Mind you, according to those same bank economists, the $NZ 'should' have been trading in a 40 to 50 cent range right now. A long way off this mornings 62 cents.

Again, it would great to have one Austrian school economist posting to this forum. There must be one stuffed away in a dark, deep closet in one of our tertiary institutions somewhere, or more likely, hopefully, our dwindling private sector.

(I used to think Infometrics came from that slant, but their postings all seem to assume the same 'huge' role of the State - as of right - as the Keynesians do.)

Fonterra is a virtual Monopoly. This is a very optimist forecast. Export receipts are going down,is our spending dropping? I would have thought a payout with a 3 in front would have been more realistic next year maybe.
Dairy farming is going to Hell in a hand basket.Land prices will fall equity will disappear,make Kawarau look like small change. Maybe Mr Key should be investing if Fonterra,oh I forgot he already offered it to the Chinese.

http://www.ft.com/cms/s/0/f4020c0a-4956-11de-9e19-00144feabdc0.html

I'm free Mark!

Then you ain't no Austrian :)

What will this do to the value of a dairy farm and LVR ratios - banks will be cruncing a few numbers right now.

Well I suspect this payment is based on a successful bond issue in the spring. Any takers out there? Fonterra has major problems but never mind as Moody's pointed out they can always pay farmers less, so keep there credit rating. Oh and less and less in the future of course.

Here is a hot property for you,don't hang around opportunities like this don't come up every day!
http://www.trademe.co.nz/Trade-Me-Property/Rural-Property/auction-219844...

By the way this farm carries 900 cows and producers 300,000 kgs milk solids at $4.55.
Got to be a great investment 1.3 million income 1.8 million costs,bank should be able to offload this in a jiffy. Anyone bank with Nat,BNZ,ASB,SCF, they all have them much worse than this this is a good one!

I forgot stupid me, I see they are contract suppliers, no shares so you either by shares at $4.52 x 300,000 or get someone else to buy your milk,who????? This deal is getting better all the time

Matt your assumption that the value will probably increase is based on?

Looking at the currency charts now (its a shame I can't post up screenshots for the readers to see), the USD$ is looking weak against the NZD (as well as the other major crosses).

From a pure technical perspective the bullish count looks like we're on a strong wave up with target above 0.65 completing sometime in July / Aug.

The way I read this, is that unless Bollard (or the budget) can talk down the kiwi and keep it below a weakening USD$ then a strong export led recovery is not looking to hot right now.

"Matt, interesting post. Then what is Infometrics philosophic stance? Vis a vis, in this instance, the role of the State?"

There is a gap between our what we may believe is appropriate, and what we think is pragmatically possible. This is one bias that may push some authors to write in a style that supports a larger state than they actually do.

Furthermore, "Infometrics" is a set of economists - we have a varying range of beliefs regarding the appropriate nature of the state. The main belief that ties us together will be a belief in "methodological individualism" - such that it is the actions of individuals that build society as a whole. Given this non-collectivist frame of reference I would say that none of us are really Keynesian in the strictest sense.

Matt S,

This could help

http://www.interest.co.nz/charts/gallery4-10.asp

Cheers

Alex

Matt Nolan. Cheers for that.

On the farm I posted above you need to spend a million on cows,cost per milk solid over $4.50 before debt servicing ,tax anyone, no I dont think so,drawings, no none of that either(wife needs to get a job).This with shares,cows machinery should set you back just over the $20,000,000.

"Mr McKenzie said Federated Farmers was concerned about Fonterra's "ongoing fixation with its capital structure".

"Senior management and the board have to focus on servicing customers and shareholders to maximise revenue," he said.

"Farmers cannot afford to have the eye of management and the board off the ball and on a shiny new capital structure that is a low priority for most shareholders.""

With the debt mounting daily and the equity vanishing rapidly, Fonterra is right to be fixated with its capital structure.

It's a pity that Fonterra is not a listed public company, I would love to have a few Put optins on their shares.

I'm surprised at the effect of the exchange rate on payout, I thought Fontera would have FX hedging in place to counter the fluctuations. Does this mean farmers should have been hedging themselves (personally I think they should as on the other side of the ledger there are other big ticket imported items such as fertilizer and machinery)?

I guess they leave it to their Co-op fertiliser companies to do that (hedge).
The reaction of how much this is going to cost NZ seems to lack an understanding that the dairy industry's set of production and management factors interlink and do not rely on any single critical factor. There are opportunities to use resources in another manner and to substitute and adopt different options.
If dairy farmers react logically (i.e. do not let their banks insist on them increasing cows and production) the number of cows will be reduced as (most) supplementary feed is no longer economically viable. This may mean a varying drop in NZ dairy production. It will reduce world supplies (although a small producer in the world scale, it has already been shown that when a close balance for supply/demand applies, small quantities may be important).
This drop in numbers and feed bought will take costs off the import side too (farm and NZ).
Who knows, the reduction in MS may stabilise the world market perception of how much dairy product is available and improve this too. (It is what Co-operatives do??)
Individual farmers may actually make more cash surplus from reducing cows than the drop in payout suggests.
But that still leaves little hope for those with much debt - although selling cows will free up some capital and selling surplus shares at this seasons price will also help.
This reply is by necessity brief. There ARE actually very good analysts around who can provide in-depth advice for farmers and the wider industry. Suffice to say they are probably NOT those who have been in the press over the past few years though.

Its Ok, Fonterra have the debt sorted

http://www.nbr.co.nz/article/fonterra-finally-tackling-debt-levels-102949

This link has appeared before on NZ dairy comments

http://www.agprodecon.org/node/29

It shows the rapidly rising debt, and increased marginal costs of production, on many NZ dairy farms in recent years. Conversion capital costs, expensive supplementary feed programs, and sale of low-debt properties to new highly leveraged owners have been major factors in shifting up NZ dairy's average cost of production.

