespri single seller model, so beloved of theorists, won’t work in the meat industry. There was talk of incremental gains being more achievable than the silver bullet approach which was doomed to fail. Mike Burrell, CEO of Aquaculture NZ, told the conference about the green lip mussel collaboration between five local producers which have formed a JV inChina, successfully lifting the price by over 40% after years of price stagnation.

This success was founded on building cohesion and capability across the industry and increasing margins by providing better value, but the collaboration has been driven by the leading companies, not by the sector organisation which has restricted itself to providing guidance and encouragement to build trust in areas like R&D, market research and law reform.

Burrell told the conference the JV experiment is working inChina, but it’s not for every company or every market and it’s not a disaster if not every company takes part. Collaboration is sometimes the answer, but not always, as independence can work too. He also told the audience no structure should last for ever andNew Zealand’s fixation with industry models to solve a problem is misguided. This tends to confirm the current meat sector structure can work, even if some companies take the independent route. Success does not come from choosing a particular model, but is the result of many factors, notably people, passion, commitment, trust and some luck.

A conversation with Ashley Cole, Western North Island Farmers Council chair and Raetihi farmer, gave me a strong insight into her success, because she provided evidence of all those success factors, including the fact she cared enough about the sector to stand for the Farmers’ Council and to come to the conference. She believes passionately in the need for improvement behind the farm gate, citing her farm practice of lower stocking rates which gave her a better docking percentage than her neighbours while being able to finish stock on her hill country farm. She is also absolutely committed to the principle of industry alignment.

Frank Bunce, ex All Black, emphasised the importance of teamwork, each person knowing their role and the ability to identify causes of problems, combined with leadership, as key aspects of great teams. The red meat sector still has a way to go, but it is fortunate to have its present crop of leaders to guide it through the path to a successful future.

The remarks by political counsellor, Cheng Lei, although low key, clearly referred to the eagerly anticipated Overseas Investment Office (OIO) decision on the second Chinese bid for the Crafar farms. Unlike the rejection of the May Wang fronted bid by Natural Dairy on the grounds of character, there appears to be no justifiable reason under the Overseas Investment Act for turning down the Pengxin bid, unless the definition of a large investment in farmland – more than 10 times the average dairy farm size – qualifies as a reason for rejection. But it’s a political minefield for the government, especially if the OIO gives its approval before the election.

Under the Act overseas investors must apply for consent to acquire sensitive areas of land and business assets worth more than $100 million. Clearly sensitive land covers most applications, since these will inevitably involve areas of scenic beauty, access to waterways and coastal locations. The transaction must be likely to benefitNew Zealandor the acquirer must intend to live in this country. In spite of the Finance Minister’s letter to the OIO late last year which strengthened the tests for consent, there is still considerable potential for embarrassment because of the implications of our trading relationships, in this case the Free Trade Agreement (FTA) withChina.

The Asia New Zealand Foundation’s Chairman Philip Burdon notes this country’s sensitivity to the overseas acquisition of land, but says, while the Foundation doesn’t take a political stance, it would be very concerned if an Asian investment were not considered as valid as any other foreign investment. However he says we are right to be nervous about any overseas investors owning too much land, as New Zealanders don’t want to become wage slaves in their own country. This view mirrors the position taken by the Prime Minister earlier in the year.

BusinessNew Zealand’s perspective is quite simple. Chief Executive Phil O’Reilly told me all investors should be treated exactly the same and, even if some countries place restrictions on New Zealand investment, we should not retaliate. IfNew Zealand’s policy is too restrictive, this would sub-optimise the achievement of fair value from a sale. He pointed to the new opportunities, skills and technology gained from more than 100 years of overseas investment in assets, while the fact some of these had not been sold well in the 1980s was no reason for condemning overseas investment.

With specific reference to land sales O’Reilly believes there shouldn’t be too many restrictions, relying on getting the basic economic settings right to incentivise overseas investors to increase value and productivity in the same way as the domestic investor.

Commenting on the Chinese bid for the Crafar farms, CTU economist Bill Rosenberg is concerned at the comparatively perfunctory nature of the OIO’s investment tests. According to him, FTAs tend to weaken the criteria for approving or rejecting overseas bids and this issue should have been resolved before signing the FTA.

He says the key issue of farmland ownership is control and the risk forNew Zealandis the potential loss of control of the whole supply chain, thereby foregoing added value which will no longer be available to contribute to jobs in this country. Ironically high commodity prices only tend to confirm our status as a global farm inRosenberg’s opinion, increasingly exporting commodities and importing manufactured goods; in fact we are adding less value than before the economy opened up.

None of the parties spoken to believe sales of farmland should be prevented provided there are clear criteria applied without prejudice against any potential investor. However nobody had any concrete suggestions which would guide the OIO in its decision making process. Fonterra has announced further investment in dairy farms inChinawhich Cheng Lei implied means Pengxin’s bid for the Crafar farms should be equally acceptable, although CTU’sRosenbergdidn’t necessarily accept that argument because of restrictions applied byChinato certain types of foreign investment.

The dairy industry and Fonterra are the test case – if Fonterra wants to build strength overseas,New Zealandmust be prepared for investment in our dairy industry and this will inevitably mean some loss of control of dairy production.

The outcome of Trade Minister Tim Groser’s talks in Beijing last week will be instructive in determining whether the government has come any closer to finding a solution which will satisfy the various interested parties: the Chinese government which expects tangible proof its investments in New Zealand are welcome, Business New Zealand and others which want minimal interference in commercial transactions, those like the CTU which want a tightening of the rules, and those such as the Greens and Campaign Against Foreign Control of Aotearoa who are dead against any sales.

If the government believes change is required, it must move quickly to tighten the rules, or else the horse will already have bolted.