Farmers missing big picture

Federated Farmers, Fonterra, missing big picture in Crafar sale says Productive Economy Council

In the wake of the announcement of the proposal for Hong Kong-based Natural Dairy Holdings to buy the Crafar dairy empire, various commentators have downplayed the potential negative side effects of the move. Unfortunately, that’s mostly wishful thinking, says the Productive Economy Council.

Federated Framer president Don Nicolson believes that the fear that foreign ownership of dairy farms here might mean benefits would be lost overseas is misplaced, saying that “putting up barriers through compliance regimes or restrictions and things like that is not going to make us a wealthy country.”

“That’s fine as far as it goes, but the problem is that putting ownership of significant chunks of a major productive resource, like our farms, is not going to achieve that either,” says PEC spokesman Selwyn Pellett.

“And while Don Nicolson draws a comparison between the proposed Chinese buyout of the Crafar farms, with joint venture farming projects that New Zealand businesses are involved in places like China and South America, he misses the essential point that those business ventures are helping us get access to overseas markets, whereas this proposal looks like it is merely going to allow overseas investors to exploit their home market using New Zealand-based resources.”

Pellett says that a significant part of New Zealand’s ability to market its agricultural products overseas is down to a combination of world-leading farming practices and science, and the country’s reputation for sustainable, eco-friendly farming practices, essentially our brand.

The later point has already become a topic of contention, with the issue of farming run-off polluting water ways having already tarnished farming’s image.

“We need only look as far as the fallout over the San Lu scandal - and the resulting bankruptcy of the company that Fonterra had a 43% stake in – to see how devastating the results of reputation failure can be. We need to be in the business of protecting the international image of our farming industry. How do we do that if we put ownership of significant portions of the resource in the hands of people whose interests do not match up with those of the New Zealand farming industry?” asks Pellett.

Pellett says there are four main drivers for buying any business: access to manufacturing resource (cheap labour) to drive down the cost curve; access/security of supply (raw materials and resources); access to intellectual property (game changing technology) and access to a market.

“In the case of the Crafar farms sale it is likely to be a mixture of security of supply and driving cost out of the business. How do we ensure those cost cutting measures fit in with what we consider best farming practices to be?” asks Pellett.

“The people behind Natural Dairy Holdings – despite their apparent lack of experience in dairying – are able to recognise a good formula when they see it. A vast, growing market in China for milk products, particularly baby milk formula, combined with a high-value perception among those consumers for New Zealand produced milk products, equals profits, and plenty of them. Those are profits which our dairy industry should be, and is, pursuing.”

“So why would you want to help set up a competitor who’s obvious intention is to squeeze you out of that market?” he asks.

Natural Dairy Holdings’ lawyer, Kerry Knight, has already gone on record saying that the company would not only own the farms, but would package the product and export it to China, as well.

"The idea is if they get into more refined products such as infant products and long life milk, if they can control the whole process, they will get a premium price for it," Knight said.

“So, these are not folks interested in a friendly, mutually beneficial joint venture. These are business people who recognise that by owning the entire supply chain, they stand to own the market,” Pellett says.

“Fonterra chief executive Andrew Ferrier doesn’t seem too troubled by this, saying he doubts there is an economic case for them to buy their own processing plants in this country, with Fonterra’s infrastructure being more efficient. But he’s thinking about this the wrong way. He’s thinking like a joint venture partner, or someone who would have to justify to shareholders any decision to invest millions of dollars in building or buying infrastructure. He is also thinking in terms of Kiwi not Chinese interest rates. He’s not thinking like someone who is happy to invest those millions, seemingly pointlessly in the medium term, with the specific aim of owning the entire business in the long term,” he says.

Losing out on business in China and potential damage to the international brand image of New Zealand’s farming sector are not the only threats inherent in the plan, Pellett says.

“Fonterra’s entire business model is based on economies of scale. Fonterra needs to channel the bulk of dairy output from New Zealand’s farms through its plants to maintain them at peak efficiency. What happens when 5%, or 10% or 15% of dairy output gets channelled into a rival processing system? Assuming this won’t happen because it doesn’t make financial sense from where you’re sitting is a dangerous way for any business to think. You only see the threat that is sitting just over the horizon by making sure you understand how things look from potential competitors’ seats.”

And then there are the farmers. Right now many of them are hurting, laden with debt and having been seduced by promise of capital returns which right now seem illusionary. And suddenly, along come folks with money in their pockets and they will make those dreams real again. Many farmers will be tempted.

“That is the difference between having economic sovereignty, and being an economic colony. We were once a colony of Great Britain. Then we forged our own path. Is that effort to be wasted, squandered out of desperation or for the chance of short term gains?”

“Large scale sale of productive farming land to overseas interests is a matter of national concern, and the Government needs to address it from a policy point of view. If there is anything a National Government should understand, its farming, and just how fundamentally important it remains to this country’s economic fortunes. Now is the time for them to demonstrate that understanding,” he says.

ENDS

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