Fonterra's auditors will be running for the door.

This piece from the NBR column is just great:
"No specific figures were provided to verify these claims, but the executives say the improvement has come through the rapid clearing of inventories as prices hit their bottom."

If this is the case they can ditch their marketing department and save even more money.

Yeah Wally, got it all sorted. Just the wrong country.
All past news I suppose as the Andrewj news for July 2010 no doubt will be:
"Banks wipe their farm losses off balance sheet through asset sales to China wealth fund."
and of course
"China buys large global milk processing facility to enhance vertical integration of world milk market".

Now that has to be good as PGGW were intending to do this with the NZ sheep market back in 2009 and everyone (?) thought that was a great idea too.
Oh, the cynics who just can't believe that even the truth is not some form of spin......

peterR said

Next is the so called fair value share price. That seems to be perverse at $4.52 given net tangible assets (unaudited) of 77 cents per share. The valuation process seems highly questionable being based on continuing expansion of milk supply through to 2018. It did interestingly reveal that Fonterra now has a WACC of 9.5%.

PeterR, how would you feel as a contract supplier now having to pay $4.52 for a share with an asset backing of 77cents. Its a case of pay up or we wont pick up. This should not be allowed its a crime!

I am sure the guys who bought shares 2 years ago and have now lost over $2 per kgMS are not that happy either?
As noted before, this is not helping their balance sheet at a time when banks are scrutinising the effect of known changes and still not wanting to acknowledge that share devaluation may be the tip of the iceberg. The big bit that some still want to hide is farm debt and the inability of many dairy farms to repay without at least $10 / kg MS payout.
And already pointed out, there is not the capacity for profitable growth on dairy farms now (as MC is almost always > MR) and conversions are no longer viable either.

Budget day tomorrow and if "Under the verbal commitment basis I guess Mr English will be able to clear the national slate on Budget day as well. " (thank-you Stephen Hulme) is true, I am sure continuing growth as per Fonterra and DairyNZ strategy can be swallowed as well.
I'd say you will need to have consumed ample quantities of NZ's finest wines to help disguise what you are actually swallowing though.
Wine industry sales will have to to rocket up? Hey. We need to get some growth somehow, somewhere, sometime.
Surely.........
Now THAT has to be possible - doesn't it?
PeterR? Andrewj? Stephen et al?

bjr.

There is good growth and bad growth, but here are couple of fail safe ones to start with:

I see the current account deficit continuing to grow until serious numbers of borrowers start defaulting on their debts, and growth in government debt for the term of this government and the next.

http://www.interest.co.nz/ratesblog/index.php/2009/05/24/have-your-say-u...

How ask how pertinent the my last two posts of two days ago at the above thread now look with events unfolding with Fontera and a Chinese company moving in on Fisher & Paykel under debt stress.

From the national bank
http://www.nationalbank.co.nz/rural/information/ruralreport/200903/repor...

The dairy sector does not split the payment of milk into a payment for milk and a bonus per se. Fonterra is on its fourth variation of trying to get to a milk price and a value-add return but the transparency of the calculations is lacking. The other companies declare an all-encompassing milk price.

Fonterra has a lower equity percentage than the other two dairy co-operatives, increasingly so in the past four years. The percentage equity for Westland and Tatua is sound but Fonterra at 29 percent is below an accepted minimum corporate manufacturing business norm of around 40 percent.

Fonterra's year end 2008 figure does include a net $600m withdrawal of equity by share redemptions.

While that may have met favour with the shareholders involved, was it a good business decision?
The simplistic measure suggests that the redemption risk for Fonterra is very high;

perhaps this is why they are unwilling to lend farmers money to buy shares

When one considers that a large chuck of Fonterra was once the "Dairy Board".. which was owned by ALL New Zealand and all farmers.... then the current Fonterra looks like it has lost its' way.....

I was amazed to read the above comments.... That Contract Milk suppliers are being Blackmailed.
That Fonterra is not at all transperent.
That Fonterra is behaving like a monolithic Monopoly.
That there is nothing magical about their growth... it is all debt based with aquisitions.

The Dairy board of old.... as well as being the global marketing and quality control for the dairy industry ... also smoothed the peaks and valleys of payout to farmers.???

Todays Fonterra is Amplifying the cyclical nature of the dairy industry.... They have been really negligent ... Considering the cyclical nature of Farming even a 50% gearing might be too much. ...???

Do they really operate in the best interests of the farmers.....???? of NZ..???

Andrewj.... Well said.... Bernard could not have written that any better....

A career in financial journalism looms.... :)

Sobering stuff

Also the Kiwi is now buying over 64c US,this must be turning into a worse case scenario in one hell of a hurry.

Thx, Paulg. I'm not in dairy so I hadn't fully appreciated what you, and Fonterra, are up against in the export markets

"So far, the main (US) government action has been to buy up 238 million pounds of nonfat dry milk powder and 4.6 million pounds of butter since prices started to fall in October. Last week, the USDA said it would provide subsidies to export up to an additional 150 million pounds of nonfat dry milk, 46 million pounds of butterfat and 6 million pounds of cheese to help dry up the (US) surplus"

Dairy producers are the same everywhere. NZ is no different except we are further into denial - this logic is prohibited thinking:

It doesn't take a complex formula to understand why we have this volatility. Our industry is hard-wired to overproduce. Not only do U.S. producers have some of the best genetics, the best technology, and the most efficient operations in the world, but we've also got every incentive to maximize those resources and produce as much milk as we can, particularly when dairy farming has any level of profitability. Simply put, individual dairies in our industry have every ability "“ and every incentive "“ to exceed market demand for dairy products, quickly turning any possible supply/demand balance (and profitable price) into a surplus (with a plummeting price).

