meta Who benefits from China’s massive investment in Kiwi dairy? | The Bullvine

Who benefits from China’s massive investment in Kiwi dairy?

If it goes ahead, New Zealand Milk’s planned listing will give local dairy farmers who are currently in co-operatives different options for supply and ownership. When the revelation hit the press in March, the move was painted as a dinkum solution of the Kiwi dairy industry, by the Kiwi dairy industry and for the Kiwi dairy industry.

Fast forward to last month: founding shareholder Inky Tulloch appeared emotional as he watched the first tanker arrive at Mataura’s recently opened NZ$240m (US$156.8m) facility, declaring, “We’ve finally done it !”

Mataura Valley Milk is the vision of local shareholders like Tulloch who saw the need to “add more value to farmer and shareholder returns than the traditional New Zealand dairy farming/processing model,” according to its marketing material.

So what links these two companies, other than the industry in which they operate and their ambition? By such measures alone, they would appear to be true-blue Kiwi to the core. In reality, though, their businesses have been transformed by substantial Chinese investment.

Milk NZ began life after Chinese billionaire Jiang Zhaobai’s vehicle Shanghai Pengxin bought the Crafar farms, once New Zealand’s biggest family-owned dairy business, in April 2012 for a reported NZ$200m (US$130.5m).

It has since expanded to be one of the biggest dairy farm groups in New Zealand, managing 29 farms, milking 30,000 cows on 12,000 hectares of land, and producing some 10m kgMS each year. Milk NZ exports UHT, fresh milk and powders to China under the Theland brand.

Likewise, the Mataura Valley Milk plant benefitted from a NZ$200m cash injection by the China Animal Husbandry Group, a Chinese state-owned enterprise, in 2016. This was in return for just under a 72% stake in the site, which will process fresh milk into UHT, nutritionals and powders.

With a number of other substantial deals either on the anvil or completed, Milk NZ and Mataura are not alone in the changing landscape of the Kiwi dairy business.

Last year, China’s Bright Food, a Shanghai-based state-owned food industry conglomerate, announced the acquisition of the New Zealand Dairy Company for NZ$56.5m (US$36.9m). The capital investment was made by Synlait Milk, another Kiwi company Bright took over in 2010, which will benefit from the deal by substantially lifting its blending and canning capacity.

Close ties

China and New Zealand have had a close relationship based on, according to one former minister, four “firsts”. These refer to New Zealand being the first western country to conclude a bilateral agreement with China on its succession to the World Trade Organisation, the first developed country to recognize China’s status as a market economy, the first developed country to enter into free trade agreement negotiations, and the first to sign a high quality comprehensive balanced free trade agreement with China.

These arrangements have worked well for the two countries. In New Zealand, China has a trusted mass exporter of dairy, with its shipments accounting for around a quarter of all milk to the country, and over 80% of butter.

The free-trade agreement, signed in 2008, has benefited both sides and helped New Zealand become the center of the global dairy export market, to which it exports 95% of its production. Last year, it shipped nearly NZ$3.3bn (US$2.2bn) of milk powder, butter and cheese to China, according to Stats NZ.

Though China’s investments in New Zealand have dwarfed outlays in the opposite direction—NZ$2.5bn (US$1.6bn) compared to NZ$47m (US$30.7m) overall last year, according to Stats NZ—Fonterra, the world’s biggest dairy company, is sizing up the possibility of building processing plants in China to create products from its China farms.

It currently uses third-party products to process milk from 28,000 cows at two hubs, with a third being built.

“There is a natural cap to how much you can do through third parties so we’re assessing all the options, but we’re not in a position to say a definite timeline or make a commitment at this point,” said Christina Zhu, Fonterra Greater China’s president, last month.

Its Anchor brand is now the top seller in both stores and e-commerce, five years after launch, while Fonterra’s business in China has quintupled in turnover to NZ$5bn (US$3.3bn) over the same period. Its brands account for 11% of China’s total dairy consumption and 36% of dairy imports alone.

However, its NZ$756m (US$493m) mega-investment in Chinese infant food company Beingmate has been criticized as it threatens to hit the rocks, with Fonterra having so far written down NZ$405m (US$264m) of the deal’s value.

