A decision on the future ownership of the Crafar Farms, a large North Island farming operation that went into receivership in October 2009 owing $194 million, is imminent. Acting on behalf of the new owners, the Australian-based Westpac Bank, the receivers KordaMentha are waiting for government ministers to decide on whether the offer by the Chinese company Milk NZ Ltd can be accepted. The $210 million bid had been approved by the government in January, but rival bidder, Michael Fay’s Crafar Farms Independent Purchase Group, lodged a Judicial Review, challenging the decision in the High Court after their own $171 million bid was rejected by the receiver for being too low.
Justice Miller ruled that the application had to be referred back to the OIO for further consideration on the grounds that the funding spent on bringing the farms back up to full production could not be counted as a benefit of the foreign investment. He argued that since any new owner could reasonably be expected to outlay a similar amount, the case for foreign investment must therefore rest on whether the additional investment being offered is ‘substantial and identifiable’.
Following Justice Miller’s decision the OIO has now revised its recommendation, and as is required under the Overseas Investment Act, sent it off for Ministerial approval by Land Information Minister Maurice Williamson and Associate Finance Minister Jonathan Coleman. Under the Overseas Invest Act such approval is required whenever foreign investors seek to buy ‘sensitive’ land such as farmland and non-urban blocks over 5ha.
An earlier Chinese bid for the farms was declined by the OIO and Ministers two years ago. The estimated $200 million offer by Hong Kong listed Natural Dairy was turned down after Natural Dairy’s May Wang and Jack Chen, the director of the associated UBNZ processing plant, failed the ‘good character’ test. May Wang had been declared bankrupt and an arrest warrant had been issued for Jack Chen. Both were under investigation by the Serious Fraud Office and Hong Kong’s Independent Commission Against Corruption over charges of money laundering.
Milk NZ, the company behind the present $210 million offer for the Crafar Farms, is a Hong Kong registered subsidiary of the Chinese company Shanghai Pengxin Group Co Ltd, which amongst other ventures runs a successful cropping farm in Bolivia and sheep breeding and cropping operations in China. The parent company, Nantong Yingxin Investment Co Ltd is owned by successful businessman Zhaobai Jiang, who holds 99 percent of the shares. The other 1 percent is owned by his brother Lei Jiang.1
The OIO application and supporting information shows that under the Milk NZ deal, while Pengxin intends to fund the management and development of the farms, it will form a joint venture profit-sharing partnership with state owned enterprise Landcorp, which will run the day to day operation and is expected to significantly boost milk production. Since more than half of New Zealand’s milk is presently exported as milk powder – rather than added value products – Milk NZ intends partnering with other New Zealand operators to process their milk into cheese, ice cream, infant formula, UHT milk and yoghurt, which they would market in China under the “Nature Pure” and “Pure 100” brands. They intend spending at least NZ$100 million on marketing these products in China during the first five years, building up market demand for New Zealand dairy exports in the process.2
Landcorp would also not only oversee the establishment of a Dairy Farming training school on one of the farms, but it would be given the option of managing Pengxin’s sheep breeding operations in China. This would provide them with the opportunity to win other consultancy and management assignments in China as well as establish market opportunities for their own produce from their other farming operations.
The purchase of farmland by foreigners has long been a contentious issue in New Zealand, but fears that China is gobbling up our land is not supported by fact. Figures released by the OIO under the Official Information Act show that of the 872,313 hectares of land sold to foreign interests over the past five years, only 223ha were sold to Chinese. The top buyers were from the United States, with 194 purchases of land for a total of 193,208ha, followed by Canada, the United Kingdom, Australia and Israel.3
Last year 15,242 hectares of farming and forestry land was approved to foreign buyers, significantly lower than the 48,828ha approved for sale in 2001 and the least amount of land approved for sale since 2007. Around 1 percent of New Zealand farmland is estimated to be in foreign ownership.
Over the years there have been a number of high profile land sales to overseas investors. These include US billionaire Julian Robertson who, in 1997, bought the 1,800ha Northland farm on which he build the world renowned Kauri Cliffs golf course and lodge. This was followed by the 2001 purchase of the 2,000ha Cape Kidnappers property that he developed into a $90 million golf course and lodge. In addition, there is now a third lodge in Queenstown, and some wineries. In 2004, country singer Shanai Twain spent $21 million purchasing around 25,000ha of lease-hold farm land near Wanaka, and over the last few months, Hollywood film-maker James Cameron has bought more than 1,000ha of South Wairarapa for $20 million.
