Defining The Disruptive Geopolitics Of The Global Farms Race
February 17th, 2015
Courtesy of the Wall Street Journal, a look at China’s impact on New Zealand’s agricultural sector:
Ken and Patricia Graham have an unwelcome new neighbor on the farm where they retired to raise sheep and cattle and tend a vineyard—a gigantic Chinese-owned infant-formula factory.
The US$165 million plant emblazoned with the company’s name—Yashili–in Chinese characters fills the view from their wooden deck. Its size is out of all proportion to the surrounding village of Pokeno, which has a population of around 400 in the heart of New Zealand’s dairy country. Before it sprung up last year the biggest structure in the area was a 14-room motel.
How do they feel? “Actually—yuck,” says Ms. Graham. “We like living in a nice rural place.”
Mr. Graham is more damning about the broader industrial development in the area spearheaded by Yashili. “It’s an absolute abomination,” he says.
The shattering of the Grahams’ rural idyll speaks to the disruptive force of China now rippling across New Zealand. China’s surging but unpredictable appetite for milk and other dairy products combined with a sudden spurt of Chinese investment in dairy plants, farmland and real estate is shaking up a traditionally placid way of life in this island nation.
Other small Asia-Pacific countries also feel the jarring effects of their massive size imbalance with China. But a unique combination of demographics and geography magnifies the impact on New Zealand.
Cows in a field in the Taranaki area in New Zealand’s North Island.Most countries produce enough dairy products to meet their own needs and export a small surplus. New Zealand, by contrast, has only about 4.5 million people and an outsized dairy sector sustained by lush pasture. It exports 95% of its output, making it the world’s largest dairy trader.
Urbanization in China has been a windfall for New Zealand. When Chinese farmers settle in cities they buy refrigerators and stock up on milk. But China’s own milk production has struggled to meet demand. With limited agricultural land and concerns about safety after a 2008 scandal in which melamine-tainted formula sickened thousands of babies, China now heavily relies on New Zealand’s pristine farms. They provide 70% of Chinese dairy imports.
The trade has exposed New Zealand to dramatic market shocks. A speculative frenzy of Chinese milk-powder buying in 2013 has turned bust: Prices have roughly halved as others have ramped up milk production to sell to China. Farmers who recently added to their dairy herds are now culling them. Many are saddled with debt that they took on to boost production. The suicide rate among farmers is ticking up.
In time, the market gyrations will calm. Yet more fundamental changes under way in settlements like Pokeno have only just begun.
China is no longer content merely to buy New Zealand’s dairy exports: It wants a stake in the entire production chain. With New Zealand lacking its own savings to fund investments, the Chinese flood is likely to continue.
‘For a small country like New Zealand, this is a pivotal moment’
—Rodney Jones, Wigram Capital Advisors
“For a small country like New Zealand, this is a pivotal moment,” says Rodney Jones, a New Zealander based in Beijing as a principal of Wigram Capital Advisors.
The company that built the infant-formula plant in Pokeno is majority-owned by Chinese state-backed giant China Mengniu Dairy Co. It will start production next month. All of China’s top three dairy producers now manufacture in the country.
In just a few years, a previously unknown Chinese private company—Shanghai Pengxin Group Co Ltd.—has vaulted into the top ranks of corporate farmland owners in New Zealand. Pengxin’s rapid acquisitions have touched off a debate about national identity. During the last election, opposition politicians warned that New Zealanders risked becoming “tenants in their own land.”
Such fears are overblown. Yet the sheer speed and scale of recent Chinese buying is daunting to many people in this country.
Although the stock of Chinese investment in New Zealand remains minuscule, the flow is large: About half of all inbound foreign direct investment in recent years has come from China and Hong Kong. Chinese money has helped to inflate a property bubble in Auckland, New Zealand’s largest city.
Mr. Jones questions what New Zealand is getting out of all this investment beyond jobs and tax revenue. The country “is not defining its long-term interests in the right way,” he says.
Others are more sanguine. David Mahon, one of the most experienced New Zealand executives in China who runs his own advisory and investment business in Beijing, agrees there’s a risk that “the real value of what we do is owned by others.” Yet he welcomes the economy’s shift toward new sources of growth. “Our potential as a country is about to be fulfilled,” he says.
That’s not the way it feels to some of the residents of Pokeno. The Grahams, whose farm is next door to the Yashili factory, plan to soldier on for a few more years and then move away. They’re both in their 70s and still own an apartment in Auckland.
Meanwhile, Helen Clotworthy, who with her husband owns the local butchery business Pokeno Bacon, is bailing out now. Her family is moving to a quieter spot nearby, although they’ll keep the shop.
The roar of bulldozers from the Yashili factory has unsettled Ms. Clotworthy, and she’s grown anxious about the way that China is reshaping her future. “They’ve got wealth that we don’t understand in New Zealand,” she says.
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Educated at Yale University (Bachelor of Arts - History) and Harvard (Master in Public Policy - International Development), Monty Simus has long held a keen interest in natural resource policy and the geopolitical implications of anticipated stresses in the areas of freshwater scarcity, biodiversity reserves & parks, and farm land. Monty has lived, worked, and traveled in more than forty countries spanning Africa, China, western Europe, the Middle East, South America, and Southeast & Central Asia, and his personal interests comprise economic development, policy, investment, technology, natural resources, and the environment, with a particular focus on globalization’s impact upon these subject areas. Monty writes about freshwater scarcity issues at www.waterpolitics.com and frontier investment markets at www.wildcatsandblacksheep.com.