Overseas buyers want our land, but is it time New Zealand locked the gate? Karyn Scherer continues her investigation into the Chinese bid for the Crafar dairy farms.

For a guy who left school with the bare minimum of qualifications, Allan Crafar hasn't done too badly.

At least that was the case until October 5 last year, when the banks that had lent him more than $200 million hit the panic button and handed over to receivers more than a dozen farms his family had accumulated throughout the central and lower North Island.

Even now, he has not given up hope that he might yet manage to wrest back control of his agricultural empire from the men in suits.

"It's like Monopoly - we haven't yet got Park Lane and Mayfair, but we're bloody working on it," he cackles from his farmhouse in Reporoa.

Beneath the bravado and the coarse language, however, there is a hint that the Crafars themselves can't quite believe they somehow managed to amass so much land - and so much debt - in less than three decades. Their 26 or so properties make them one of the biggest private landowners in New Zealand.

The way this tough-as-old-gumboots farmer tells it, Chance and Community Chest had an awful lot to do with it, along with a lot of "bloody hard work". But the cards now seem to be stacked against the couple. For nine months they have been living off the charity of others as a completely different game takes place around them.

The new players include a secretive group of Chinese investors, several large banks, populist politicians, bewildered bureaucrats and some of New Zealand's most powerful businesspeople.

If the Chinese investors are to be believed, it is Monopoly all right - but in this case the monopoly sanctioned by the Labour Government back in 2001, when it agreed to the creation of dairy giant Fonterra.

The problem with the Crafar saga as a study in xenophobia is that it is difficult to separate what some claim is a racist public reaction to foreign investment, from doubts about the credibility of Hong Kong company Natural Dairy.

The company has announced plans to spend up to $1.5 billion establishing a business in New Zealand to export huge quantities of UHT milk and infant formula back to China.

Massey University marketing lecturer Henry Chung has spent a good chunk of his career observing China's economic transformation and is fascinated by the negative public reaction to the Natural Dairy proposal.

Chung's family emigrated to New Zealand from Taiwan 20 years ago and he believes much of the public concern is simply a fear of the unknown. China has only recently overtaken Japan as our third most important trading partner and the speed of its progress has clearly unsettled some Kiwis, he says.

"Japan we don't emphasise so much because in a way it is quite close to America and a lot of its infrastructure was established by America. Because it's close to New Zealand as a country, it doesn't feel so foreign. Whereas with China, particularly in the last 10 years, it's become so important and so powerful, yet it's still quite foreign to this country."

Chung is optimistic that our understanding of the Chinese will improve. "As time progresses, hopefully we might understand them better and that will certainly help us to make our own judgment."

While he admits it is going to take some time for Fonterra's fatal partnership with Chinese dairy company Sanlu to fade from the public's memory, it is unfair to tar all Chinese businesses with the same wide brush, he believes.

It has been noted that Bright Dairy - another Chinese dairy company that last month announced an $82 million investment in struggling South Island milk processor Synlait - was also implicated in the melamine-contaminated milk scandal which claimed the lives of at least six babies in China in 2008 and made another 300,000 ill.

Astonishingly, the scandal flared again last month, when Chinese food safety officials discovered another 76 tonnes of the toxic milk powder at various dairy plants, apparently left over from the original episode.

Bright Dairy, one of China's top three dairy companies, was also implicated in a major scandal in 2005 when a journalist exposed its practice of reprocessing expired milk in one of its factories in Henan. But Chung says we shouldn't necessarily fear the worst over its first overseas investment.

"With Sanlu, the major problem was that we didn't have control. It was 43 per cent, but in the Chinese view this is nothing because you need to have 51 per cent or more in order to control the operation. And most importantly, those products were made in China. In Christchurch, I'm pretty sure all the product control will stay in New Zealand. They want to capitalise on our green and clean image."

It has also been pointed out that Bright Dairy has effectively saved Synlait, as local investors were reluctant to come to its rescue. Synlait should also benefit from Bright Dairy's well-developed distribution networks in China, says Chung.

"If we do well, it's going to be a win-win situation as we can get the capital we need. But we need to make very, very sure we don't lose control, particularly on the products."

It may also be a case of beggars not being choosers, he says.

"Personally, I'd like to see more domestic investment, but sometimes because of the scale of investment we're looking for in a short period of time, we have to take the opportunity from other countries ... We can't guarantee any business venture is going to be successful but if we don't open up, the opportunities are lost."

Economist Andrew Gawith seemed to take a similar line this week in a piece he penned for the Herald, which argued that making it harder for foreigners to purchase rural land could be counter-productive as it could prompt a further fall in land prices.

Gawith, the former head of Infometrics who now helps run Gareth Morgan Investments, argues that farmers need the assurance of a decent capital gain to make farming worthwhile these days - and without wealthy foreigners prepared to pay asking prices, the sector could be in trouble.

Natural Dairy's apparent willingness to pay $500 million for - among other things - land originally valued at $320 million but now said to be worth significantly less, has certainly raised eyebrows in both New Zealand and Hong Kong.

