The Dominion Post 16/01/2010
by Catherine Harris
News that an overseas-backed Maori trust is trying to buy 28 farms in Southland sent alarm bells ringing at Federated Farmers.
Its concern was mostly about the details of the financial arrangements, but it highlighted the fact that corporate farming, a trend that has been slow to take off in New Zealand, is becoming a force to be reckoned with.
Chris Kelly, chief executive of the country's largest corporate farmer, Landcorp, says he knows of other initiatives being explored and believes there will be more foreign investors knocking at New Zealand agriculture's door.
"One of the increasing issues that is emerging in the world is the issue of security of supply of food," he says.
Middle Eastern countries, in particular, "are suddenly realising that really, we're not getting any more land, we're getting more people, we have to feed them, and they have to live somewhere so the availability of agricultural land is decreasing".
A list of foreign investments in New Zealand agriculture tells the story.
Last year alone, Singapore's Olam took 14 per cent of NZ Farming Systems Uruguay, in addition to the quarter stake it holds in Open Country Cheese.
Mitsui raised its stake to 22 per cent of Canterbury milk powder company Synlait, and Russian baby and specialist food giant Nutritek bought New Zealand Dairies in July.
But it's not just foreigners buying up large.
For at least two decades farmers have been upsizing to get economies of scale. Mr Kelly thinks the days of the small family farm are numbered.
"If I take the dairying industry for example, as recently as 10 years ago, the average herd size was 150 cows, now it's 300 and growing, ... so I think the concept of corporate farming, as in a large farm, will only increase."
The biggest players in New Zealand are Landcorp, the 58-farm South Island-based Dairy Holdings Ltd, the Cushing family's $200 million, 30-farm New Zealand Rural Equities Ltd based in Hastings, and some of the Maori incorporations.
With the exception of Landcorp, these are all in private ownership. In Australia, insurance companies own many of the high country stations where they can get the benefits of massive scale.
But that kind of model is thin on the ground in New Zealand, and there are no NZX-listed farming operations, with the exception of PGG Wrightson's venture in Uruguay.
Experts agree this is largely because farming is an asset-rich, cash-poor activity, unsuited to short-term investment.
"In farming most of the economic returns you get are from capital gain of the land as opposed to cash dividends and that just doesn't suit the corporate model in New Zealand," says Mr Kelly. According to one estimate, income-only farming returns hover between 2 and 4 per cent, no better than some banks. Farm syndication firm MyFarm begs to differ. Thanks to land development and lower mortgages, it is forecasting short-term annual dividends of 6 to 7 per cent on some of its farms. "With low debt and land prices going down in the past year and disillusioned investors [from other sectors], the focus for us is very much on cash returns," a spokesman says. When capital gains are tossed in, investing in a farm becomes even more alluring. The average farm price grew 16 per cent between 2000 and 2008. MyFarm has averaged a similar rate of return for the last five years. Traditionally though, farm investors have had to wait long periods of time to realise big gains. They may also be unable to sell their stake easily and must wear the risk of both adverse markets and weather. So those who are prepared to take those risks are typically private – overseas companies, wealthy individuals and traditional family partnerships, who shut up the cheque book when times are tough. "In husband and wife family farming, you batten down the hatches and you're only answering to yourselves," Federated Farmers president Don Nicolson says. Nevertheless, farm aggregation continues apace. Former Landcorp director Lex Henry believes New Zealand is simply returning to its roots as "one big corporate farm" before its big farming estates were broken up for returning soldiers. "All we're doing is repeating history." He is also in no doubt about farming's inherent value. A cluster of Landcorp dairy farms in the Manawatu alone would rank between the country's 14th and 18th largest public company if it was listed, Mr Henry says. But getting a slice of rural action has not always been easy. John Larmer, rural director for valuation firm Telfer Young, jokes that when he was young, there were only three ways to get into farming: "patrimony, matrimony and parsimony," a reference to the New Zealand sharemilking system. Now private equity partnerships are becoming popular as farmers seek to reduce their debt. The country's biggest family-owned dairy business, Crafar Farms, went into receivership recently, due mostly to a crippling $200m debt and a drop in milk payout. However, Mr Larmer says the attraction to farms is often more emotional than investors care to admit. "Farms are valued much more like houses than they are like businesses." He says it is quite the reverse of a commercial property investment where the link between rental income and value is clear and the tenants are a third party. "Most [farm] businesses are owner-operated in one form or another and there is not a direct link between income and value. If there was, farmland would be worth a lot less than it is at the moment. "The thing, I think, that scares corporates off this sector is that they are competing with the farming community who don't require those sorts of yields on their equity." Mr Larmer thinks the future of corporate farming in New Zealand lies with the Maori trusts whom, he notes, are inter-generational investors with a keen sense of environmental awareness. Landcorp's Chris Kelly agrees the Maori long-term view makes them "ideal landowners" but says the less wealthy incorporations lack capital to develop their potential and there will be more land ripe for development as treaty settlements speed up. "They love their land, and it's never for sale and that may be an issue for raising capital of course, because people often like to have a share of the capital gain action." At Maori-owned PKW Farms in Taranaki, the fact that selling up is never an option means that it has to be a healthy business, general manager Ranald Gordon says. "We've got a strong focus on operational performance because cash is king. Capital gains are no good to us, and the focus is on at least matching or bettering the cost of capital." PKW Farms is a subsidiary of Parininihi Ki Waitotara Inc, Fonterra's largest milk supplier in Taranaki. The company owns $50m worth of dairy land plus a stake in a farm in West Australia. Mr Gordon agrees it likes to keep a low profile – "Maori don't tend to beat their own drums" – and he also believes corporate farmers have been "unfairly maligned" by greenies. `We are very conscious about our environmental responsibilities." In fact, says Mr Kelly, it's the "perception that corporate farming is dirty, it pollutes, it does nasty things" that prompts corporate farming to fly under the radar in this country. Landcorp knows a thing or two about being big. With an asset base of $1.7 billion, it employs nearly 600 staff, owns 110 farms and manages the environmentally sensitive Molesworth station. Some resent the fact a state-owned enterprise owns so much productive land but Mr Kelly notes that it buys and sells on the open market. "There's no doubt that when I first joined there was a lack of knowledge about Landcorp," he says, noting that many farmers thought it made no dividends, paid no taxes and had access to cheap money. "None of which is true, of course." Landcorp has been a good little earner for the Government in the last five years, averaging 18 per cent per annum including capital gains, and informal talks are ongoing with the New Zealand Superannuation Fund. But the sheer size of its operation has brought other benefits. Landcorp's research into sheep genetics receives widespread praise, and it is currently experimenting with biofuel, adding methane to diesel to power electricity generation. It also acts as a training ground for the industry, an issue which concerns Timaru-based Dairy Holdings. General manager Colin Glass agrees there are "huge synergies to be had" from aggregating farms but the pool of farm workers is getting smaller as, like all nations, people drift to the cities. "New Zealand has a huge talent base but the growth that we have seen, particularly in dairying, over the last 10 to 15 years has shown that people capacity is something we can't take for granted," he says. "Our growth in the future will be very much determined by our ability to keep bringing new people into the industry and in agriculture, in general."
