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Market will see off Shanghai Pengxin – eventually, English says

Last Tuesday Finance Minister Bill English declared himself pretty relaxed about the potential sale of one of New Zealand largest, most valuable farms to Shanghai Pengxin.

Now it seems his quietude about the Lochinver Station issue is at least partly down to his belief the Chinese company is unlikely to hack it in NZ in the long-haul.

On Friday Mr English told a gathering in Hamilton his personal view is that corporate farming entities, whether local or overseas-owned, don’t tend to survive in the long term.

That’s because of the “low return on assets” that farming delivers – just 1-2%, not including capital gains.

"Prices peak,” he said. “When they start falling, the syndicates and the shareholders want to sell out. And if I was them I would, too, because if you don't live it and love it, you'll end up asset-rich and cash-poor.”

Ticking off New Zealand Dairy Farms, Tasman and the Hubbard and Solid Energy “empires” as examples of corporates bailing out of the sector when the going’s got tough, Mr English said of Pengxin, "These guys, as much as they might not be saying it, they'll come and go. The owner-operator works. The Waikato's testament to it."

Federated Farmers national president William Rolleston agreed with Mr English – up to a point.

"You don't see many corporates holding farms on an intergenerational scale,” he said. “But you can't be completely complacent about it."

And although he didn’t want to get into a debate with Mr English, his shareholding minister, Landcorp CEO Steve Carden said he backed the long-term prospects for corporate farming.

"We've been around for 27 years,” Mr Carden said, “and we've only ever lost money in one of those years."

Shanghai Pengxin’s application to purchase the 13,800 hectare Lochinver property near Taupo is currently being considered by the Overseas Investment Office

Since it was revealed by Conservative Party leader Colin Craig at a Grey Power meeting a week-and-half ago, the sale of NZ farms to overseas interests has become an election issue, with Labour, the Greens, New Zealand First and the Conservative Party lining up to oppose such sales.

NZ First’s Winston Peters has adopted the strongest stance, saying he’d make blocking the sale a bottom line for supporting the next government and vowing to buy back strategically important farms sold to foreigners.

In 2012 the government controversially approved the sale of the 16 central North Island Crafar farms, which total almost 8000ha, to Shanghai Pengxin.

And earlier this year the Chinese company took a 75% stake in the 4500 hectare Synlait Farms in Canterbury, a deal that included 12ha of conservation property.

Prime Minister John Key has warned other parties about the danger of trying to make political hay from the issue by rushing to judgement about the Lochinver Station sale.

"The government would almost certainly be open to legal action if they pre-judge the decision made by the Overseas Investment Office without knowing the facts," Mr Key said.

More by Nick Grant

Comments and questions

The Japanese were going around buying assets and businesses around the world during the 80s and 90s at less than 2% return as well. They learnt a very bitter lesson and so will the China Chinese. Gravity takes over.

When the billions in population puts pressure on the Chinese regime for a NZ sized welfare system and a NZ sized minimum wage....yes. They will have to be able to have a vote that means something first.

Never mind nanny-state. Mate, it's mumma-market you've got to watch out for. She has a tendency to fall asleep on the job. Then, when she wakes up to find the house in cinders, is the first in line for a hand out, and always makes sure that there's never enough to go round.

China's investment strategy seems to be very different to others.

Two points - they are known to play a very long game, and as shown in Iraq with their oil contracts, they are ok with razor thin margins.

You have to look at the motivations for buying the farms to determine whether they are in there for the long term - if this is about supplying China, then I'd say they'll live with the margins and buy big.

Bill English would know this, so I am having a hard time understanding his statement.

I could be wrong though...

Bill is right about cycles, but I would challenge Bill to point to any farmland sale by Chinese owners. The biggest difference between buyers in China and others is the view on never selling land. Amercians, Japanese ect have boight and sold land - but to my knowledge, Chinese buyers never sell land.

The biggest issue here is environmental. Turning a significant amount of marginal land into dairy will have disastrous consequences for the environment. The water quality in the Buller, the Ruamahanga, the Rakaia and numerous other large rivers is absoultely disgraceful and we should be fighting to stop more rivers being ruined. The Mohaka is one of the few clean rivers left in New Zealand and we should be fighting to preserve this.

In principle we should be happy with foreign ownership, though they should not be allowed to convert it to dairy. Though to be fair, that stipulation should be applied to potential NZ buyers also.

Maybe Landcorp / DOC would be the best buyers of this peice of land?

Let's just bring back Muldoon under the guise of Winston Peters and start regulating everything.

Oh, forgot that Muldoon left NZ in an economic and social mess before he was booted out.

Why should my taxpayer dollars be invested in a business I don't want to be in? I prefer to make my own investment decisions.

Agree. Dairy conversions should have been outlawed a decade ago.

