South America investment appeals

A dairy unit in Chile, developed by a New Zealand company

05-12-2008 | Not Specified

New Zealand dairy farmers under-estimate the problems of developing dairy in South America, says Keith Woodford.

Lincoln University's Professor of Farm Management and Agribusiness says at the same time they also under-estimate the reliability of our farming environment here.

Professor Woodford gave a measured overview of farming opportunities in South America to the recent agricultural journalists' conference in Wellington, saying there seems to be considerable scope for New Zealanders to invest in agriculture in several South American countries.

"It is very easy for our farmers to think that some of their achievements are the result of their expertise rather than understanding how blessed we are in terms of the agricultural environment in NZ."

Regardless of what NZ does, agriculture will expand in South America, he says.

Our technology is there; the South American markets will also expand; there are good farmers using sophisticated computerised farming systems; and it is inevitable we will face more competition in the North American market from Brazil in terms of dairying, he says.

South Americans have a Latin way of doing things, he says. "It's hard to put into words and it's why New Zealanders get into trouble."

For example there are cultural issues, with local farm workers used to doing things differently, such as using horses for stock work, while few have working dogs. You can't automatically assume that you can say this is the way to do it and it will be done, he says.

As well, the legal system in terms of buying and selling land is different, he says.

South Americans are much more sociable when they are negotiating a business relationship, he says.

"You have to socialise with people and build up relationships to create a win:win for everybody, and put together a partnership so you can all be winners. We don't necessarily have the skills that some other groups do."

Woodford, who was mountaineer­ing in Peru in the 1970s and has been following agricultural developments there since that time, is cautious about transferring NZ farming technology overseas.

He used the example of a long-term aid project on the Peruvian altiplano during the 1970s and 1980s which introduced NZ ryegrasses, white clover and lucerne to the area.

"Now there is no sign of Kiwis having been there except that some lucerne is still grown. But that may have happened without the Kiwis. There have been similar major Kiwi projects in other parts of the world such as deer in Malaysia and beef in Korea which have also left minimal impact."

He has visited South America three times in the past three years, including Chile. Region 10 is Chile's pastoral farming area, running from 38-42 degrees south, and is the only part where pastoral farming, as we know it, is possible, he says.

The main towns in the region are Osorno and Valdivia; the soils are free draining and volcanic; rainfall is winter dominant with about 500mm in each of June and July; there's a lot of rural poverty, and there's an existing dairy industry with Fonterra owning milk processor Soprole, he says.

This region has 1.4m ha of pastoral land, which is about 10% the size of NZ's pastoral area.

Kiwis have been buying land there to convert to dairying for more than six years, he says.

Other advantages are that the country is quite stable now, there's a free trade agreement with NZ, and good government links.

Recently 19,000ha have been bought by a NZ company to split into 45 dairy farms.

Woodford was circumspect about opportunities in Argentina. Argentina's farming land is divided into pampas and Patagonia; the latter is like the McKenzie country and good for organic production.

Much of the pampas has a Canterbury rainfall but higher evapotranspiration rate. The best land is in the south of Buenos Aires province where the southerlies blow in off the ocean.

But Argentina had a raft of problems including a populist government with a hugely important urban vote.

"They tax exports or ban exporting products such as beef and dairy in a move to lower domestic prices. They also have a history of freezing foreign funds."

Provincial governments are also important, and can be a challenge for overseas investors, Woodford says.

He was more positive about farming opportunities in Uruguay.

A tractor could be driven over most of the country, and the pastoral area there was greater than in NZ, he says.

Rainfall averages 1000-1500mm/year; the country sits at about the latitude of North Auckland, and is generally warmer than NZ.

Summers can be hot and good growth is possible over winter, yet the whole country can get a drought at the same time, he says.

And the farmland looks very much like NZ, with the same pasture species, he says. For the past 40 years the Uruguayans have been studying NZ agriculture, and use the same breeds of sheep and cattle. But there are subtle systems differences, he says.

Some Kiwis have failed when farming there, he says.

"The Uruguayans tell us their climate is less reliable than in NZ."

Other features of farming there include growing cereals, including rice in northern Uruguay. Eucalypts are grown on an eight to 10 year harvest cycle.

Farming is on a grand scale in Uruguay, and the country has very good agricultural knowledge, with graduates coming out with a better technical knowledge than NZ graduates, he says. "But our Kiwi graduates are better at putting the system together."

The government is stable and democratic, and the country has a floating exchange rate just like NZ.

Agricultural prices are quoted in US dollars, and land is very cheap by NZ standards, selling until recently at $2000/ha, with top alluvial soils more than $5000/ha. But recently land prices have doubled.

"Cash returns from existing farms tend to be no more than 6%; land is cheap but not well developed; there is moderate taxation and no capital gains.

"If there is a problem for NZ investors, it will be taxation at the NZ end not the Uruguayan end.  There are no constraints on moving capital in and out and never have been."

But the banking system is not well developed for agriculture, and you can't borrow money there for agriculture which is part of the reason land is so cheap, he says.

There is very considerable scope for investment and some scope for irrigation.

However there are traps, and Kiwis who don't understand the Latin way seem to get into trouble, he says. For example a Kiwi who bought a dairy farm in February 2006 sold it three months later - despite having a Uruguayan fiancée.

Kiwis going there don't make enough use of local Uruguayans who have come here and understand our systems.

The honorary consul to Uruguay is Mac Herrara, an organic dairy farmer and former professor of extension, who in the 1960s studied at Lincoln.

PGW's NZ Farming Systems Uruguay (NZFSU) is an exciting project, but the jury is still out on it, he says.

"They have had some great successes but it's a little bit early to be totally convinced that the whole system will work on the whole 36,000ha they have purchased.

Kiwi investors at the start paid $1/share, watched them rise to $1.15 then fall to their present level of less than 90 cents.

NZFSU has good technology and a charismatic leader in Craig Norgate, he says. Milk is sold to the major dairy company Conaprole, which is a co-operative.

Woodford also discussed farming opportunities in Brazil, which has 90m hectares of savannah grasslands in its south and central regions.

This is four times the total area of NZ or eight times the pastoral area that can be developed without cutting down trees.

Producing biofuel from sugar cane is a huge industry, and is totally economic without any subsidies. Technology is now available to deal with the acid soils, and rainfall is reliable.

There are good links between Brazil and NZ, including with Lincoln University.

He thinks the best farmers are pretty much the same all around the world, but we have less of the poor ones at the bottom compared with the South American countries. "Usually in NZ they can get out with dignity and some cash."

In Brazil wetlands have to be protected, eg they keep 30% of a property in protection, he says.

In only six years Brazil moved from being an importer of beef to the world's biggest exporter. However, there are also foot and mouth issues there.

While Brazil exports to the European Union, because of trade barriers, it doesn't export to the United States.

Woodford doesn't have shares in NZFSU. "I have to be careful about conflicts of interest," he says.

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