By Bernard Hickey
Prime Minister John Key, Finance Minister Bill English and State Owned Enterprises Minister Todd McClay have raised concerns about Landcorp's ability to finance dairy conversion commitments in the years ahead, given the NZ$214.5 million of bank debt it has on its books.
Landcorp has a 50 year partnership with Wairakei Pastoral to convert 20,000 hectares of former Fletcher Forests land into dairying for an extra 27,000 cows by 2021. The land is owned by Wairakei Pastoral, which is owned by Auckland property developers Ross Green, Mark Wyborn and Trevor Farmer, who bought the land from Fletcher Challenge Forests in 2003.
Landcorp signed the deal in 2004 and is due to increase its spending in the years ahead to finance the conversions, yet has also increased its bank debts to NZ$214.5 million by December 30, 2014 from NZ$149.4 million as at June 30, 2010.
SOE Minister Todd McClay said he was having an ongoing discussion with the board of Landcorp.
"I want to make sure that with changes some of the pricing around dairy and other things that it doesn't become an issue for them. Landcorp buy and sell farms all the time. It is fair to say a few years ago they purchased a lot more farms and that created some debt," McClay said.
"They are also working through some issues in as far as a contract they entered into in 2004 around land conversions which means that they will have expenditure in the next few years going forward. It's important we get the right balance. It's a sustainable business, we want to make sure the debt doesn't get ahead of them," he said.
McClay said he wasn't overly concerned about Landcorp, "but they have gone through a period where they have bought a number of farms, a significant number of farms, and they have debt on their books."
"They buy and sell farms all the time. It may be that they need to look at some of those and..." he said, without specifying possible sales.
'Noose around their necks'
Key said there was a "concern that they could get too much debt and, as we saw with Solid Energy, that became a noose around their neck."
He said ministers had been looking at Landcorp for a year or so.
"I don't think it's been so much the fall in dairy prices, I think the issue's really been around that they could see their balance sheet was growing and their debt was growing and just a general concern about what that would mean ultimately if they stress tested, but also the forward outlook for the capital that they would require," Key said.
"I know that for quite some time they have been saying to be that there are some concerns about the level of debt. It's definitely been ongoing. For quite some time they have been raising the issue. It's for the shareholding minister to address the Board about any concerns they have about the level of gearing they have. On the government's part we can see this pipeline of capital that they will require," he said.
"There's only so much debt they can actually carry and if they carry more than that it will be very problematic."
'Extra capital needed for conversions'
English said the Government was in intensive discussions with Landcorp and others SOEs.
He said Landcorp was not asking the Government for capital, but needed extra capital for its dairy conversions contract with Wairakei Pastoral.
Asked if partial privatisation was an option for raising capital, English said: "We are not really at a stage where we need to sort that through. They've got to redo their forecasts, they've got various plans. They've had an ongoing process of sales of land driven by land that's not core, farms that aren't core to their operation and also sales related to the Treaty process."
"We are not ruling anything in or anything out because we are not dealing with propositions at the moment. There's been past discussion with them, as there is with all SOEs, about their capital structure just to ensure they are sustainable. It's pretty clear in Landcorp's case that a drop in the dairy payout is going to have some impact on them so we have to wait and see what impact."
'More farm sales an option'
English would not rule out land sales by Landcorp and admitted partial privatisation had been raised as an option.
"I mean they are regularly selling off land now. Certainly our objective is a healthy, sustainable organisation. What we do know is that with a drop in the dairy payout there'll be implications of that and we'll have to see what those are," he said.
Asked if partial privatisation was considered, he said: "As an option? Yeah. I think they've probably looked at ways of raising capital related to selling their land, but not floats or big sell offs or anything like that."
"One of the options would be to sell down some farms to reduce debt," he said.
"We expect Landcorp to sustain its business. That may involve, like a whole lot of other people particularly in the dairy business, involve selling a few more farms."