100% in agreement with Really? and grandstream above. It is a mantra in China to NEVER sell land once acquired. Not surprising when they cannot even purchase land in their own country, where all land is owned by the government and leased. These acquisitions will deprive NZers of EVER acquiring this land again. This is a fundamental issue which needs proper debate in this wonderful "democractic" country of ours, instead of having purchase approvals made by unqualified Wellington civil service boffins in secret.

Yes, this is what is so stunning about a lot of NZers' perspective on foreign land ownership. It seems to come down to:

1. "What harm can it do?"
2. "It is required for foreign investment to happen" (It plainly is not - see overseas countries that don't allow it, including China, Vietnam, the Philippines etc. )
3. "I can get a higher price by selling to an overseas concern" (Well, of course you can - that will be part of the long term problem for future NZ generations, and is what a number of countries try to protect their citizens from. Do we want to become a Monaco or Luxembourg?).

When foreign ownership is NOT required for foreign investment to take place, and when many foreigners are much better at playing the long game than NZers, why simply sell all our land off willy nilly?

Foreigners are also simply holding an asset, to exploit it for financial gain - their is not the same motivation toward the long term future of the country that citizens will naturally have in stronger measure.

NZ does not have the power to be able to forcibly repatriate land assets in future should food security become a major international issue, as it is slated to be later this century.

People need to stop crying xenophobia and start thinking about the long term issues of NZers becoming tenants in their own country - as John Key said in 2010 we should not be, but is not planning to do anything about.

" they should not be allowed to convert it to dairy."

It is not "dairy" or "dairy cows" per se which causes the problem of excess nitrogen loss to groundwater, to which you allude.

Any grazing animal at sufficient density can have the effect ; beef cows , or sheep even , can do it. Any stock density which results in soil damage , and which results in deposition of urine in excess of the soil's capacity to absorb it will have the same effect.
There are dairy regimes which have little or no effect in this way.

If it were only for business purposes then leasing of farms would be the best choice for overseas investors.

Float the idea to lease Lochinvar to Shanghai Pengxin and see if the interest I still there.

Thats all very well if the property was in Government ownership, but it's not. Why should a private freehold owner be forced to convert the title to leasehold and sell at a discount. Would you prefer that the Government bought the farm at market rates from the private owner, then sell leasehold at a discount to the Chinese.

Its all very well to adopt a moral highground position when its not your wallet that will take the hit.

English may well be right. People forget, but the mainland Chinese are brand spanking new to investing, both domestically and internationally. They don't have the benefit yet of a deep knowledge and experience that is built up after decades in the game. Most of the current crop of Chinese billion and millionaires, 30 years ago were communists (or their kids) running around in their Mao suites on the commune ladling out the night-soil without so much as two brass farthings to rub together. I know, because I was there! Just as anyone new to any game, they will make lots of mistakes.

Agreed. What are people worried about? That the owner will sell the produce on the international market? We already do that. That a corporate will be farming the land? We already do that. That it will impact the environment? We already do that.

If people have a problem with any of the issues, focus on solving/preventing them.

Interesting comment from Landcorp - re operating for 27 years and only making a loss in one year. But what has the return on the government investment been?

i suspect they carry little debt and therefore are not exposed to interest costs like many other farmers are.

why is the government a farmer in anycase?

Landcorp is a great employer and has great staff. They are in a prime position to comment with confidence. As regards Mr English, I know who would win that battle if he came face to face in debate with the ubiquitous Steve Carden and his co-hort, CFO, Mr Steven McJorrow.

Bill English is a favourite of mine, and I've never seen him so shallow in thinking as here, so I'm sure this is ideological spin... coz it sure ain't economic thinking! PengXin want Lochinver to acheive critical mass with the Crafar structure, to align dairy production via a vertical manufacturing base. This in turn has the bonus of giving them complete entre nous in the NZ dairy production technology gammit. As for returns?... Has English heard of veritices, or is he just stuck in the agrarian past? The farms make 1-2%.. The factory makes 7-9%.. the brand marketing to retailer makes 20+%. put them together and you'll get a whopping mass GP that makes NP the envy of the banking classes. PengXin have got this thought through clearly.

I believe Mr English is correct, the "owner operator" has, in NZ, historically seen off every other model.
the reason is very simple; corporate management will not take a pay cut in hard times, nor will they work with anything less than modern machinery with all the latest bells and whistles. Where as the poor old "owner operator" in hard times just pulls his belt in another notch, kicks the missus out to work and does anything that needs an extra pair of hands either before the kids go to school or after they get home. That is the way it has always has been and, I believe, always will be.
As for Landcorp, darn good news they are doing so well and no longer need to be underpinned with the taxpayers good name. YAY

"Last Tuesday Finance Minister Bill English declared himself pretty relaxed..."

The Bill & John seems pretty relaxed about a lot of things lately. It's not entirely reassuring...

Simple economics. The best farmer will generate the best return on capital and can afford to pay the most for the opportunity. The rest will go broke if they outbid him/her.

English is correct and economics will trump ideology as it always has.