KEY POINTS:
Five years ago dairy farmers in Chile pelted the Trade Minister at the time, Jim Sutton, with a barrage of fruit. Today they're extending a welcoming hand, which New Zealand companies are eager to take.
South American suspicion of foreign companies and economic and political instability is giving way to co-operation, development and growth.
Stability, growing wealth and underdeveloped economies are bringing the region to the attention of international businesses, and Kiwi companies are at the vanguard.
Farmer co-operative Fonterra is looking to expand its already significant presence in the South American dairy industry, while farm services company PGG Wrightson is buying up land in Uruguay, which has a climate suited to New Zealand's intensive grass-fed systems.
But it's not just farming - Kiwi interests in the region range from oil exploration in the Strait of Magellan to software for interactive televisions on buses in Brazil, business consultancy and turning agricultural waste into energy.
And air links are growing. From December 20 Chile's Lan Airlines will fly daily from Auckland to Santiago, and Air New Zealand is considering flights to South America.
The dairy industry has become a foundation stone of the New Zealand economy but history has shown that core industries - be they coal, steel, shipbuilding or farming - are not a birthright for life.
The global economic balance of power can shift overnight.
Fonterra chief executive Andrew Ferrier believes major dairy companies will emerge in South America, potentially with a global market presence.
"Frankly we intend to be that individual rather than waiting for somebody else to do it," he said. "You can't stick your head in the sand."
Prime Minister Helen Clark last month announced regular bilateral foreign policy talks with Uruguay and said the relationship had been growing, particularly after being named among six priority relationships in Latin America.
The similar agricultural base of the two countries' economies meant collaboration in this area made sense, Clark said.
In September Trade Minister Phil Goff led a trade mission of 10 companies including Fonterra, PGG Wrightson and AgResearch to Argentina, Uruguay, Brazil and Chile.
"When my predecessor Jim Sutton went there back about five years the dairy farmers threw tomatoes at him because they saw New Zealand and Fonterra as a threat," Goff said. "Today there was just no suggestion of that."
The Trans-Pacific Strategic Economic Partnership Agreement in 2005 had brought free trade with Chile. "They understand that they can learn from us and work with us to mutual benefit so I think the mood in that sense is changing."
In the 1980s all four countries had military regimes but had since become functioning democracies, while Chile and Brazil were now self-sufficient dairy producers and exporters, Goff said.
New Zealand has had a formal, Government-backed push into Latin America before. In 1996 the Focus Latin America programme was launched when exports were worth $500 million, former finance minister Ruth Richardson was advising Argentina on economic reform, and images of dictatorships, dirty wars and corruption were receding.
A reality check came in the late 1990s when Argentina and Brazil were hit by a debt crisis that stymied growth in the region and scared off foreign investors.
But Latin America has been in recovery, and in the past three years enjoyed its strongest growth since the 1970s. Disparity of wealth in many countries, most notably Brazil, is falling. According to the United States Central Intelligence Agency, the gross domestic product growth of Chile, Uruguay and Argentina in 2006 was estimated at 4 per cent, 7 per cent and 8.5 per cent respectively.
Meanwhile, the 2007 Transparency International Corruption Perceptions Index placed Chile and Uruguay a credible 22nd and 25th respectively - ahead of Spain, Portugal and Italy.
"We're not going to be able to stop [the development], the question is whether we collaborate with it and gain commercial advantage from so doing rather than simply go out and try to compete against a country that has a vastly greater land area and vastly lower costs," Goff said.
PGG Wrightson, which already owned a seeds business in the region, created NZ Farming Systems Uruguay last year to export Kiwi dairy farming expertise.
NZ Farming Systems says it can develop a fully functional dairy farm in Uruguay for between $10,000 and $11,000 a hectare - up to a quarter of the cost in New Zealand of about $30,000 to $40,000.
The company has raised $169.6 million and acquired 30,980ha of farms and land in Uruguay and plans to raise at least a further $50 million this month and float on the New Zealand Stock Exchange, with the potential to expand to 50,000ha at current prices.
PGG Wrightson chairman Craig Norgate said flying across Argentina was like flying across the American Midwest, with temperate-zone land well suited to New Zealand's style of natural, grass-based production.
"That zone is the middle of Chile, North Argentina, Uruguay and southern Brazil and it's in those areas that New Zealand-style farming, there's no reason why it won't have the same sort of productivity as what we see in New Zealand."
The dairy industry looked at the region 20 years ago and viewed it as a potential threat, but economic crisis in Brazil and dark periods in Argentina had prevented the building of export market structures that would support intensification, Norgate said.
"It's always been going to come and we're just now in a period of pretty strong global growth and good stability in countries like Brazil, Chile and Uruguay in particular."