'Foreign buyers may pounce'
Labour Leader Andrew Little criticised any suggestion of partial privatisation of Landcorp.
"I think we need to understand what it is that is driving the government to sell off Landcorp which has been a successful farmer. We know that Landcorp buys and sells farms, that is part of its business. But when it starts selling off large chunks out of proportion to what they have sold before, the real question is 'why are they doing that?'," Little said.
"The low New Zealand dollar makes it more attractive for overseas buyers and we need to be sure that we are not selling to overseas buyers who cannot add value to New Zealand farms," he said.
45 Comments
So was the contract with Wairakei Pastoral ever viable? To convert forest to dairy is an expensive excercise. I have heard $11000/ha quoted. What was the payback? Clearly at the moment there is no payback. So what recourse does Landcorp have? This is lookjng like a crisis. How bad are the figures right now? How bad is the cashflow moving forward?English must be tearing his hair out to go public on it.
Yes AJ, Their Broadlands project involving conversion on long leases was a stupid idea right from day one, especially for an SOE which by its very nature is a transitory organ (tho the left deny that) to private enterprise. The problem now tho is that these Whigs that have captured the Nats just want to flog taxpayer assets off to their mates at any price. Landcorp should be sold entirely but not now when prices are low. This government would have them sell good freehold farms (and Landcorp are good farmers - probably too good) to capitalise the completion of leasehold ones. Dumb, or crooked?
I find it hard to believe that dead flat Broadlands area best land use was pines. None of the neighbours were doing pines and the lucerne plant next door was trucking stuff in from far away as the 'rapa. Dumb, crooked or bad timing? If they were named kiwirail instead of landcorp most of these commenters would rallying in support/ must be saved mentality. Perhaps that is that is the most politically expedient solution for solid energy - bring it in under kiwirail...
Profile, There's nothing wrong with the Broadlands land now - it was historically "Bush Sick" lacking in Cobalt, that's why the Kaingaroa district was originally planted in forestry- with trace elements added there are now many good dairy farms there. It don't matter what the timing, it's stupid for an SOE to spend a fortune converting forestry slash to farms on land it don't own.
Ergo - the conversion was done by Landcorp on behalf of the owners. If they didn't do it someone else would have. The long term lease of that land is a separate transaction/decision. Conversion to dairy is a better land use for that land ultimately - though a free stall barn with bio-digestor would be a better bet on pumice. Aware of the historic cobalt issue.
Probably more like $20,000/ha. I would be curious to understand how land improvement is factored into the agreement, surely the land-owner would have to compensate LandCorp at some stage?
We have an SOE involved in a project that will result in environmental degradation on highly erodible soils, with excess nitrogen to manage, and significant greenhouse gases emissions that will have to fit under the Government's commitment. This area can also get pretty dry in summer, and I doubt they have a right to take water out of the Waikato River.
They were going to have to clear the ex-forestry land no matter what they were going to do and it wasn't valuable (and even might not be legal) to reforest and re-harvest in 20+ years time.... given the carbon credits cost. If it was re-declared as diary farms, a very high land value, then a massive paper profit on that years harvest would result (justifying the clean up project). _and_ convert the land before they had to pay carbon credits for deforesting.
And in the future it meant the dairy farms would be liquid gold OR they could get carbon credits for putting the land in to trees.
Isn't it amazing how these geniuses who profess to lead us are so wise when things are so blatantly obvious to even a half wit. Smart government and leadership would have seen this a lot earlier and acted in a wise and timely way that best looks after our interests. On the other hand maybe they are smart; just looking after different interests like their mates overseas.
Greed, by Govn and their appointed toadies? ie a rinse and repeat of Solid Energy? whereby the Govn demands an un-reaslitic level of return and the sycophants obey.
and that goes across multiple Govns IMHO...ie jobs for the boys....
There is no "wise and timely" manner about any Govn's action, its a case of "pray it doesnt happen on my watch" IMHO.