However, Gawith's argument fails to acknowledge that it is not just foreigners who have been paying silly prices for land over the past decade - and there is no guarantee anyone will continue to do so in the future.

While buoyant global commodity prices have undoubtedly been a major factor in the dairy boom of the past few years, the accompanying boom and bust in rural land prices has also been linked to over-enthusiastic lending by banks.

Data collated by the Reserve Bank shows bank lending to the agricultural sector has rocketed from $12.5 billion to $47.3 billion over the past decade. For most of that time, year-on-year lending has increased at a double-digit rate, peaking at just under 23 per cent at the beginning of last year. Since then, however, growth has slowed dramatically and in the past few months lending has barely increased.

In its Monetary Policy Statement at the end of June, the Reserve Bank noted that commodity prices remained strong. However, it warned that the boost to farmers' incomes could be short-lived.

It also noted that many farmers were likely to use the fillip in their finances to reduce their debt rather than substantially increase spending, particularly with interest rates on the way up again.

Whole milk powder prices have been falling lately, and a Fonterra manager admitted this week that the market was "going through a rough patch".

As a former Minister of Agriculture and Rural Affairs, and a farmer himself, Jim Sutton is wearily familiar with the rollercoaster ride that is rural enterprise in this country. These days he is chairman of our biggest corporate farmer, state-owned Landcorp.

With more than 100 farms around New Zealand, Landcorp is acutely aware of the precarious state of many farmers' finances right now, says Sutton.

"For a generation, everyone who got into it had been lucky, but every 40 years or so there's a downturn in land values. Well, it's been a lot quicker this time and people have been caught out. The number of farms that have been trading has been very low and that is because there is a huge discrepancy between what people can finance and what the vendors' expectations are."

He believes the only reason the banks are not forcing more farms into receivership is because they're scared of further spooking the market.

Not surprisingly, Sutton sees the situation as an opportunity for Landcorp. "The thing that has surprised me is how much this event seems to have energised the corporate investment sector and how many people are apparently sitting up and saying: 'Hold on, farming is having some hard times at the moment - there may be an opportunity here for us to get in, and maybe corporate farming isn't the dog it's traditionally been in New Zealand."'

Foreign buyers are clearly having the same thought, and Sutton acknowledges many farmers are two-faced on the subject.

"When they're trying to settle their family on farms or buy land themselves, they don't think foreigners should come along and bid against them - but when they're selling their farms, it's 'may the highest bid win'."

As Minister of Trade Negotiations, Sutton bought the line that it was in New Zealand's interests to promote free trade, as we had more to gain than lose in the equation. The same argument applies to foreign investment, he says - we can't afford to turn buyers away as we don't want to be turned away ourselves. And besides, the competition is good for us.

Sutton is reluctant to comment on Natural Dairy's plans, but he supports the Bright Dairy investment in Synlait, as well as the Russian investment in Southland infant formula business New Zealand Dairies. Although that business is also struggling, the food technologists behind it have concentrated on a market niche that doesn't directly compete with New Zealand, he says.

As one of the ministers who helped to create Fonterra, Sutton supports its strategy but is surprised more foreign investors have not tried to compete with it on its own turf.

"I thought that we wouldn't have had to wait long before one of the major multinationals was building dairy factories in New Zealand and going out to buy milk from the farmers to get them to sign contracts to supply milk. Well, that hasn't happened."

Sutton reveals that Chinese officials once offered him a job buying dairy farms on their behalf. He turned them down - but only because he didn't think it made sense for them to buy the land.

"I told them I didn't think they would find it a rewarding experience because the return on their investment would be very small. The other thing was, it wouldn't really advance their objective, which was basically getting a secure supply of dairy products to improve the nutrition of Chinese infants. I thought what they should be doing was looking to invest in joint ventures with major New Zealand milk processors, rather than buy farms."

He believes the Chinese may have been put off by Fonterra's dominance of the local market, even though the quid pro quo of its unique legislation is that it is required to provide up to 50 million litres of raw milk to virtually any rival processor that asks.

Fonterra has been lobbying to have that requirement removed, or at least moderated, citing Natural Dairy as an example of how it can work against the national interest.

Sutton says it was predictable that "every time there was another little problem that Fonterra ran into they'd be coming and knocking on the doors in Wellington, and trying to change the law and try and reinforce their monopoly".

He is unsympathetic, however, and the current Government also appears unmoved. Agriculture Minister David Carter announced this week that sunset clauses relating to the requirement, written into the original legislation, will now be extended "to ensure a competitive and innovative dairy industry".

New Zealand cannot afford to upset China over the Natural Dairy issue, says Sutton.

"The China relationship is absolutely critical to New Zealand's economic future and we can't afford to damage that by indulging xenophobic impulses."

Not surprisingly, Fonterra chairman Sir Henry van der Heyden rejects any suggestion of "xenophobic impulses". Van der Heyden is just back from three weeks in China himself and insists no one raised the issue with him.