Another point is that we do this with government research supporting over production and have banks happy to provide borrowed money.

Then claim to tourists that we are clean and green.

andrewj,
assuming you are right, maybe they have chosen the "doubling down" gambling strategy.

Choices may well be to crystalize some losses now.

Or "double down", by upping the amount at stake, and hoping they can recoup most, if not all, the dosh that is at stake. If so, what information are they basing their decision on? Is it a likely scenario?

What should they be doing if they were rational? What does their behaviour suggest about their state of mind?

I'm following your posts on Fonterra with some interest. I have no idea if they are being rational or not.

This all reminds me of the deer boom, goat boom, forestry boom, ostrich boom......,
The deer boom held for a while because their rate of replication is quite slow. Goats at 2 a year, up to 4, was over quick. Forestry was tax driven I think so relied on government policy. Ostriches were hilarious, $80,000 for a pair, that could deliver you 30 or more offspring in a season, well any fool could see the breeding stock value would keel over quickly there. This dairy thing had me fooled for a bit though. I fell for the feed the world, the world is starving, the population is growing, asia is rich.
Now I havent travelled much, but I happened to pick up a book of photos, satellite photos, before and after shots. I quickly realised we are just a pimple when it comes to farming, in 30 years the world has gotten hold of this farming thing, and they are as good as us. Marrying that with the old saying, milk production is 90% feeding and 10% breeding I realised if you pay someone enough, they will ramp up their feed supply, and those cows will pump out heaps more white gold. It only takes a couple of days of better nutrition to increase milk production.
I wasnt sure, but I was suspicious this $7.90 payout was going to create production problems of magnitude. And it did. Very quickly. Just as quickly as supply boomed, price dropped.
So, now we have an artificial suspension of price in the market. Subsidies. Back on the rollercoaster.
AndrewJ you asked what I thought of those farmers who dont have shares. What will happen. Damned if they do, damned if they dont. Some very hard numbers to crunch. Bankers tearing their hair out.
I dont know, they really do have to buy. If the bankers dont back them, they are cutting the tits of their cash cow.
Well maybe this will happen, it occurred in the mid to late 80s. Banks forgave loans.
They wrote money off. They had to keep farmers farming. Those farmers that crumbled under pressure, were sold up. Those that dug in eventually were "mortgaged down", not sure if that is they way to put it.
Realistically if the payout stays under $5.00, many of these large conversions will not perform. They built and conceived on buying in a large amount of feed, and at these prices it is not sustainable.
Those that are on contract supply and in a poor financial position, could be getting bad news shortly.
My Agribusiness manager doesnt say a hell of a lot, but he is a pretty grim dude when mentioning anything related to dairy. He acknowleded some months ago it was not a very nice occupation to be in these days, very distressed people, distressing decisions to make, advice to give.
I would say, and I have said this before, I think some of the first to keel over will be the equity partnerships. But lastly, $5.20 is not a bad payout. Many dairy farmers will do quite nicely at that. Its those that believed the hype and borrowed because of it who are in for a haircut.

I agree wholeheartedly Andrew with your posting on where our deficits are headed right now. It always amazes me how slow the economics experts are at picking up on how drought affects all of New Zealanders.
Just maybe New Zealand incorporated might start understanding in the next few years how crucial the nz farmer is to everybodies standard of living here in godzone.

The pigs are getting a break, I hear.....

Andrewj,
this piece from your California Milk Producers:
"The U.S. dairy industry is a highly regulated industry,
and anyone who says something like "the markets will
fix this problem" are not living in reality." brought back the sense of futility felt over 2 years ago when a small group tried to present their concerns to Treasury about the future of the dairy industry. It was obvious then that much of the "model" was flawed and would be detrimental to dairy farmers, the environment and (because of the importance of the dairy industry) to the future of NZ.
We received a reasonable hearing until a more senior manager pretty much quashed our arguments and research by using the same "market" line. We felt at the time that most within the dairy industry had become "dislocated from reality" (a phrase now much used between the group) but were astounded at the same attitude at this level.
Despite repeated approaches to others in the industry (and even politicians) we have been forced to watch the "train wreck" (Andrewj ... again) unfold.
There are ways that some can be spared the worst effects of current problems, but unfortunately there is no evidence that anyone is yet prepared to listen. Just as in 2007.
Very FRUSTRATING when lives and not just money will now be at risk.
How will the problem likely be fixed? By employing the same people who caused the mess to provide wise counsel would seem the most likely answer......

Gibber.

Excellent questions regards Fonterra who are definitely gambling, and almost certainly from a very poor financial position. That possibly means that from their perspective what now appears rational wouldn't in more normal circumstances. That may extend to ethical standards as well.

Fonterra has excessive debt from years of following an ill advised growth strategy. World demand for dairy products is contracting. Commodity prices are falling. Many dairy farmers are already under extreme financial pressure. A reduction in NZ milk production would reduce farm costs, in most cases improve farm profitability, reduce world dairy stockpiles and support dairy prices - it would be rational.

Rational except that Fonterra urgently requires capital. Not that capital will fix anything "“ just allow it to survive a little longer. Share redemption risk looms large, but new dairy production and shareholding are needed to provide capital. Fonterra are "doubling down" as you describe it. Hoping "“ irrationally "“ that something like the 2007 commodity bubble might save them.

