Ministers offer mixed messages as to whether the takeover of Australian farming land and firms by Chinese companies represents a threat or an opportunity
The dollar was high, the country was dry and the chances of a sale looked both – until the Chinese appeared.
The Duddy family attracted barely a flicker of interest from local buyers as their southern Queensland cattle station Hollymount lingered on the market last year.
“There wasn’t much interest from Australians,” says Brian Duddy, a fifth-generation cattleman. “We had two inspections through and not one offer.”
Enter Hailiang Group, a family-controlled $12bn business empire on a mission to put their own brand of Aussie beef in their supermarkets in mainland China. They sent a delegation led by a well-educated, well-spoken young negotiator but “all the decisions were made in Shanghai”.
Hailiang knew the market and their due diligence was exhaustive.
“They weren’t going to buy a pig in a poke,” Duddy says.
In March, the two parties settled the deal for $31.5m. Hailiang also paid $10m for another cattle and cropping property nearby. It was hardly a “mega-deal” by corporate standards but one of the biggest involving Chinese in the Australian farming sector over the previous year.
Then it was eclipsed last month by the$47m sale of 700,000 hectares of grazing land traversing the Queensland and Northern Territory border to the ballbearing billionaire Xingfa Ma.
That deal could also be eclipsed within the next year if one of China’s largest beef producers, Chongqing Hondo Agriculture Group, follows through on a plan to plunge up to $100m into farmland and slaughterhouses. “I like Australia because there are big farms and we are wanting to increase our consistency of supply,” the company’s president, Qin Ya Liang, told Fairfax Media at a trade seminar in Brisbane in May. The “bigger size is good” but the company was willing to take shares in smaller enterprises as well, he said.
But all of these stand to be dwarfed by the upcoming sale of S Kidman and Co, the country’s biggest beef empire covering more than 100,000 square kilometres, which is on the market for more than $325m.
Two Chinese players are thought to be on the shortlist of bidders: the conglomerate Ningbo Xianfeng New Material and the Rifa group, a textile machinery enterprise formerly owned by the Chinese government. Last year Rifa spent $37m on sheep properties in Victoria. If either company prevails, it would be the biggest chunk of Australian farmland acquired by Chinese – or anyone else so far.
In June, the prospect of Australia’s largest private landholding passing into foreign, perhaps even Chinese hands, was the catalyst for a rallying cry by the federal agriculture minister, Barnaby Joyce. It was reported at the time that several foreign state-owned enterprises were weighing up bids for the cattle empire. Joyce spoke strongly in support of a NSW National party conference motion opposing the sale of Kidman to any such state interest.
“It’s different when it is a genuine foreign company or individual investing; they will make their decisions whether to buy land and then stay in [Australian] agriculture or not based on the returns they earn,” Joyce told the conference.
“But a foreign government has a more long-term purpose [in buying farms], which could over the long run undermine our nation’s interests.”
Two months on, it is not clear what foreign state-owned enterprise was exercising the minds of Joyce and the Nationals, beyond suspicions about Rifa’s origins and the fact another possible bidder is backed by Canada’s public-sector pension fund.
the fact another possible bidder is backed by Canada’s public-sector pension fund.
But the episode highlighted concerns about the strategies of foreign companies buying Australian farmland – notwithstanding Joyce’s attempt to pre-empt accusations of xenophobia by distinguishing between private- and state-owned foreign buyers.
This was a distinction that eluded the broadcaster Alan Jones on Wednesday when he was accused by an Abbott government minister of running a “racist” scare campaign about foreign ownership of Australian farmland.
Jones repeatedly raised concerns about not just Chinese but also Japanese and Korean interests. He said China and Japan “won’t need our exports [because] they’re going to buy up our dairy farms and buy up our beef farms”.
The trade minister, Andrew Robb, insisted only 1% of agriculture was owned by the Chinese “and yet most people would think it’s probably 20% … with all of the ranting by the unions and everyone else”.
Beyond talkback radio, there are suspicions that the Chinese at least, who are short of water and land, are playing a government-inspired long game to ensure “food security” – to the possible detriment of Australia’s interests.
