2016/17 Annual review of Landcorp Farming Limited

Transcription

1 2016/17 Annual review of Landcorp Farming Limited Report of the Primary Production Committee March 2018 Contents Recommendation... 2 About Landcorp Farming Limited... 2 Financial performance... 2 Directions from the new Government... 2 Support for change of name... 2 Progress on Landcorp s transformation strategy... 3 Returns to shareholders... 4 Animal welfare... 4 Innovation in farming... 5 Diversifying into forestry... 6 Treaty of Waitangi settlements... 6 Relationship with other farmers... 6 Pāmu Academy... 6 Focus Genetics... 7 Divesting farms... 7 Staff wellbeing... 7 Appendix... 8

2 Landcorp Farming Limited Recommendation The Primary Production Committee has conducted the annual review of Landcorp Farming Limited for 2016/17, and recommends that the House take note of its report. About Landcorp Farming Limited Landcorp Farming Limited is a State-Owned Enterprise, with two shareholding Ministers. It has a nationwide portfolio of 125 farms that produce milk, beef, sheep meat, wool, venison, deer velvet, and wood. Pāmu Farms of New Zealand is the brand name for Landcorp. It strives to be a leader in New Zealand agriculture and create natural products of high quality. Landcorp describes itself as being into the fourth year of an ambitious transformation strategy. This moves from traditional commodity-producing agriculture to a business focused on high-value food and nutrition products under the Pāmu brand. Financial performance In 2016/17, Landcorp s total revenue was $233.5 million and its total operating expenses were $197.3 million. It achieved a net profit after tax of $51.9 million. This compares with $11.5 million in 2015/16. The Auditor-General rated Landcorp s management control environment and financial information systems and controls as very good, with no recommendations for improvement. We commend Landcorp for these results. Directions from the new Government Landcorp has had a briefing meeting with the Minister of Finance and the Ministers for State Owned Enterprises, Forestry, and Primary Industries. The meeting covered strategic issues, such as sustainability, environmental management, and some of the main strategies in the Government s policy frameworks. We heard that Landcorp s transformation strategy aligns well with the environmental and sustainability parts of the Government s policy framework. Support for change of name Landcorp now trades under the name Pāmu, a Māori transliteration meaning to farm or a farm. The Landcorp constitution requires Cabinet approval to change the name. Landcorp would welcome the opportunity to legally and formally change its name to Pāmu. It previously made this request to shareholders but it was declined because Landcorp s strategy was new and the shareholders wanted proof of progress on the strategy. We support this change of name and hope to be reviewing Pāmu at future reviews. 2

3 Progress on Landcorp s transformation strategy Landcorp is in the fourth year of a business transformation strategy, which shifts it from traditional commodity production to adding value to its products and selling them under the Pāmu brand. Landcorp believes it is making good progress. Adding value to milk products Landcorp told us that it primarily produces wool, dairy products, and meat. Over 90 percent is sent to traditional commodity processors. However, it is considering ways in which it can produce differentiated products, such as organics, sheep milk, and A2 milk, which will attract a premium in the market. 1 In 2016/17, less than 2 percent of Landcorp s total milk solids were sold under the Pāmu brand. The milk was primarily organic. Landcorp is converting some farms to organic but it said they are small-scale operations in the context of its overall business. We asked how Landcorp differentiates the milk that it wants to add value to, given it supplies its milk to several processors. Landcorp told us that the industry is configured for large-scale commodity production. It has had difficulty finding processors to take its products on a small scale. At present, Landcorp has a partnership for its milk with the Dairy Goat Co-operative. Innovation Waikato, which is developing niche sectors in the Waikato region, also processes Landcorp s sheep-milk business. Landcorp recognises that most of its work focuses on supplying and supporting large-scale processors in the industry. It will continue to do so under its transformation strategy. Adding value to meat products About 350,000 lambs are sold under the Pāmu brand each year. Landcorp has been investigating how to get Pāmu lamb into the Middle East and China. At present, it has not found a viable, cost-effective way of doing so. Landcorp is working with Duncan New Zealand Venison, a specialist venison processor, to get into the US market under the Pāmu brand. We heard that venison is one area where Landcorp has made some traction. Landcorp accepts that it is struggling to develop the premium Pāmu brand for sheep and beef meat. It said that it will not use the brand if it is not commercially sensible. Alternatives to developing the Pāmu brand We queried whether Landcorp s value-add plan is sensible in the long term. In particular, we discussed Landcorp s difficulties in finding suitable processors, and the fact that the plan would involve significant capital investment and the loss of intellectual property. We asked how Landcorp could ensure that New Zealand benefits rather than simply shareholders or an international company. 1 A2 milk is cow s milk that mostly lacks the A1 protein and instead contains mostly the A2 protein. 3