So, to the information Fonterra is working from. Their projected payout is not supported by prevailing commodity prices. Those average USD 2,050 so far this year and look set to settle lower still at least in NZD terms. But Fonterra is projecting based on USD 2,750 and a 0.59 NZD:USD. Fonterra's interim accounts are missing a supporting accountant's report and previous information on accounting standards regards valuation of assets. Fonterra's share valuation is perverse. They have not made available the required statutory information on projected milk production volumes. Questions are not being answered.

What does their behaviour suggest about their state of mind?

Is desperation driving stupid, unethical or fraudulent activity or are we simply witnessing the arrogance of a distressed monopoly?

Andrewj

We certainly are in the 'Core' camp. And yet if we were nimble we could leverage the collapse of the USD to our advantage.

The BRIC economies may be small in ecomonic terms when compared to the US but so is their level of indebtness.

They can only benefit (leverage) from an outflow of capital from the US and could well provide us with a market to sell our goods if we can quickly bankrupt our indebted operators and reorganise the existing infrastructure.

Equally a revaluation of our national worth (higher NZD versus only the US ) provides an opportunity to raise the capital to conduct such a re-organisation.

But we must come up with a tenable plan to achieve this quickly.

1) I hope the economy academics working in the upper-floors with figures/ charts speculating what's going to happen next, start moving downstairs to the ground- level weak up and experience the real world for a while.

I think relatively small economies will be dictated/ ruled by worldwide power politics.
Upcoming major changes in world politics are not excluded.
http://en.wikipedia.org/wiki/Authoritarianism#Authoritarianism_and_democ...

Andrewj - "Our productive sector has been suffocated by regulation, taxes and other costs to the stage of failure."

Can you tell us specifically what regulation, taxes and other cost have impacted you in your sector?

Les
Before I sold my 1000 acre farm I had rates of $36,000.(+13,000 regional council rates)On top of this I had to provide details on such things as water use from my bores etc which I was charged the pleasure for. I had animal health board costs for possum control of $14,000. Every time a truck left my farm mileage tax was paid at nearly $1 a km(+existing taxes at pump). I had an accountants bill that often was as high as $10,000. My Fertiliser bill was around the $60,000 mark how much of this was costs that had a component of a Govt charge I would hate to think. My employees all had employment contracts,double time on Sundays 4 weeks holiday, I had to be careful as farmers in the area had been to the employment court and being fined over $20,000.
I think that the high cost of govt has filtered through to all parts of our cost structure. They must how else and the Govt continue to Rob Peter to Pay Paul. Even such piffle's like diesel tax on farm utes became a big cost. Putting down a new bore was horrendously expensive due to the cost of meeting regulation some of which admittedly was justified due to abuse by the dairy industry. Registration was getting to $380 for a diesel Ute, I paid over $20,000 a year in ACC. My insurance was around $10,000.
Everyone who came onto my farm,well drillers,plumbers,electricians,livestock carriers,stock agents must also have been suffering a similar assault by the state included in their costs. Its Sunday Night and Ive had a drink otherwise Im sure my brain would be smarter and I could remember more.
I had a visit from OSH, nothing happened just a friendly visit to remind me to spend a fortune on my cattle yards and tractors making them safer when any Idiot should know to keep his hand away from a rapidly spinning object and earmuffs had to be worn and so on and on.
Rates are a real killer on farms now I think in the future organised rate revolt will be a reality.

ACC claiming 1 million for a Mob member who was shot in the car park of AFFCO,because it was work related is just one example of costs imposed off farm, that farmers get to pay in lower meat prices.

Andrewj - thanks for that. Similar tone and shape of response I'd expect from other areas of the prod. sector. I guess while some folk may have view that ag. benefits from preferential policy, for instance the sector exclusive 'Primary Growth Partnerships' and ag. still has 'the subsidy that got away from '84', ie. nil-CGT, as individual operators you still have same and similar day-to-day crap to get through. Plus, I've seen various posts with misgivings and disappointments about the Fontera model, it's behaviour and there being more, possibly debilitating, toxic debt in ag. that we are seeing reported in other media. I read this last week on another thread contributed by jh:

"Capital gains tax to aid young farmers"

http://www.ruralnews.co.nz/Default.asp?task=article&subtask=show&item=14...

I get concerned enough when I hear similar sentiment from other areas of the prod. sector, and in particular the effect on 'Gen 'X & Y's in general*, but when I see that kind of thing coming from those operating the 'engine of the economy' it does start to jarr more somehow.

Would sorting this effective subsidy help sort ag. as a whole do you think?

* http://www.interest.co.nz/ratesblog/index.php/2009/05/28/opinion-this-bu...

PS - I trust you don't have a hangover this morning....if so, remember the Nurofen and Red Bull next time, cheers.

There's a bit of a worrying theme in a few of your threads, Andrewj. eg: expenditure on the scale of a war, but without a war etc.
Let's hope that Barak doesn't help us out with that one, with the help of The Beloved Leader.

Sorry
how about a holiday

http://www.youtube.com/watch?v=8ifqkhg0hZE

you may find this link better

www.mykiska.cz/typy%20na%20leto.pps

http://agprodecon.org/node/29 the may 31st update on rural debt.
Its shocking

Andrewj - that youtube clip was great. Was that the NZ bike trail??? Not for the fainthearted.

AndrewJ, Yeah I read it, for those that havent, $4.00 is the realistic payout at 59US, the mind boggles. Anyone know if it is true that some Southland farms are already in the hands of banks, they have kicked the owners off, and put managers in? A radio announcer mentioned this, dunno if he was just reproducing gossip or really knew what was happening.

Thanks for that PeterR, most interesting (if a tad scary).

Ohh William, thats a scary post too....

.........Andrewj great posts too, very mind boggling stuff. It seems just amazing that the REAL threat of the compounding debt, and the way it will impact this nation continues to go unreported in mainstraem media.