Cattle in drought-hit Longreach, central Queensland. With climate risks high and profit margins low, Australian farms do not hold irresistible allure for the Chinese. Photograph: Lisa Maree Williams/Getty Images
The arrival of the Chinese as serious buyers into Australian agriculture coincides with the Abbott government dramatically raising the scrutiny of their farmland purchases.
It has slashed the threshold for Foreign Investment Review Board screening of agricultural land acquisitions by Chinese from $248m to $15m, which has focused new attention even on deals at the modest end of this space. The government has also tasked the tax office with collecting all data on foreign ownership of farmland, with a view to compiling a register next year.
These moves come well on the heels of Europeans, Americans, Japanese and Koreans acquiring great swaths of Australian agriculture.
They offer a potentially mixed message at a time when a new free trade deal between China and Australia has eased the passage of Australian farm products into the Chinese market by lifting tariffs, as well as easing Foreign Investment Review Board scrutiny of Chinese acquisitions in “non-sensitive” sectors.
Part of the sensitivity around Chinese acquiring farmland in Australia is the perception that companies acting overseas are an extension of Chinese government imperatives.
Tim Buckley, of the Institute for Energy Economics and Financial Analysis, says the posture of many Chinese companies can be explicitly linked to a Chinese government mandate to expand their global footprint. The annual report of the Chinese coalminer Shenhua, for one, makes this clear, he says.
Buckley says the same strategic concerns in agriculture would be at play whether it is a state-owned or private enterprise: a combination of profit-seeking vertical integration, the desire for long-term food security and the simple desire to project power.
“It does not surprise me at all the Chinese are busy buying up land in Australia,” Buckley says. “It’s almost inevitable because they’re short water and they’re short land, and the one thing we do know is the richer they get the more protein they want.
“But it’s not just strategic vertical integration food security. It’s projecting power, going beyond the borders of China.”
In contrast to the attention the Chinese receive, Buckley says “no one blinked an eyelid” when James Packer unloaded his massive cattle interests to the British private equity firm Terra Firma for a reported $400m-plus in 2009.Terra Firma is also said to be eyeing a bid for the Kidman empire.
Despite the ongoing series of multimillion-dollar deals capturing headlines, farmland purchases in fact represent a tiny proportion of Chinese investment in Australia.
Chinese companies have invested less than $2bn in total on Australian farms or agricultural businesses, according to research by the accounting firm KPMG and the University of Sydney’s China studies centre, one of the few sources of detailed information on Chinese investment.
Almost a third of this comes from a single “mega-deal” involving a Chinese state-owned enterprise, Bright Food, which paid $550m for a 75% stake in Manassen Foods in 2011.
By contrast, Chinese invested $4.3bn in commercial real estate in Australia last year alone.
About 12.5% of Australian farmland was at least partly owned by foreign investors as of mid-2013, according to the Australian Bureau of Statistics. The bureau has not published data to show what proportion belongs to Chinese interests. KPMG’s Doug Ferguson, the lead author of the report Demystifying Chinese Investment in Australia”, says the Chinese share is “definitely” negligible.
According to figures from the Foreign Investment Review Board for 2013-14, China was the largest foreign investor in the category of agriculture, forestry and fishing with $632m in total (combining figures for Hong Kong and China, which the board lists separately). Canada and the US were a close second and third, with $602m and $584m respectively. In the previous year, investment from the US eclipsed all other countries at $880m.
According to KPMG the narrower category of farmland and agribusiness deals account for less than 1% of total Chinese investment in Australia in 2014, being worth $140m.
But Ferguson says 2015 looms as a potential “breakthrough” year for such deals, bringing their share to more than 1%. This is still a far cry from even the fading mining sector and hinges on the outcome a number of cattle station deals involving Chinese.
A spokeswoman for the Chinese embassy in Canberra says the two countries, both major agricultural producers, are “highly complementary in terms of land resources, capital, technology, labour, industrial structure and market”.
“Growing agricultural and business ties will deliver huge benefits to both countries and peoples,” she says, adding that China has been Australia’s largest trading partner in farm produce since 2010-11.
“The two countries have carried out fruitful agricultural cooperation thanks to the great efforts made by the two governments,” she says, adding that the free trade agreement and export deal on Australian live cattle to China “herald great potential and broad prospect for bilateral cooperation in a wide range of areas including beef cattle and diary”.