4 Landcorp told us that it has taken a conservative, partnership-based approach to developing its supply chain. It relies on industry processors having spare capacity, and partners willing to take its product into various markets under the Pāmu brand. We asked whether Landcorp had considered finding another New Zealand brand that could be marketed. Landcorp said that it will not spend a lot of capital developing a brand that it cannot achieve premiums for. However, it has done the market research for dairy and is confident of success. We commend Landcorp for the work it has done to add value. Returns to shareholders We sought Landcorp s views about using international companies to process milk given that one of its shareholding ministers has publicly stated that he does not support using overseas-owned processors in the New Zealand market. Landcorp said that it is sensitive to its shareholders expectations of it as a state-owned enterprise. Although most of its milk goes to New Zealand owned co-ops, Silver Fern Farms processes quite a lot of its beef and lamb through an overseas-owned processor. We heard that, as a state-owned enterprise, Landcorp s main objectives are to optimise its returns to shareholders and minimise risk. Until it receives a more specific direction from its shareholders about preferred processors, Landcorp will continue with those objectives. In 2016/17, the Crown had a 3.8 percent total return on its shareholder equity, the majority of which was from revaluation. Instead of paying a dividend, the Landcorp board decided to continue paying its debt. We asked how Landcorp will move forward if there is no return to shareholders and it is supporting internationally-owned companies. We were told that Landcorp has returned over 9 percent annually and paid out $500 million worth of dividends in the 30 years since it became a state-owned enterprise. Animal welfare Landcorp told us that animal welfare is an ongoing challenge because it has about 800,000 animals. It is investing in training for staff about appropriate animal welfare practices on its farms. Incident at Eweburn Station In early January, during a period of extreme heat in the Te Anau basin, 120 cows were left without access to water in a paddock that had been fenced off for conversion work. This was caused by a breakdown in communication. Landcorp believes that it was about seven to eight days before staff discovered the cows. The cows were immediately given water. However, 70 cows died as a result of salt poisoning. This occurs when a dehydrated cow is exposed to a lot of water quickly. Eweburn Station has about 2,600 hectares, with about 6,000 animals. We heard that there were no audible signs that the cows were in distress and they sought shelter in a Mānuka plantation so were not visible to staff. Landcorp does not know how often the cows were checked during the period. 4

5 As soon as the cows were found, Landcorp notified its vets and the Ministry for Primary Industries. Landcorp understands that the ministry is not investigating it at present. Landcorp said it has disclosed everything to the ministry from its full internal investigation. Landcorp recognises that its teams were under pressure in the extreme drought. Farm staff are being supported and are on two-daily reports, which will continue for the next three months. We acknowledge Landcorp has taken a responsible attitude as a good employer but we believe it should also take the opportunity to check that staff are competent. The chair of Landcorp told us that the board was fully informed about the incident. The board acknowledged that it was unacceptable and that it needs to improve its systems and infrastructure, such as water reticulation, fences, and gates. We were disappointed to hear about this incident and have sought more information. Innovation in farming We asked whether Landcorp should be innovative in agriculture and horticulture or whether it should manage its properties and let individual farmers make these developments. Landcorp told us that it sees a lot of innovation in the private sector which it supports and tries to learn from. It believes that its work in sheep and deer milk has demonstrated that it can be innovative and bring unique products to the market. Intellectual property We asked what Landcorp plans to do with the intellectual property (IP) it develops, and how farmers can access it. We heard that Landcorp s involvement with the Primary Growth Partnership (PGP) is a good example of this working effectively. Landcorp is a partner in the Sheep Horizon Three PGP established to create a national sheep milk industry. It provides funding and operational expertise to the PGP, primarily through the Spring Sheep Milk joint venture company. Landcorp said that this business is about taking its IP and commercialising it so that the private sector can benefit from this work. Alternative uses of land We asked Landcorp what proportion of its land is marginally productive and could be used for other purposes. Landcorp told us it owns about 160,000 hectares of land. Although it is difficult to answer how much of that land is productive, it believes that only about 5 to 10 percent of that land use could shift. Landcorp is exploring alternative uses for that land. This includes growing its honey business, diversifying its forestry portfolio, and growing berries, kiwifruit, and avocados. However, it recognises that it has no expertise in these areas and will be relatively cautious should it choose to pursue them. We note a lack of science and research about the various uses of land and the ultimate environmental benefits. We asked whether Landcorp could advise farmers about scientific data so they could determine whether a change of land use would meet environmental needs. Landcorp agreed, noting that its environmental reference group is focusing on this topic for the next few years. It is establishing an internal group targeting alternative land use because Landcorp recognises it needs to obtain this data across its land portfolios. We 5

