New Zealand Farming Systems Uruguay (NZFSU) started out in 2006 as a grand strategy by PGG Wrightson (PGGW) to apply New Zealand farming expertise to dairying in Uruguay. The idea was that land could be bought cheaply and that the application of irrigation, fertiliser and New Zealand grassland farming techniques would lead to healthy entrepreneurial profits.
The initial results were exciting. After an initial float at $NZ1 per share, there was a further capital raising the next year at $NZ1.50 per share. The shares then rose on the share market to reach $NZ1.74 at the end of June 2008. (This is the price reported by NZFSU at the end of their financial year; my recollection is that they reached at least $1.92 at other times during that year). Shareholder returns were reported at that time as 43%, and PGGW earned a performance bonus of $US13.6 million. The company became big enough to become part of the NZX50, which is a share market grouping of the 50 largest companies in New Zealand.
One of the main visionaries behind the project was Craig Norgate, who at that time was not only the hands-on chairman of cornerstone investor and project manager PGGW, but also was closely associated with a major private investment in NZFSU by Rural Portfolio Investments (RPI).
In late 2008 there was a huge change of fortune as the NZFSU project was hit by both the global financial crisis and a serious drought. The years 2009 and 2010 were terrible years for NZFSU. On the ground they had to renew 72% of the pastures as a result of the droughts. Cash flows were highly negative, and RPI had to exit, having gone into receivership. PGGW was itself in major financial strife and also had to exit.
The major beneficiary was Olam International, who first bought into NZFSU at fire sale prices as low as 39c a share, and then built their stake at progressively higher prices. That process reached its finale in late November 2012 when, with further purchases at 75c per share, they grew their shareholding to more than 90%, giving them the right to compulsory acquisition of the remaining shares at this same price of 75c.
My estimate is that the initial shareholders invested at an average price of about $NZ1.17 in 2006 and 2007. I also estimate that Olam progressively bought out these shareholders between 2010 and 2012 to achieve an average buy-in price of about 65c. So on average the original shareholders lost more than 40% of their investment.
I have not done a detailed analysis as to how PGGW fared as promoters of the scheme. However, Tony Chaston reported on the www.interest.co.nz site in August 2012 that “PGGW received $[NZ]22.8m in performance fees and $[NZ]8.2m in management fees from 2007 to 2010” according to a NZFSU-contracted appraisal undertaken by Grant Samuel at that time . Also, that “the appraisal shows in the two years to June 2009 [that PGGW] supplied US$28.7m (NZ$40.8m) of equipment, supplies and real estate services”. At that time they also reached agreement with NZFSU that their future management contracts would be bought out for $NZ4 million.
In fact Olam had acquired effective control of the company back in late 2010, and since that time the entity was ‘NZFSU’ only in name. The new Managing Director David Beca (himself originally a New Zealander, but based in Australia for many years prior to taking up the NZFSU appointment) led a shift away from New Zealand style farming systems to a hybrid Australia-Uruguay style of farming.
Since mid 2011 there have only been two people on the operational side of the company who have had strong links to New Zealand. One has been David Beca, and the other has been a Uruguayan middle manager who is a graduate of Lincoln University here in New Zealand.
NZFSU has developed its operations rapidly under Olam and by mid 2012 was farming more than 70,000 dairy cattle (including youngstock) and producing 150 million litres of milk on 45 farms. However, the farms were still running operational losses. In August 2012 Olam reported that the company needed to raise an additional $US135 million equity to pay down loans and to complete the development process.
Now, with ownership entirely in the hands of Olam, we can expect that the veil will come down as to how the business operates in future. Olam is a large international company and will have no need to report on an individual component such as NZFSU. It means there will be no final answers in the public arena as to whether the current strategy is a good one. And that will make it harder for entrepreneurs to fully learn the appropriate lessons before setting out on the next endeavour.
There are some, such as former PGGW executive Barry Brook who for much of the time oversaw the NZFSU operation, who still believe the fundamentals of New Zealand grassland farming systems were inherently appropriate for Uruguay. Barry Brook made this very clear when he presented the inaugural Sir James Stewart Memorial Lecture at Lincoln University in October 2012. However, there are others (including me) who believe that the differences between New Zealand and Uruguay were under-estimated. I think we need to learn from that.
