Landcorp wants to boost Crafar farms output to 5m kg/year

BUSINESSDESK: Landcorp wants to squeeze more than five million kilograms of milk solids a year from the Crafar farms, if and when its Chinese partner Shanghai Pengxin takes ownership of the land.

Chief executive Chris Kelly told Parliament's primary production committee the Crafar farms now produce about 4.3m kilograms annually and he wants to get that to more than 5m over the next two or three years.

That would take production back to where it was under Crafar family ownership, but Mr Kelly said the cows are now in much better condition.

"The Crafars were farming pretty much at the edge," he said.

Landcorp will manage and develop the 16 Central North Island farms for Shanghai Pengxin, which got government approval for a second time last month after the first nod was overturned by a High Court appeal.

Mr Kelly told the committee the deal will be similar to a 50:50 sharemilking joint venture through a yet-to-be-formed entity called Milk New Zealand Farming Ltd.

Where the relationship differs from a typical sharemilking deal is that there will be a "sliding scale of revenue sharing based on 50:50 at a certain point" to lock in Landcorp's ability to pay its fixed costs.

"We get more of the revenue once the payout goes lower and we get relatively less of the revenue once the payout gets higher," Mr Kelly said.

The entity will have two directors each from Landcorp and Shanghai Pengxin, with an independent chairman.

It will advise shareholders "independently about whether they hold shares, whether they don't hold shares, whether they buy farms, sell farms, what critical mass. All those sort of things," Mr Kelly said.

Shanghai Pengxin doesn't have any interest in investing in processing facilities, and sees its biggest commercial opportunity where it can sell New Zealand-sourced product for almost five times more than local UHT milk in China.

"They are prepared to pay a premium, in their view, for the farms back in New Zealand," he said.

Landcorp hasn't decided on whether to sell its dividend rights from its Fonterra Cooperative Group shares as part of the proposed Trading Among Farmers scheme, and wants to see the details of the new capital structure.

"We are also going to canvass the views of other independents such as Westland and Open Country Dairy and make decision based on what we find and see and read," Mr Kelly said.

Shanghai Pengxin will hold the Fonterra shares of the Crafar farms and will ultimately decide whether to sell the dividend rights of the "dry shares" into the Fonterra Shareholders' Fund.

"They haven't given an indication, because I don't think they know."

Landcorp supplies raw milk to four dairy processors, and when asked by Labour Party MP Damien O'Connor whether it had been pressured to switch its supply, Mr Kelly said past chairman Jim Sutton received a letter from the company but the board chose not to change.

Asked if the company was Taupo-based processor Miraka, he said: "It might have been, yes."