6 believe that this would be very helpful for decision making across government and in the farming sector. Diversifying into forestry We asked whether Landcorp is considering diversifying its portfolio with forestry. Landcorp told us it has 10,000 hectares of forestry, 6,000 of which are commercial forests. It planted 1,000 hectares of trees in each of the past two years, and plans to plant a further 1,000 hectares this year. Landcorp is considering its strategy to see how it can become more environmentally sustainable, optimise land use, and get the best commercial returns from its land. It believes that the value of carbon credits means it may get a better return from forestry compared to marginal sheep and beef. Landcorp has received no specific direction from the Government but its shareholders have said that part of their policy is an increase in the Crown s overall forestry portfolio. Treaty of Waitangi settlements Under section 7 of the State-Owned Enterprises Act 1986, Landcorp can seek compensation from the Crown if it requires Landcorp to act in a way that could affect Landcorp s profit or value. This includes compensation for retaining properties intended for sale but which might be required by the Crown to fulfil Treaty of Waitangi obligations. We asked whether Landcorp has had any compensation claims or any obligations for Treaty of Waitangi settlements that might constrain it commercially. Landcorp said that it does not have any compensation claims. It has properties in its portfolio that interest iwi and it works with the Office of Treaty Settlements to take care of those interests. Relationship with other farmers We note previous tensions between Landcorp and other farmers because Landcorp s size meant it could receive a higher premium than its neighbours. Landcorp believes that this may still happen. It is in a difficult position because it must optimise its return to shareholders, which it can do through scale. However, Landcorp also wants to be seen as contributing to the sector. Landcorp is sharing its knowledge and expertise by working with industry groups to improve profits for the sector. It works in the Red Meat Profit Partnership, which aims to increase profits from red meat. Landcorp is also implementing programmes for agriculture technology and beef and lamb sustainability. Pāmu Academy In 2016/17, Landcorp launched the Pāmu Academy to help address risk and safety challenges in agriculture. Training is available for any business and can be delivered at any location. The training has five core areas and Landcorp can tailor specific programmes 6

7 based on an organisation s needs. Internal training began in August 2017 and external courses in September Focus Genetics Landcorp became a 100 percent shareholder of Focus Genetics Ltd three years ago. Focus Genetics aims to advance sheep, cattle, and deer genetics to improve animal productivity and meat quality. We heard that Landcorp expects Focus Genetics to be a sustainable investment. It has some operations in Australia that Landcorp acquired several years ago. Landcorp expects that Focus Genetics Australia will end up being larger than Focus Genetics New Zealand. Divesting farms Landcorp has a programme of divesting its farms, primarily in the South Island. Three properties are being marketed or are in the sales process. Landcorp expects that this will conclude the farm-sale programme. It is comfortable with this decision because it considers its portfolio is well balanced. Staff wellbeing We asked about how Landcorp values its staff wellbeing and how it treats its employees. Landcorp told us that it cannot run its business without good people. It has spent a lot of time transforming and building a single culture across the organisation. We noted that Landcorp s written response to questions about 90-day trial employment periods was not applicable. Landcorp confirmed that no staff are employed on 90-day trial periods. We suggest that Landcorp includes that in future responses because it is useful for us to know. 7

8 Appendix Committee procedure We met on 15 February and 22 March 2018 to consider the annual review of Landcorp Farming Limited. We heard evidence from Landcorp and received advice from the Office of the Auditor-General. Committee members Hon David Bennett (Chairperson) Hon Nathan Guy Jo Luxton Kieran McAnulty Mark Patterson Stuart Smith (from 21 March 2018) Rino Tirikatene Tim van de Molen (until 21 March 2018) Hamish Walker Rt Hon David Carter and Willow-Jean Prime took part in the consideration of this item of business. Advice and evidence received We received the following documents as advice and evidence for this annual review. They are available on the Parliament website, Landcorp Farming Limited, Responses to annual review questions 1 to 106. Landcorp Farming Limited, Responses to post-hearing questions 107 to 114. Office of the Auditor-General, Briefing on Landcorp Farming Limited, dated 15 February