$4.00 per kg seems likely. It also seems likely we are watching the end of an era. The squeeze was applied to farmers ever since they turned down the Board's motion to go public and open the door to overseas shareholders. The small kiwi dairy farmer will soon be working for a European or Asian majority stockholder.

Oh dear:

http://www.nbr.co.nz/article/milk-prices-fonterra-auction-head-all-too-f...

Alex, bloody rough day

"It's a long-established tradition among dairy farmers that they don't make a profit," said Prof Locke.

"The return on assets was a negligible 2 per cent, but the appreciation in land prices had been significant.

"Now we're getting to a point where land appreciation just isn't happening, and that, coupled with growing problems in servicing debt could lead to a real shakeout in the sector."

From:

Academic foresees shake-out in dairy sector

(or, The dismal effects of the subsidy that got away)

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1057...

And some wonder why asset/property/land taxation and effective inflation control are so unpopular.

Subsidy created dependency cycles, How2 to fix em?

Hope we can, for the engine's sake.

Check out this advetorial from investment company MyFarm

"We forecast this supply and demand imbalance should see property prices return to levels last seen in 2007."

http://www.stuff.co.nz/national/farming/2480474/Time-to-invest-in-dairy

I don't think so..........

"Toss in the concerning factor that the European Union is warning that its dairy export subsidies will not be eliminated before 2013 - and the expectation that the United States will soon signal its dairy subsidies will stay in place for a similar period - and there is the making of a full-blown crisis for New Zealand's dairy industry."

Fran O'Sullivan: Key's silence leaves dairy farmers in peril

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1057...

"But so far, there has been diddly-squat from John Key's Government to suggest it even appreciates the economic danger this country's productive base faces."

Agreed, but as Don Nicholson says:

"Problem is nobody is listening."

Which is not a new problem, sadly.

If Fonterra is predicting (have we seen the last revision?) a payout below $5 today, imagine what next year's milk price will be? I won't be surprised when it cracks the $4 threshold in 2010. With bank borrowing costs on the rise at the same time farm revenues keep dropping it won't be long before the banks own more dairy units than the Federated Farmers. Short of using the Cullen Fund to subsidize farmers and underwrite their losses the only thing that will save the Kiwi dairy farmer is himself (or herself). It is time for a tractor hikoi that closes down Wellington.

I have little sympathy for F&P who planned to move manufacturing to Mexico, or for our agriculture giants investing in farms and production plants in Bolivia and China. New Zealand has been ill-served by the globalist dreams of those looking to move up in the world and away from here.

I dont see how you can blame the present Govt or expect it to fix the problem. No one made Fonterra borrow billions to the point of having liabilities of over 14 billion. Who forced farmers to pay record prices for land based on record amounts of debt. Who complained every year Fonterra increased its share price and borrowed heavily to make high payouts. The banks may have added the fuel but they didnt hold anyone's arm behind their back.
This is an industry problem that belongs to the farmers and the farmer shareholders,if they wish to pay record salaries, go for it after all at the end of the day it comes of milk prices. The banks may not be innocent and they will pay a price for careless lending which they are well aware of. It will affect all kiwis but its a shareholder problem. The only concern to the Govt is the way they weld their virtual monopoly status to fleece consumers in NZ.

Les : no doubt you have followed the agriculture industry over some years. The boom and bust cycle is a recurring theme. After a small glimmer of promise in a particular product ( think apples/kiwi-fruit/blackcurrants/cashmere-angora goats/pine trees ) every man and his dog leaps in hollus bollus. Existing players expand to the max. And, inevitably, a day of reckoning occurs, and there is great wailing and lamentation as the market collapses, and the bankers circle in for their pound of flesh from the foolish.

Dairying is different, in that it supplies products that the world has increasing demand for. The fiscally prudent cockies ( read, not overly leveraged ) will weather the storm, and one day be back on top of the profit pile.

http://www.odt.co.nz/news/business/59080/industry-threat-039a-nonsense039
--"You'll never see an empty farm in New Zealand because people always occupy land to produce something off it," he said.
--If debt drove a dairy farmer off the land, the land purchaser was more than likely another dairy farmer.

A CO-OPERATIVE should always ensure full information be supplied to shareholders to ensure the long term viability of all its shareholders.
A CORPORATE looks at short term gain with "churn" of supply and shareholders as part of the inevitable sacrifice required from some to achieve corporate success of others.

Both Fonterra and Californian Milk Producers are Co-operatives.
Californian Milk Producers and Cornell analysis (above) show every sign of Co-operative ethics.

Roger - nope, have not followed ag. in that much detail, am a keen observer and very interested given ag. is our main sector and therefore I think tends to drive foundational policy thinking. Anyway thanks for going through the bubble stuff.

I guess I've also become more and more concerned about ag. given the kind of information shared by people on this site, eg toxic debt and all that, the fact that without capital gain some would not make a buck at all, it seems. So hardly any wonder no one is that keen talking about LVT, CGT and better inflation control, etc, albeit there are some exceptions as we've seen in other discussion threads, who see such as improving the strength and future of their sector, by removing the 'subsidy that got away'. A hard one eh?

Cheers, Les.

Roger - my CGT?! Please.....

CGT/LVT, am not fussed really, whatever might be easiest to implement and so long as it enabled flat, across the board, lower rate down to mid, low 20's, thus allowing investment in wider productive activy to look more attractive than asset holding/PI - all good.

Cheers, Les.

bjr.

You have linked the Fonterra response, but I can't see anywhere on this thread the Macquarie article that forced it - something rare. Macquarie's analysis is here in the ODT:

http://www.odt.co.nz/news/business/59078/is-debt-doing-dairy-farmers

http://www.odt.co.nz/news/business/59080/industry-threat-039a-nonsense039

This response from Fonterra is a joke. It is not funny, but it is a joke.

http://www.nbr.co.nz/article/us-dairy-subsidies-begin-fonterra-benefit-1...