New Zealand was ahead of the game when it came to involvement in the South American dairy industry.
"The old line is first to critical mass owns the market," Norgate said. "So it's not about protecting intellectual property, it's about getting it out into the marketplace and having enough of the market to be able to use that scale to your advantage."
There was potential for NZ Farming Systems to grow further and even cross the border into Brazil, he said.
"The knowledge was going [there] anyway so the real challenge is how New Zealand farmers and New Zealand in general can benefit from that, and so that's what led us to set up New Zealand Farming Systems."
A hundred years ago countries like Argentina, Uruguay and Brazil fed the whole of Europe, Norgate said.
"The Argentinian economy, I think, was the sixth largest in the world in 1900. They've historically been huge agricultural producers."
The Uruguayan President, Minister of Finance and Minister of Agriculture recently visited New Zealand to have a closer look at the workings of our rural infrastructure.
"We're finding in Uruguay that we're certainly one of the favoured investors in land because what we're doing is a very intensive form of land use so provides a lot of employment and does have the potential to really lift the fortunes of those rural communities," Norgate said.
Eastern Europe was another region with potential but was two flights away, he said.
"If something goes wrong in South America you're there in 24 hours ... it's a lot harder running businesses in Europe out of New Zealand."
Meanwhile, Fonterra owns 57 per cent of leading Chilean dairy consumer business Soprole, and through Dairy Partners Americas - a joint venture with Nestle - is active in countries including Brazil, Argentina and Ecuador.
Chief executive Ferrier said there was huge suspicion of Fonterra in Chile five years ago. "They thought that all we really wanted to do was to overwhelm their country with New Zealand dairy products. Now we're universally accepted as a key contributor in the industry."
Fonterra's investment in Soprole dates back about 20 years, but until about three years ago was essentially a passive investment. Last year it contributed $25 million of earnings before interest and tax to Fonterra and this year was up by about 60 per cent.
Fonterra has unveiled a preferred capital restructure to ensure access to capital for global growth which could - if approved by farmers - see a new NZX-listed company created to hold all the assets.
"We want to continue to build that footprint and capital for growth is certainly going to help," Ferrier said.
Fonterra's primary function was to invest in New Zealand to maintain productivity, critical mass and economies of scale to stay ahead of the game.
"But at the same time, we feel that if we aren't building strong presences in the other parts of the world that are going to be New Zealand competitors, then we can't grow with our customers in those markets.
"Those other people that supply them have the chance to supplant us in other markets and then we start cycling down."
South America had a growing middle class and greater, more sophisticated dairy consumption per head than Asian markets, Ferrier said.
"So all the trends that we would be looking at in other parts of the world certainly exist in South America but with the added benefits that consumption is already higher so the prize is already there."
Universities urged to seek out new markets
By Eloise Gibson
Education is the key to expanding trade relationships with Latin American countries, says Auckland University's expert on the region.
Walescka Pino-Ojeda, the university's Latin American Studies co-ordinator and acting director of the New Zealand Centre for Latin American Studies, said education was a promising area for business growth, as Latin Americans increasingly looked beyond the United States for study opportunities.
"With the political situation in the United States, many, many people who used to study in the US are choosing not to go there," she said. "They are not choosing Europe because it's expensive. They are looking west to New Zealand and Australia."
Pino-Ojeda said New Zealand was popular with Latin Americans because it was English-speaking, affordable, and in the Southern hemisphere. As a small, Pacific country, New Zealand was seen as less threatening than Europe or North America.
Pino-Ojeda said there was currently a "love affair" between Latin America and New Zealand spearheaded by a long-standing diplomatic and trade relationship with Chile.
However, while she applauded the establishment of a New Zealand Ministry of Education outpost in Santiago, Chile this year, Pino-Ojeda said New Zealand universities had some catching up to do.
"At the university level we need to become more proactive. Auckland University is the only university with a Latin American Studies programme, and it's a very small one."
Tourism consultant Barney Irvine has just completed a masters degree at Auckland University. He is now establishing the New Zealand arm of Kiwi-run Chilean company P4, which assists small New Zealand companies wanting to enter the Chilean market.
He said Chile's similarities with New Zealand's natural environment made our tourism industry an ideal model for the developing industry.
Chilean oil and gas draws small NZ company into $140m search
By Grant Bradley
In Chile's remote south, surrounded by global energy exploration giants, a small New Zealand company is starting a $140 million hunt for oil and gas.
Greymouth Petroleum, a young firm which has had success in Taranaki, is in the Straits of Magellan after gaining rights from the Chilean Government to explore 14,900 sq km, more than twice the area of Lake Taupo.
It won the largest chunk of territory in bidding that involved industry giants Apache Corporation of Texas and Total of France.