He is adamant that "New Zealand Inc" needs to discuss the issue and that New Zealand's economic future could, in fact, be in jeopardy if we allow our dairy industry to slip from our control.

Whether we like it or not, he says, New Zealand earns most of its revenue from pastoral farming and tourism. "We do this better than anyone else in the world. It's about how we utilise our soil and our climate to produce food. And food is going to be absolutely key going forward."

For anyone who has been around long enough to remember when a New Zealand family on the average wage could afford to buy milk, butter and cheese all in one shop, the argument over foreign ownership appears to have reversed over the past couple of decades.

"We should have actually learnt from the past," van der Heyden argues. "Go back 15 to 20 years where we actually sold our banks. The levers of control for funding in New Zealand are now outside the shores of New Zealand. Four out of five of the major banks are controlled out of Sydney and Melbourne.

"Those banks are now making strategic decisions that they think their future is in Asia rather than here in New Zealand, so that's where their capital is. Their capital follows where the margins are ... so the impact of that is that our farmers are actually feeling that. Three to four years ago the banks were just shovelling money out. Now they've actually tightened up as far as liquidity is concerned and now we're suffering for that. We've just got to learn from that."

Van der Heyden insists he doesn't have an issue with competition in milk processing - although he does point out that farmers have done pretty well out of the Fonterra model so far.

"We're a little island in the South Pacific of 4 million people trying to take on the world in dairy. Look at other industries where there is competition at the farm gate - the meat industry, for example. It's a very easy argument to run, that competition at the farm gate is good, but you give me the example where that has been successful."

But land must remain sacrosanct, he says. "Would a family sell its silver? You just don't do that because then the other question is, if we sell our strategic assets then where is our future? Then you're actually having to really dance to the people who are controlling the assets."

A review of our overseas investment laws is under way but appears to have become bogged down by the latest political developments. Finance Minister Bill English has admitted that although the review was originally intended to make it easier for foreign buyers to spend their money here, it may no longer work out that way.

Prime Minister John Key has been far more blunt. Key has stated repeatedly that he does not want to see New Zealanders "become tenants in our own country" - although, as some have noted, that's not quite the message he has been delivering overseas. This good cop/bad cop routine makes some sense - apart from anything else, it has left Parliament's other parties little latitude to score political points on the issue. But it's a sure sign that politics is getting weird when farmers and unions are lined up on the same side.

Academic Dr Bill Rosenberg has been outspoken on foreign ownership issues for many years and is not about to hold his tongue now that he is the policy director and economist for the Council of Trade Unions.

While he agrees there has been a degree of xenophobia among some people, he disagrees that it's the basis for most people's concerns.

Rosenberg points out that Maori have always had strong views on the ownership of land and that Pakeha concerns date back to the early days of settlement, when squatters acquired huge holdings. Farmers also remember the situation in the middle of last century when their meat was shipped back to Britain to be processed in British factories, he notes.

If foreigners now want to own the farmland as well, then it is perhaps understandable that rural people are concerned at how much of the ticket will be left to clip, he says.

He also points out that while Natural Dairy might claim it intends to pay millions of dollars in tax and wages, there have been many overseas owners who have claimed the same thing then promptly employed clever lawyers and accountants to ensure the reverse is the case. There has already been speculation Natural Dairy would sell its Fonterra shares for quick cash.

Another issue the Government might be considering is whether significant foreign investment in our dairy industry could have trade implications, he says.

"I suspect that could well complicate things like negotiating trade deals with the US, because not only is there the prospect of a highly efficient Fonterra getting into the dairy market in the US, but actually competing with Chinese producers as well."

According to Rosenberg, the main problem with our current overseas investment laws is they give the bureaucrats who are meant to enforce them little guidance about exactly what New Zealand's economic strategy might be.

To his knowledge no one from overseas who has applied to buy a New Zealand business has ever been turned down, yet about half a dozen applicants wanting to buy land are turned down each year.

Land purchases only total hundreds of millions, whereas businesses total many billions. "There's the constant suspicion that things are getting through that we might regret in the longer run."

That said, some New Zealanders seem to forget we are just as capable as overseas owners of destroying a company's value. We might whinge about the Aussie banks but it was Kiwis running the BNZ when it almost collapsed in the 1980s - and Kiwis in the cockpit when Air New Zealand had to be nationalised.

One of the problems with the foreign investment debate is that almost everyone involved can be accused of hypocrisy. Take, for example, the contention that we shouldn't restrict other countries, or they might do the same to us.

"If we want to be pure as the driven snow, I suppose that's an argument," says Rosenberg. "But the real world is that every country has some kind of limitation of these things and they all understand - even if they might complain - that people do these things, and they all work in their own interests.

"Everyone knows China is one of the strongest on this and good on them - they've done really well out of it. So I think that's a pretty shallow argument. New Zealanders do invest overseas and the limitation is the savings both within New Zealand companies and by individuals, rather than any significant barriers overseas. And we're quite capable of cocking up our investments in Australia, too, without any restrictions there."