"Fonterra is Dairy America's export agent, handling the sale and transfer of goods on its behalf. The company's various US arrangements with DairyAmerica and Dairy Farmers of America (a US co-operative) account for around 80% of its non-NZ milk supply business."

In early May, the Prime Minister told the dairy sector his Government was "right behind" it as it charted a course for the future.

On the Key Government's programme was work to remove barriers to free trade, support for primary sector research and development, the reduction of red tape, developing critical infrastructure and supporting rural communities.

But right now other prime dairy exporting nations like Ireland and other parts of the European Union, and the United States are all pointing the finger at dairy monolith Fonterra claiming its auction system is driving prices down. Fonterra disputes their claims by saying their support mechanisms are the real cause of the diminishing prices.

The point is New Zealand is stuck in an international blame game which our farmers' competitors are playing for all it's worth. Do we continue to ignore this reality - or examine what - short of protectionism - can be done to salvage the industry's long-term future.

So now its time to reward stupidity,what a great idea. When has govt intervention resulted in a positive outcome.
Lower land prices are what we need to stem the flow of talented young farmers leaving for better opportunities due to lower capital costs in foreign fields.

Just put this in another thread but probably more relevant here:

Regarding farms - the market should be left to sort this out ie existing farmers who paid too much for their properties or did a diary conversion when the market was already oversuppllied should simply be left to fail - tough bikkie!

The quicker the banks pull the plug on these negative equity farms the better!

Then new owners can pick these properties up at realistic values so that they are actual businesses that are viable rather than the speculative property moves that farm purchases have been in the past.

It's a corporate problem and if Fonterra think these farms are worth the big bucks that were being paid for them pre 2008 then let Fonterra bail them out.

Could it be that dairy conversions will now be re-convereted to wheat - it's wheat that will be in demand in the immediate future.

Rather than "too big too fail" I would call these over geared enterprises "not worth saving". Let a new owner snap up a bargain at a realistic level that provides a normal business ROFE - the milk will still be produced but the industry will be owned by a new wave of farmers.

Fonterra may become a 50% wheat 50% dairy company in the medium term.

There's always a group of property speculators behind these farming problems, syndication, etc, etc - this is why the market has to sort this mess out so failure is simply the natural leveller in this environment.

As the USD$ falls through the floor the exporters will suffer more pain and an even lower payout could be the result.

Andrew J What's the use by date/shelf life on the huge milk powder mountain that is currently stockpiled throughout NZ?

I think there may be some lobbying behind Fran's article.

The dairy industry's problems pre-existed, but they have now become obvious to all as the recession-depression has reduced world demand. The Fonterra industry model was never going to work, and it hasn't.

The dairy industry has to change. Before it can change it has to work its way through the grieving process: Denial: Anger; Bargaining; Depression and; Acceptance. That process gives context to much of the current debate about the dairy industry, and probably wider economic debates. Lets just say many have a long way to go before they get to acceptance. Expect more articles in the media along the themes of denial, blame, and bargaining.

The dairy industry problem is one jointly created by government and industry over decades. It is not going to be fixed by government "leadership" - that has always been part of the problem, and this time will likely again make the long term situation worse.

What would help is for individuals to cease relying on the government and/or industry bodies doing the thinking. That is a dumbing down process that essentially defends the status quo. Instead: Start looking for other sources of information, share them around, discuss ideas and build their own solutions which will almost certainly be more practical, and smarter.

Andrew J

What! Are you saying that our milk powder stockpile has all been sold - so why have Fonterra been leasing tens of thousands of square metres of commercial space to store it in?

Do you have evidence of the stockplie being sold to China at a discount?

Bernard.

There are 140 comments on this post, and many of them are very relevant to the major discusssion going on around dairying, Fonterra and issues with agriculture's debt. Some comments are even informing the articles in the media.

Shouldn't you consider distilling the essence of this thread into a new post? Otherwise your site and its viewers are missing a major debate.

Heard of a cockie today who dumped $300k of unpaid, overdue bills on his bank managers desk and said "your problem now" and walked off. They had him budgeted on 210k milk solids production for the year, but he had dried of in Feburary and only done 160k milk solids. No doubt lots more like this to come.

I agree with what you're saying William. Up until the point where you say 'so we get our cheap milk...'. It ain't that cheap in N.Z.
But yeah, even some of my local runs around the rural roads, there's some awful skinny young animals around and about and winter's only just begun...

I am sure I saw on the front page of the NBR on the newstand earlier this week that the average dairy farm is carrying a $17m monkey - pretty horrific!

Bank Manager.

The NBR said: "358 most indebted dairy farms have debts around $17.3 million". I think that may be based on data that is a couple of years old.

PeterR, Les

Yes cheers. That is a good idea, will try get something going (I'm off tomorrow, so may be Friday). Or there was a farm sales story a couple of days back - an info piece. Farm sales fell in May if you look at the month on its own.

http://www.interest.co.nz/ratesblog/index.php/2009/06/12/total-farm-sale...

We will also be getting sector credit data (inc. Agri credit) from RBNZ near the end of the month.

Cheers

Alex

The Bank Manager.

I thought I was seeing things! So was it saying there are 358 farms each with an average debt of $17.3m - how the hell do the farms stack up?

Yes. The story is that corporate dairy farms often do not stack up, and assets don't cover their $17 million debts.

