Fran O'Sullivan: More clarity needed on Chinese land bids

Chinese companies are keen on investing in dairy farms in New Zealand. Photo / Sarah Ivey

Labour MP Stuart Nash sang a tune from Prime Minister John Key's songbook as he yesterday ramped up the fear that New Zealand farmers were poised to be "tenants in their own country".

Nash was just one of several MPs from different political parties to zero in on the potential of the Chinese firms trying to gobble up Kiwi dairy farms to establish vertically integrated businesses that will undercut NZ dairy giant Fonterra within China.

"New Zealanders don't want to become tenants in our own lands ... so we can be milked" - was the general refrain.

In Nash's case, it would be trite to suggest he had been persuaded by the power of the Prime Minister's arguments (Key was the first politician to use the "tenants in their own country" slogan).

It was probably more of a subtle indication that Fonterra's lobbyists (with those representing other dairy industry proponents) have managed to cement a belief that the downside of the proposed Chinese firm buy-up of some prime NZ dairy farms is such that it should be killed at birth.

The political heat came to the fore as Parliament debated the second reading of the Dairy Industry Restructuring (New Sunset Provisions) Amendment Bill.

Fonterra has been chafing at the current requirement to sell up to 600 million litres of its milk to other milk processors. It argues many of those other milk processors are either foreign-owned competitors or are exporting product offshore in direct competition with the dairy giant.

It is an argument that resonates in New Zealand where - despite very high international milk powder prices - the agricultural sector is still relatively depressed.

It's a factor which is highlighted by KPMG in its latest banking survey, where it says farm debt remains one of the greatest concerns for the sector, despite historically high prices for agricultural exports and a dramatic slowdown in lending to the rural sector last year.

But not all MPs bought the dairy lobby's arguments.

Some attacked the pitiful amount of tax NZ dairy farmers stump up to the IRD - a factor which is compounded by the lack of strong capital gains tax to clip profits when farms are sold. If such a tax was imposed, it would arguably lower the entry price for young farmers to get into dairying.

But the Government has yet to take a truly holistic look at the dairy industry.

The problem is the debate over China's strategic interests needs to be better based. The National Government and its Labour predecessor both voted in favour of the China-New Zealand free trade deal which set a very open - and seemingly fair - bilateral investment regime.

When the opposition to selling the Crafar dairy farms to interests associated with Natural Dairy (a Hong Kong-based company) became too loud, the Government issued new guidelines for foreign investment in farmland.

These guidelines allow Cabinet ministers to consider whether NZ's economic interests are sufficiently safeguarded and promoted in proposed farm purchases. At issue is the threshold at which new "economic interests" tests and mitigating factors will be applied.

Finance Minister Bill English - who had earlier been promoting a more open foreign investment regime - wrote to the Overseas Investment Office (OIO) saying he wanted such factors given high relative importance in decisions it made on the sale of large areas of farmland (10 times the average size of any given dairy or sheep farm) to offshore buyers. Mitigating factors could include either setting up a New Zealand head office for the company which acquires the farms and/or having a majority of NZ directors on the local board.

But judging by the tenor of the parliamentary debate, English's new test has not done enough to assuage political concerns. The problem is that although the Government appears to have shifted the goal posts, the OIO (and Cabinet ministers) have yet to reinforce this by issuing their response to the latest Chinese bid for the Crafar farms. This bid has been skilfully framed to meet the new OIO environment.

Australia went through a similar scenario in 2009 as it grappled with a huge escalation in interest by Chinese firms in the Australian resources sector. Many Australians were concerned not simply by the source of the investment, but that much of it was from Chinese state-owned enterprises.

The SOEs were seen as being too close to the Chinese Government and sporting competitive advantages such as a lower cost of capital than Australian firms.

The Australian Senate standing committee on economics issued its own report on Australia's policy on foreign investment by SOEs. It came down in favour of issuing approvals on a case-by-case basis (which is similar to what New Zealand adopts).

But it said the Australian Foreign Investment Review Board (FIRB) needed to adopt a more effective communication strategy and provide additional information over how foreign investment decisions are made.

It is a step New Zealand's politicians should study. On this side of the Tasman, New Zealand's OIO remains hopelessly opaque.

Until we get greater clarity all round, Chinese investment in NZ's agriculture sector will remain a thorny issue.