Since the discovery of oil in the area 60 years ago, the Magallanes Basin has produced 500 million barrels of oil and more than 10 trillion cubic feet of gas.
Greymouth Petroleum chief executive Mark Dunphy says data released during the tendering had given the company plenty to be optimistic about.
"We're very encouraged by what we've seen. We start with the easy gets and then go after the big fish."
Greymouth Petroleum, founded in 2000 and owing its name to its founders' family links to the West Coast town, was told by a Canadian petrochemical client in May about the Chilean opportunity.
Energy-starved Chile wanted to exploit the area and short term gas prices in New Zealand are soft, so Greymouth seized the opportunity.
"Every molecule of gas you can produce in Chile you can sell for a good price. There are very few times in your life when you get the planets lining up," says Dunphy, a former banker with more than 15 years' experience in energy.
Chile imports 98 per cent of its crude oil, 96 per cent of its coal and 75 per cent of its natural gas. Its needs have become desperate in the past three years after Argentina cut off as much as much as 50 per cent of gas, due to political pressure from Bolivia, which supplies Argentina.
"From a regime point of view Chile is probably regarded as the best in Latin America. It is stable politically and it has similarities with New Zealand. The further north you go the more difficult it becomes. We figured it was worth taking a look"
Greymouth put in its bid on October 9, bids were opened at the end of October and the successful companies were announced on November 15.
As in New Zealand, bidders had to submit a work programme rather than pay fees, but unlike here companies can bid on how they pay royalties - the speed of repayment and whether they would go into a joint venture with the Chilean Government's energy company, Enap.
After royalties and taxes Greymouth could take home between 50 per cent and 60 per cent of what it finds.
Exploration tapered off in the area during the Pinochet years in the 1970s and 1980s and Dunphy says technology and techniques are out of date.
"It's like Taranaki as it was 25 to 30 years ago. It's a heck of an opportunity when you think about it."
The geology of the Magallanes Basin has similarities to the Taranaki Basin, and Greymouth has identified gas and oil potential in the area equivalent to the Turangi-Pohokura gas-condensate area.
Dunphy says the tendering process was not only quick but very open with universal benchmarks applied to all players.
"That gives you a lot of confidence about a level playing field."
Greymouth now has a small geotechnical team working in Punta Arenas, the main city in Chile's far south, and is also drawing on data from experts in Alberta, Canada and from the company's New Zealand base at Bell Block, New Plymouth.
The talk among Greymouth's 80-strong local team is of learning Spanish in the hope of a Chilean posting when drilling begins towards the end of next year.
There they will face extreme weather - gale westerlies and sub-zero temperatures in the area which lies around the same latitude as Campbell Island in New Zealand's great southern basin. In other words: next stop Antarctica.
A crew of up to 30 will work two shifts a day with two weeks on and two weeks off.
Dunphy says that besides the geotechnical work already under way, staff are in the thick of commercial negotiations setting up an operating company, Petromagallanes
"We want a local identity. Greymouth Petroleum doesn't mean that much to the people of Auckland let alone to the people of south Chile."
Greymouth acquired permits for four of the five blocks in Magallanes Basin, the Brotula and Isla Magdalena offshore blocks and the Provenir, Caupolican onshore blocks.
The first phase of exploration will last for three years and the second and third phases will last for two years each.
Explorer keeps 'fishing spots' private
While a sharemarket listing has been talked about at times, chief executive Mark Dunphy says the six-year-old company has no plans to go public.
Disclosure regimes are not ideally suited to energy companies with exploration interests.
"The oil business is just like fishing - you don't want to tell everyone where your best fishing spot is. We are still keeping our fishing spots private."
Greymouth was founded in July 2000 by energy sector veteran Dunphy and former Shell petroleum engineer John Sturgess, with heavyweight private investor Peter Masfen as its third partner.
Dunphy hit the headlines when he was beaten by Shell to buy Fletcher Energy in 2001.
Greymouth has successful gas and oil interests in Taranaki and has won a block in the Great Southern Basin where it has committed itself to a $23 million programme of gathering and studying data.
An innovator, Greymouth has installed and runs a gas generator at Waikato Hospital, established a spot market for gas, converted an old fire engine from Japan into a drilling rig, and set up a drilling school at its Bell Block base near New Plymouth.
An energy analyst with McDouall Stuart Securities, John Kidd, says Greymouth is an innovator "outside of the mould".
Creating a spot market for gas from the Turangi field had given the gas industry a shakeup.
"They're absolutely nimble, creating opportunities in a space where people have been apprehensive about moving before.
"Energy prices are pushing up quickly so to have someone like Greymouth coming in with some short to medium-term gas which is favourably priced, they'll make a lot of friends out there."
- Grant Bradley