I wonder if Landcorp is one of the 358?

and there predicting a nice fat el nino to add the cherry on the top

I don't think ag./dairy sector will get much help. Like the greens have been saying, the environmental degredation to the natural environment by dairy farmers is just starting to catch them up. Animal welfare problems are getting more publicity. Expect farmer to be told to cut the stocking rate and look after their animals properly, and their land. This will reduce the income, but will at least be enviromentaly sustainable. World wide food production is in decline, its not getting to much press because of the credit crunch, but the food crunch is coming to a TV screen near you soon (might be a year or two away).

Regarding the animal welfare issues, is it time to get the tabloid television involved - Campbell live et al?

Following the sow crate story with another tale of woe would be good copy for them and it may stir MAF/NZFSA into action.

Denninger had this today.

See, debt deflation cannot be avoided once you blow asset bubbles supported by debt - it simply can't. That cycle must end and when it does you wind up with the debt service sucking all the oxygen out of room and prohibiting growth. Once that condition asserts itself asset prices collapse and defaults go parabolic.

Put simply:
Once you start borrowing to pay current costs and interest - that is, you start "rolling forward" debt such that the amount outstanding increases as a percentage faster than GDP increases and this "rolling forward" shows up in asset prices, you are doomed to a deflationary credit collapse.

The longer you let it go on (or try to force it to go on) the worse the collapse will be.

This is mathematically certain - it is no more subject to avoidance than is the fact that you cannot "get" energy - you can store it, transform it or use it but each and every transformation will lose some of what you started with.

Likewise, once debt is taken on there are only two alternatives: PAY IT DOWN OR DEFAULT IT.

need I say more

Around here we have our equivalent to the USA's plunge protection team. National bank call it the 'debt management team' they are their to protect the banks capital not the farmers and they are busy chaps, can they stop the inevitable not a show but good luck trying. I wouldnt want to be one of their victims, i mean clients.

"Oh yeah, it starts with reviews and ends with a subsidy. Think you're wrong on this one Stevel. My bet is English is desperate for a way to prop up the Fonterra mess before the stack of cards collapses."

Umm I don't think joe public, not me anyway is going to let my taxes go from hospitals and schools into debt riddled farm business and thier co-ops. The govt. is going to have a hard time justifying its landcorp prop ups, let alone "bail-out" 328 farmers and their AVERAGE of $17m of debt. (and they are just the "current" basket cases)

No way nadda, just not going to happen,
English will be desperate, but he is not that stupid!

William
Just out of a meeting. Its hit the fan, unpaid bills everywhere,wages unpaid, stories of some farms 30-40 k behind on wages.17 conversions in trouble in Southland this week. Major headaches in rural support industries no one is getting paid. Banks are trying to sell farms at price of land before conversion. Wheres Fonterra and your 4 million $ man when you need him?

Andrewj: what meeting was that?

Shite. What can you say really. Its gona get worse for the poor old girls, less staff. Do you think PGGW are mad advertising 12 months credit to all and sundry. Will they ever get paid?

Mark, stock firm. May be all b*llsh*t. Id bet %90 right

This from denninger,

See, debt deflation cannot be avoided once you blow asset bubbles supported by debt - it simply can't. That cycle must end and when it does you wind up with the debt service sucking all the oxygen out of room and prohibiting growth. Once that condition asserts itself asset prices collapse and defaults go parabolic.

Put simply:

Once you start borrowing to pay current costs and interest - that is, you start "rolling forward" debt such that the amount outstanding increases as a percentage faster than GDP increases and this "rolling forward" shows up in asset prices, you are doomed to a deflationary credit collapse.

The longer you let it go on (or try to force it to go on) the worse the collapse will be.

This is mathematically certain - it is no more subject to avoidance than is the fact that you cannot "get" energy - you can store it, transform it or use it but each and every transformation will lose some of what you started with.

Likewise, once debt is taken on there are only two alternatives: PAY IT DOWN OR DEFAULT IT.

"English will be desperate, but he is not that stupid!"
Agreed. But perhaps there are many politicians in National who are.
Bill English has been the only sensible voice heard (occasionally) since election .. and before that too.

Large dairy farms and economies of scale are a myth. Distance and time walked (and energy consumed doing this) time for milking, lack of appropriate management skills and an inability to sell such farms (except to Councils perhaps) due to their "value" have now all become a recurring nightmare for banks and rural support industries.

To take up on another comment, another misconception is that any reduction in production will decrease ability of farms to pay down debt. This ignores some basic production economics. The ONLY way many farmers have to survive is to actually bring management back to all pasture managed well. Unfortunately, the period from 1990 to now has been on the expanding use of bought in supplements (and it could be argued, the wrong genetics). The extensive use of supplements, many imported, have allowed farms to ignore real pasture management practices.

Overall, New Zealand will be better off with reduced dairy production (just read what real co-operatives do) as the imports of feed, machinery, fuel, drenches, sprays and vet products will markedly reduce along with a moderate decline in product sold.
This will allow the country to recover from the horror stories (that will be exposed soon??) of animal cruelty and environmental damage - all perpetrated in the name of increased production, and bring some logic, instead of greed, back into farming.

BJR
Who the hell had the bright idea to guarantee deposits out side the main trading banks. Lets give that guy a DB. Shet he must be a f**king genius we have been onto this for over 3 years, now we get to pay for it as well, via a taxpayer deposit guarantee.

Look at this crap from within the industry these guys dont have a clue.Well if you are going to be wrong you may as well be really wrong, who pays these guy's Fonterra? oh, I think they do work for Fonterra.

