Time’s up for Landcorp

Ray Macleod argues state-owned farmer Landcorp annual result shows abysmal performance and its farms should be sold to a new generation of farmers willing to put their own money into the business.

As a business, Landcorp has a limited useful future in public ownership. If we taxpayers were to achieve anything close to our equity position on the balance sheet, in a sell off, we could invest in government bonds and pull better than $40 million each year, without the hassles.

Gross revenue from farming at $227m is less than 13% of balance sheet asset value. That is not economically pretty. The best farmers will achieve operating margins of that order before interest, tax and depreciation. Farm revenue that low is appalling for the value of the assets employed to generate that profit, which will be considerably larger than the assets owned by Landcorp given it leases 42 farms that don’t appear on the balance sheet, that at balance date 2017 was 214,858ha compared to the 158,652ha owned.

Most farmers would be devastated, but not Landcorp it seems. It claims to have achieved a 3.7% EBITDAR return on $1.121 billion which is the balance sheet value of $1.857b less the revaluation reserve of $736m, allowing for rounding errors, use balance sheet value of $1.857b that return plummets to about 2.2%.

Landcorp passed that insipid performance off with some nonchalance, preferring to promote its aspirations rather than comment on what I would label its desperations.

Take out fair value adjustments, non-farming revenues and one-off revenue gains it goes negative. The smoke and mirrors of financial reporting that are fair value gains reported as profit, even if much of it won’t be realised because it is in breeding stock, add in revaluation reserves of $736m and core debt closer to $670m because $306m of that is hidden as “other equity” or Landcorp-speak for shareholder advances and its performances are really poor.

All these things conspire, probably to Landcorp’s relief, to protect the reported results from causing further public embarrassment when, as best can be estimated from the trading data, it struggles to achieve operational farm surpluses.

If we examine other business revenue of $19.9m we find half of it is carbon credits and $1.2m is property sales. It paid a dividend it seems from borrowings and examining the creep in liabilities supports this. Ask local government what happens when you do that, google Delta?

Arguments about the land being of poorer quality can be trotted out by the army of defenders in its ranks, but poorer quality is normally offset by lower cost and lower balance sheet values. What would it look like if it were more productive land? My guess, the performance would be worse.

Pamu a failing SOE

Slapping the picture of a kiwi in your annual report doesn’t make you environmental leadership material.

The average Landcorp cow produces 336kg milksolids (MS) and the New Zealand average cow produced 368kg MS in the same reporting season. Landcorp has 297 cows per 100,000kg MS produced. The country average is 272 cows and sadly there are growing numbers of dairy farms that would frankly embarrass Landcorp by operating at almost twice the per-cow output therefore almost half the cows. That is called efficiency, it is hard to take Landcorp seriously in this area.

Landcorp is not an industry leader, it is a pampered state-owned enterprise that is past its use-by date, certainly in its current form, and increasingly appears as a safe haven for the environmentally self-righteous who don’t have any skin in the environmental management game like the primary and industrial sector investors do.

Rebranding as Pamu fools no one. Farmers who put their family capital into sustainable farming and readily invest in environmental and efficiency initiatives have my utmost respect, yet they are subjected to the propaganda and criticism of the Landcorps of this world blowing trumpets they haven’t learned to play in the real world. And five of its six environmental measures, as published in the annual report, have NA against them.

‘…plays in the sandpit with Greenpeace, Forest and Bird, Fish and Game and Ecologic but somehow ignores Federated Farmers, its own lobby vehicle.’

As to areas under QE11 Covenants, plenty of farmers place greater areas, as a percentage of area farmed, into QE11 Covenants and use their own capital to do it. I am aware of dairy farmers that have N leaching of under 20kg, they quietly achieve, are happy to share their stories and lead from the front. Modesty isn’t, it appears, a Landcorp trait.

Landcorp, to follow the lead in the annual report (good grief!) is entering its fifth year of delivering abject operational averageness or less. Its version of “solid growth” is less than 3.4% on farming revenue with the bulk of its growth an $8.1m carbon credit allocation and a sneaky $1.2m from a property sale labelled as “other minor items”.

To be clear farming revenue for the 2018 reporting year at $227m falls short of the 2014 reporting year which stood at $242m, the solid growth claim falls well short of being convincing and although admittedly far better than the 2015 and 2016 years really only represents a partial recovery, at best.

Over the past five years we have seen bank debt creep up from $282m to $360m, “other equity” or Landcorp speak for shareholder advances has crept up from $282m to $306m. To claim, as it does, that “the focus is on Pamu as a land use company which increasingly operates beyond its traditional farming role, with major responsibilities for stewardship of resources and industry” is to conveniently deflect from the appalling farming record and the arrogance of such a claim is insulting to the many farmers who are leaving it behind in these areas and doing so with their own money and without the fanfare.

It is hard to get excited and it is even harder now that it doesn’t recognise us taxpayers as the most important stakeholder but instead plays in the sandpit with Greenpeace, Forest and Bird, Fish and Game and Ecologic but somehow ignores Federated Farmers, its own lobby vehicle.

Pushing the boat out further it is trying to ingratiate itself with Government and environmental lobby groups by pursuing some fairly outlandish taxation suggestions with the Tax Working Group. Taxing pollution is the most backward suggestion I have ever heard. If Landcorp was ever to be an influence on good farming practice, that submission to the Tax Working Group blew it.

Solving problems in the real world is a collaborative construct, farmers don’t need or deserve the crocodile tears of a failing SOE. Almost two billion of investment dollars could be realised and used to work with all New Zealanders on developing constructive responses to environmental management.

One suspects that Landcorp’s angle is it hopes to be the grateful recipient of a punitive taxation tool to ensure its survival, rather than become an also-ran in an increasingly demanding sector, one many farmers are putting real risk capital into. It is more of a festering sore in the primary sector landscape.

Is it time for Landcorp-owned farms to be sold off to a new generation of young people who truly do know how to innovate and progress some pretty dated farming models and even better, are happy to use their own capital.

  • Ray Macleod is a Dunedin-based agricultural economist