I imagine this land was in forestry in the first place as it wasn't the most desirable land for dairy in the first place. Maybe the best thing to come out of this reality check with dairy is that some of the farms in the stupid places (like MacKenzie Country etc) will vanish, lesson learned, never to return.
Landcorp have managed to turn land that would not have owed the country a dime into another debt laden burden that will have to be sold, probably to foreigners, just like Solid Energy's assets will be.
Incompetence seems to be the best descriptor for this lot in govt now all we are going to end up with when their tenure is up is an asset stripped, foreign owned country with just a new piece of rag to show for it
bush previous to this. it was never workable as dairy land because of what was known as "Bush Sickness" which meant cattle did very poorly and died. Since NZ fixed that problem, the land became viable as dairy - until the nutrient caps were put in place.
It was planted as forestry because government of day had declared with careful reports and academic support that NZ's growing economy was going to require huge amounts of lumber to support it's growing population, and it was more economically to grow our own than to import a shortfall (into our agrarian economy). Any excess could be sold into the worlds shortfall of timber/lumber/logs.
I believe this was immediately on the tail of the governments "highly profitable" sale of forest AND land (since they couldn't sell the lumber/logs/trees at any price) to foreigners - ie they noticed that NZ's ability to produce its own lumber had dramatically reduced.... So that reduction along with projected needs required urgent conversion of land...as replanting/cleaning up Mamaku/Rotorua would (1) be expensive, (2!) show that a previous decision by government not to replant was wrong.
Landcorp, is an easy fix, They have good local farm managers, let them manage the farms and fire everybody above them.
Let the managers run the farm like everybody else, accounts done locally, local vets and farm stores, no special treatment, no kidding ourselves about economies of scale, local farms run locally with someone to keep an eye out for problems. They still won't make much money but the risk profile will be a lot better.
If it makes you feel better a fair chunk of nz forestry is foreign owned anyway. Keep in mind the deal with Wairakei Pastoral was signed under the Clarke govt. Clarke allowed landcorp to sell all the land around taupo to Colin Armor to convert to dAiry. Instead of keeping it as sheep country. This govt, that govt, they are all full of idiots. On the nearby Landcorp outfit they employed a current bankrupt to do some fencing. He ripped them off something wicked. Did a terrible job With imported labour thst had never fenced before. They ended up sacking him, and the landcorp overseer, not before the locals missed out on all the work Though. Idiots. Idiots with a free rein with tax payer money.
Works well in some cases Belle but not in others. The area we went farming in was predominately a ballot farm area - for the sheep farmers, who were the biggest land holders. Within 10years (the mid 1990's) there were only 4 sheep farms left - the rest mainly sold to dairy conversion, though some went to forestry. The main reason was while at the time of balloting the farms were a viable size, by the mid 90's they weren't and the farmers were struggling. They couldn't afford to 'buy the neighbour' to give them economy of scale. It was also interesting the number of them that had funds sent from the UK to give them the deposit they needed to be eligible - they had taken out citizenship in order to qualify for the ballots.
That would have infuriated the locals CO. Yes I remember now the talk of the farms not being big enough. Pays to never look a gift horse in the mouth and get on with it. Its might not be the perfect answer, but with the returned services guys getting farms too we certainly have a great history of giving chances to the young. What happened to that?
$1,300,000,000 of assets returned $1m to government - appalling yield and a bad use of tax payer funds.
You would have to argue that the timing to sell however is poor.
I also wonder under what mandate Landcorp operates as no minister in their right mind would want to run a portfolio like this - surely
Landcorp, Solid Energy, Kiwirail ...the list goes on. Doesn't this tell us taxpayers that the State has no idea about running businesses? Best leave it to private enterprise. And stop taking unnecessary risks with taxpayers’ funds.
As Bill English puts it, quoted this afternoon in Stuff, "The boards are just there to do what the shareholder wants."
The incompetence begins right at the top. The boards, apparently, do no more than ensure that government incompetence faces no obstruction in delivery.
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