But as the dairy major looks to ramp up its milk supply in China, Chinese firms seem to be determined to integrate New Zealand deeply into its supply chain.

Obstacles

It hasn’t all been plain sailing for these companies. After buying the Crafar farms in 2012, Shanghai Pengxin looked to increase its land ownership by making a NZ$56m (US$36.5m) bid to buy the iconic Lochinver farm in the Waikato, only for the deal to be unexpectedly blocked by the government.

In return, Pengxin then pulled the plug on another deal to buy a group of farms 3,300 hectares in size, saying it was “not confident ” of approval from the government, considering its previous experience.

Terry Lee, director Pengxin’s subsidiary, Milk New Zealand, said at the time that he wanted “clarity ” on the requirement used to assess the sale of farmland bigger than five hectares to foreign buyers.

Not all sections of the Kiwi dairy industry are sanguine about how rapidly Chinese firms have been buying into the market. Indeed, some members of the Federated Farmers of New Zealand have been vocal about the scale of the purchases.

New Zealanders don’t have an issue on ownership at a low level. No one would be concerned if 5% of farmland was owned by overseas buyers ,” said William Rolleston, former president of the lobby group.

But if 95% of the land in New Zealand was owned by overseas buyers, I think we would have an issue—it would reduce our strategic options in the future .”

Dr Rolleston’s views echo public concern at the time of Pengxin’s Crafar deal, which sparked a debate about national identity.

Meanwhile, politicians largely on opposition benches have stoked such fears by saying that New Zealanders risked becoming “tenants in their own land.

One powerful figure, deputy prime minister Winston Peters, a nationalist firebrand, last year accused China of “exporting from New Zealand—to itself, ” in a reference to the country’s ownership and control of the infant formula supply chain between the two countries.

Right under our noses China has scored a massive coup. All the wealth and the added value is gushing out of New Zealand ,” he added.

Kiwi pragmatism

Yet New Zealanders are broadly in favor of increasing Chinese investment, which is widely seen as a positive development that puts money in farmers’ pockets, improves infrastructure and drives the industry forward at a frenzied pace. Indeed, government and trade organizations strongly maintain the country remains open for business.

One of New Zealand’s biggest dairy farmers, Colin Armer, summed up the general feeling when he told the BBC, “Bring it on! Foreign investment is great for New Zealand—it’s needed. I hope [the foreign investors] do well—I hope New Zealand does well out of it as well.

There is a lot to be said for this view. Looking at Milk NZ, the dairy has invested more than NZ$500m (US$326m) in its farms, including NZ$38m (US$24.8m) on new projects to “protect the environment, improve the living conditions for farm workers and enhance animal health ,” according to its managing director, Tony Nie.

One example of our on-farm investment is the construction of 300km of fencing to keep livestock away from lakes and waterways for our 16 farms in the North Island ,” he told DairyReporter .

He did, however, lament the “major challenges ” to its business the company faces, including the uncertainty caused by the Overseas Investment Office, which regulates foreign investment, and the time it takes to approve applications.

He also criticized the “special conditions imposed to prevent Pengxin and all its related parties from having more than 50% of interest in any dairy processing plant, and the requirement for the remaining 50% to be owned by New Zealanders.

Nevertheless, the relationship between the two countries remains on strong ground, he said.

The NZ-China FTA and good bi-literal relationship also contribute to the long-term investment in NZ. Milk NZ will continue to add value to New Zealand premium milk by providing consumer products to the Chinese market .”

Knowledge and capital

As Milk NZ weighs up its floatation and eyes new lands, and Mataura begins processing at its new plant, with some of its production due to be sent to the land of its major investor, there is still debate over the pros and cons of foreign investment in New Zealand’s dairy industry.

But, according to the Asia-New Zealand Foundation, an independent Kiwi non-profit, in an assessment of investment into New Zealand, the new captains of industry have been demonstrating a commitment to business growth and providing knowledge and capital to improve the competitiveness of the businesses.

“Successful investment requires a fit between the investors’ commitment, knowledge and networks; the businesses’ capabilities and resources; and their surroundings [such as] the community and business ecosystem,” it said.

By pursuing this fit, foreign investors have enhanced the connectedness between New Zealand and Asia, while ramping up the development of the local dairy business.

Source: dairyreporter.com

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