I made my first visit to Uruguay in 2005. I was immediately struck by the potential for land development. A few months later I was sponsored by INIA, the Uruguayan National Agricultural Research Organisation, to return to Uruguay to present a paper at a national economic development conference. That also gave me a chance to then spend 10 days with a Uruguayan friend Nacho Gonzales visiting farms all across the country. Then in 2006 I spent several days visiting the NZFSU farms with a group of prospective investors. My most recent visit to Uruguay was in late 2010, once again sponsored by INIA, to talk about meat industry innovation.
On all of these trips I was excited by what I saw. Indeed after my second visit to Uruguay in late 2005 I pondered on trying myself to get investors together for a private investment in land development. But PGGW were several steps ahead of me and much more skilled in drumming up enthusiasm. So I stayed on the sideline, but did take the opportunity to join potential investors on their tour in 2006.
I knew a little about the sub tropics myself, having spent nearly 20 years in southern Queensland, and I came away from that 2006 trip uneasy that the NZFSU people were not seeing some aspects of sub-tropical reality. Too many technical questions were quickly brushed away. This was clearly a trip to drum up the enthusiasm of potential investors and not a visit to expose potential challenges.
The expected productivity of the project was based on several years of particularly impressive pasture and meat data from intensive beef production under PGGW management on a leased Uruguayan property. The problem was that the ‘whole farm dairy system’ planned by PGGW as managers of NZFSU had never really been tested on a long term basis.
On that 2006 trip I also made a private visit to Mac Herrera’s dairy farm. Mac came to New Zealand in the late 1960s as a student and he is a graduate of Lincoln University. Since then he has spent much of his life back in Uruguay as a dairy farmer, and also working for dairy industry organisations He also happens to be New Zealand’s Honorary Consul in Uruguay. Mac Herrera is a great proponent of New Zealand grassland systems, but he cautioned me that some things are rather different in Uruguay. The way that Mac has applied and adapted those New Zealand principles on his own farm are somewhat different to how they were applied by NZFSU.
Consequently, my doubts about the PGGW/NZFSU project were sufficient that I did not invest myself, but I did fervently hope that the grand NZFSU strategy would work.
My personal view is that as Kiwis we tend to be a little arrogant about our farming expertise. Related to this, we also tend to under-estimate our good fortune in New Zealand to have a temperate and maritime climate. Continental climates are much more challenging. We also tend to under-estimate the importance of the supporting industries and institutional environment here in New Zealand. And we don’t listen enough to what the locals in foreign countries have to tell us about the realities in their countries. We think we can blast through.
I recall Craig Norgate being very specific in telling potential investors in late 2006 that there would be a dividend paid by 2009. He made it clear that this particular commitment was underpinned by the need for his own investment vehicle, RPI, to obtain cash flow.
However, NZFSU did not follow its own business plan. Instead of purchasing about 13,000 ha and developing this, they ‘landbanked’ some 37,000 ha which left them with insufficient cash to develop the farms. If only the global financial crisis had not occurred, and as long as there had been no drought, then it would have panned out all right. But the plan lacked resiliency.
Here in New Zealand we tend to give insufficient thought to the need for farming systems to be resilient. One of the messages to be learned from pastoral farming in Uruguay is that it is easy in the good seasons. The real test of appropriateness is the ability to withstand the bad years. Linked to this is a fundamental truism that under Uruguay conditions the typical Uruguayan dairy systems, based on crop and pasture rotations rather than permanent pastures, are indeed more resilient in dealing with the bad years.
Back here in New Zealand I also get a little irritated at our apparent inability to take on board the lessons that need to be learned about the export of agri-tech and the associated farming systems. I keep hearing of grandiose projects, most of them in environments that are a lot more difficult than Uruguay.
I remain a believer that there are opportunities for the export of New Zealand agri-tech, but that we do need to be a little more humble if we are to prosper from those opportunities. In particular, we need to give a lot more thought to the need for farming systems to be both physically and economically resilient to all the vagaries of climate and economic conditions. The key is to be able to survive the bad years and still be there for the good years. In comparison with many areas of the world, pastoral farming in New Zealand is somewhat easy.
Professor of Farm Management and Agribusiness
Lincoln University, NZ
16 December 2012