Dairy debate is getting really interesting

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 I have picked up 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 toNew Zealandthan 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 Zealandowned processing unit to export high value products toChina. This subsidiary will ensure at least half the profits earned offshore will revert toNew Zealand, not be completely lost. Some will question whyNew Zealandshouldn’t continue to own the farms and set up a wholly owned business to export these selfsame products toChina.

 

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 isNew 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 Zealandis 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 thatNew Zealandkeeps 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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Tags: Bill English, Bright Dairy, China, Crafar farms, Fonterra, Fran O'Sullivan, OIO, Pengxin, Rod Oram, Synlait, value added production