Ferguson says cattle and dairy remain the top focus for Chinese players in Australia, followed by “a pretty big gap, frankly, to anything else”.
One key deal is the sale of a reported $40m stake by the media buyer Harold Mitchell in Yougawalla cattle station in Western Australia.
But the “one to watch” is Kidman, according to Ferguson.
Buckley says a farmland register would be “a good starting point so we actually know the magnitude of the issue because at the moment, everyone’s shooting blind”.
On the question of Chinese companies acting on the mandate of their government to spread their influence as a projection of national power, Ferguson disagrees.
Of those actively seeking a foothold in Australian agriculture, Bright Foods and Cosco are the only state-owned players, with “the remainder really privately owned”, he said.
“These things are far more commercial, profit-driven rather than being encouraged from a government perspective,” Ferguson says.
“These are simply highly entrepreneurial people that want to diversify their capital anyway and they want to play in the sectors that are going to enable them to not only invest more but also sell at a much higher profit margin back into the Chinese market.”
Ferguson also says there is a misconception the Chinese desire for “food security”, or self-sufficiency in food production, is what is driving the purchase of Australian farmland.
The Fortescue Solomon iron ore mine in the Valley of the Kings. Shares in Fortescue Metals Group jumped 9% in one day this week, boosted by a report that China’s Hebei Iron & Steel Group and Tewoo Group could invest in its infrastructure and mining assets. Photograph: David Gray/Reuters
“The food security thing is focused on their own production zones within China, using technology and capital to aggregate and build larger scale dairy farms and grazing companies, importing livestock, genetics, animal feeds, et cetera.
“I think what we’re seeing in Australia is very much the focus on acquiring premium, highest quality, high-value brands that will enable a very significant mark-up or profit with the wealthiest element of Chinese society.”
It is not that the Australian farms hold irresistible allure for the Chinese or come without hitches, as KPMG points out. Profit margins are low, climate risks high. Most are family-owned operations that can barely touch the sides in massive Chinese supply chains. Most Chinese buyers have no experience in farming so are ill-equipped to build, piece by piece, operations of suitable size in Australia.
And then there is the high level of scrutiny given to such deals by the Australian media, which Ferguson says does influence the decisions of Chinese investors.
“In most cases, they’re pretty hard-nosed commercial people but at the same time the Chinese clients that I speak to are sensitive around whether or not they feel welcomed, whether or not they feel as though they can actually not only buy the asset but then operate in the community,” he says.
“There is a lot more to making a business work than just buying it.”
The end game for these investors is not to control Australian land but “to have enough equity in the business to have a say on the direction of the offtake”.
“That’s what they want,” he says. “They want to firm up their supply chains. They can see an opportunity to go from primary production in Australia to the finished good in a supermarket in China.”
Ferguson and Buckley agree it is the “fear of the unknown” that is working against the Chinese in Australian agriculture investments.
Ferguson says: “We’re pretty comfortable now with Japanese investors, Korean investors, Middle Eastern investors. The Chinese are new and relatively inexperienced and they come from a different political basis and a very different cultural basis. There is a lot of anxiety.”
Much of this anxiety will be “taken out of the equation” by examples of successful joint ventures, particularly those that leave Australian managers in control of farm operations, according to Ferguson.
“Especially if it’s a private Chinese company with clearly a profit motive,” he adds.
This is a nod to reservations in Australia’s farming sector about the motives of Chinese state enterprise, even among those who have no concerns doing business with private Chinese players.
Brian Duddy, whose family made a fortune selling land to one such player, says there persists among farmers “a genuine fear about state-owned companies”.
He indicates this is as much a concern about the unfair competitive advantage a state-backed enterprise might enjoy, perhaps in the form of secret subsidies or tax breaks, as about national strategic interest in food supply.
“Even if you’ve got a free trade deal, you don’t know what benefits they’ve got,” he says. “They could be completely uncompetitive and still be there.
“If there’s a farmer who’s competing on the same footing and they want to go and buy another property, at least if it’s a private [Chinese] operator, they have to make a profit and abide by the rules that exist.”
It could be that simply speaking the language of profit is the key to China’s entrepreneurial class winning its social licence to operate in this new frontier.
Data research by Nick Evershed