The total holdings associated with the Crafar’s 13 working dairy farms and 3 drystock units is around 8,000ha – there are four farms in Reporoa of almost 1,600ha, a 200ha farm in Hawera, two farms in Benneydale of 1,700ha, an 1,800ha Clements Mill station, a 200ha Atiamuri farm, a 200ha farm in Waverley, two farms in Bulls of 600ha, two in Ohaupo totalling almost 400ha, a Kuratau farm of 700ha, and a 600ha farm at Maxwell.
This week’s NZCPR Guest Commentator is Bronwyn Howell, the General Manager of New Zealand Institute for the Study of Competition and Regulation. Bronwyn has been examining the rules surrounding foreign investment in New Zealand and the effect not only of Justice Miller’s ruling on the OIO tests, but of the Overseas Investment Act itself.
In her article Fact or Counterfactional? Unpacking the Crafar Controversy, she argues that “If one considers the act of foreign investment as a means of improving the financial state of the economy into which the investment is made, then it appears naïve to discount what is almost surely the most substantial economic gain – the price premium paid by the foreigner – from consideration in the assessment of the ‘substantial and identifiable benefits’ to New Zealand of the transaction proceeding.” She describes the profit foregone by vendors if a sale to foreign owners is turned down as a ‘curse’, an “uncompensated ‘taking’ of the right a New Zealand owner has to freely decide to whom a property can be sold”.
She explains that as a result of Justice Miller’s ruling, the foreign ownership test has become more difficult and more applications are likely to be declined. “In the long run there will also be a ‘knock-on effect’ in the dairy farm property market. Regardless of whether a local offer for the Crafar farms is accepted, the signal to the farm property market is that dairy farm sales to foreigners are now highly unlikely to be acceptable. The market value of all such farms will now fall as prospective buyers and sellers take account of the new information. Whilst this may be good news for those New Zealanders wishing to buy a farm, it is bad news for those currently owning them. As farms are businesses, a fall in market value translates to fall in the capital value of all farms.
“All New Zealand farmers are now poorer as a consequence of the refusal. Some may now be in the position of having debts that exceed the new lower capital value of the business, and like the Crafars, be forced into receivership. It cannot be discounted that this will set in train yet another round of declining market values for farm businesses. Even farmers without debt overhang will be affected, as their ability to borrow to fund new developments is correspondingly constrained. This will likely have the effect of restricting the pace of on-farm productivity improvements in New Zealand, relative to other countries where there are more liberal approaches to foreign farm ownership. This would not bode well for the competitiveness of New Zealand’s main exporting businesses.”
In her article Bronwyn points out that the Overseas Investment Act requirement for rural land over 5ha to be regarded as ‘sensitive’ and needing OIO approval, dates back to the restrictive farm land controls that came into existence in the 1880s, to prevent the aggregation of farm land. The fact that such provisions are still current demonstrates the urgent need for a thorough update of the law! To read the full article, click here >>>
China is expected to become the world’s biggest economy by 2020. It is already New Zealand’s second largest trading partner and the biggest importer of our dairy products. In 2008, China imported 69 million kg of New Zealand milk products, but by 2010 this had grown more than fivefold to 353 million kg. More than 60 percent of all imported dairy products in China come from New Zealand. China is our fastest growing market, with total exports growing 22 percent last year to break the $6 billion mark. It is our largest source of foreign students and the fastest growing source of foreign visitors. Our relationship with China has undoubtedly helped buffer New Zealand from the worst effects of the global economic downturn.
The rapid urbanisation that is taking place in China and the fact that by 2020 half of their urban population will be middle class is increasing their demand for food. This has enabled New Zealand companies like Fonterra to make significant investments in China, as they now get ready to open their second farm (worth US$40 million) with around 4,000 cows. And while Fonterra cannot buy freehold title to their farms in China, nor can the Chinese – all property in China is owned by the state.
On Sunday, TV1’s Q+A programme interviewed New Zealander David Mahon, the Managing Director of Mahon China Investments, who was asked to clarify what it is that China really wants when it looks to foreign investment in countries like New Zealand. He explained, “China actually wants resources – whether they’re fibre, timber, wool – or whether it is protein. In the case of the Crafar farm deal, it’s a search for protein. The Chinese aren’t looking to buy land and to own land around the world; they’re looking to secure the resources that their own narrow agriculture base doesn’t supply them. And given the fact that Chinese are urbanising in such great numbers, and the demand for food is increasing, there is an urgency for the Chinese to secure good lines of supply.”4
If securing resources is the driving force for China, it is easy to see why Shanghai Pengxin would be so interested in buying the Crafar Farms and working with such an experienced operator as Landcorp in a joint venture deal. Whether their plan to restore the profitability of the Crafar Farms – and set up an added value supply chain of New Zealand protein products for their growing Chinese market – succeeds, remains to be seen.