DAIRYNZ DAIRYING ECONOMICS COMMENTS

"While we agree with Colin Riden's calculation of average debt levels,
our analysis done last week [12th June] says that the distribution of
debt between farms is much more evenly spread than he claims. Allowing
for increase in debt levels between 07/08 and 08/09, we estimate that
5-10% of milksolids production (and farms) have debt levels over
$40/kg MS. Mr Riden is claiming that 33% of farms have a debt level
averaging $47/kg MS. Our data would suggest only 5% would have this
average today.

"These farms clearly face major financial pressures, but many of these
farms will be in development phases with ability to profitably lift
production and reduce debt per kg MS. In other cases farmers will be
looking to a mix of asset sales, reducing interest rates and cost
control to get them through the current downturn in the payout cycle "“
the 30 year trend in payout signals a $5.55 payout would be the
trendline payout for the 2009/10 season.

"Debt levels on farms have increased over the last decade as the
industry has expanded and capitalised gains in profit into land
values. The current downturn will certainly lead to some farmers
leaving the industry or down-sizing "“ but the debt tsunami scenario is
based on a overestimate of the numbers of farms under high debt
load."

"DairyNZ expects that over the next three to five years we will see
the cycle repeat the pattern of the late 1990s with farmers focusing
on profitability gains on farm to lift return on assets, followed by a
cyclical lift in payout adding to these profits and underpinning land
values.

Alex Fear

Senior Communications Advisor

Spin,spin,spin,spin,spin,spin. Im getting disorientated due for a holiday in Brazil lets take some kiwis along for the ride. Sh*t that was meant to be a secret.

This is my first real foray into this thread. Reading all the comments here, I have been very confused, and have to say, I agree with Alex Fear quoted above. I have dairy farming clients throughout South Canterbury, some of them big (1000 plus cow herds), and I am in regular email contact with them - I'm trying to convert them all into Austrians. :). Yes, some have high levels of debt, but no one is being pressured by their bank, they are all paying their bills, as far as I know, and it is not as dire as one would think reading the above.

Perhaps it is different in Southland, where AndrewJ is, I have no clients down there, but from where I sit, it is not dire, banks are taking a reasoned approach to the situation, my clients are taking the actions needed to weather this, there is no panic.

The animal welfare issue is different, I'm an animal lover - indeed, am ex a farming family, but could not farm because I would become too attached to the stock - and would be distressed if some of what I read above is true regarding the large herds. I suspect there is truth in some of it, but again, I am sure on my client base this is not going on. My dairy clients, including the large herd guys, are not land speculators, they are dairy farmers and they love their industry, and their herds (including the welfare of).

But, thus far, and gained from talking to my dairy clients bank managers, we are nowhere near the financial armageddon that would be signified in some of the posts above. So, I keep a watching brief.

Information is king. I look forward to more analysls on this site.

From Andrewj clip:
Presumably the data referred to is sourced from DairyBase
http://www.dairybase.co.nz/index.php

Peruse where this data comes from, how it is arrived at and how current it is.
This applies to a small % of farms and data (based on financial records from previous season plus standardised physical figures) which is supplied by "rural professionals" on a voluntary basis. Not great for indicative sample so far.
Hopefully they merge this with more relevant data .
The "Colin Riden" referred to seems to gather his from both Reserve Bank figures and MAF monitor farms - with reservations about the latter in terms of which farm data are included. Also some logic applied to total debt vs. number of farms and production to repay it.

If the more indebted farms are as stated - "but many of these
farms will be in development phases with ability to profitably lift
production and reduce debt per kg MS. "
it would be of interest to elaborate on just how this lift in production will be achieved.
By more borrowing?
Presumably they attached the analysis done last week to this press release?
Dig it out please Andrewj - before you dash off overseas to some new dairying venture??

Mark
I talked to my accountant last year about what a terrible time we were having. He thought it was going ok , so far he could see no problems. Last month he was in shock horrible books massive losses. He was just doing the books over a year after the event. This year he is busy because the banks want to see the accounts asap to check on the financial state of their clients. I suspect many dairy conversions in north Canterbury are under financial stress. One of my friends has bolted in hiding with his wife while Rabo appoints a manager up to the auction, nice guy works hard just out of his depth in debt. The farmer Stevel talks about dropping 300k of bills on the bank mangers desk wasn't the farm i thought so that makes 2 i know in similar state. My father always said, a dairy farmers idea of cost cutting is to dig a hole and bury the cheque book till spring. Great for the farmer hard on the service sector. I also have a friend owed a heap for irrigation equipment from the Wairarapa so the problems I believe affect all new conversions and all existing farmers with high debt.

Yep Mark I think that cockies can hide deficits for ages in their business. I talked to a independent stock agent a couple of days ago, one of his clients left him hanging on $275k worth of dairy stock (heifers). His terms of trade were 14 days, he got paid at 28 days. Was the longest 2 weeks of his life, but he was sooooo relived to get paid!

The slippery slide is getting more vertical by the week (day?).

I'm in the same boat as you Brownie, my wife gave me the ultimatum a couple of years ago "you choose; the fanny and the family or the f@rkin farm". So after 20 years of farming I'm back at school! (thanks for funding my higher education fonterra)

Andrewj, you predicted the breakdown so well ....now there are breakdowns within as reported above regarding herds of cows in strife not to mention human misery ....it is not just financial failure but systemic breakdown (disintegration?) ...put simply Chaos Theory has been set in motion with the destruction of virtual reality money, the dimensions are still incalculable as there is no tangible way to estimate of the magnitude of the world virtual reality currencie$ that have either evaporated or vanished.... Remember my posts last Oct/Nov regarding Chaos Theory?

A little bit of info at a time creeping into mainstream media,just a little, no PANIC yet.

http://www.stuff.co.nz/national/farming/2515409/Debt-forces-farmers-off-...

The banks had pulled back on their lending into the sector and been tougher with farmers not paying back on schedule.

So far there had been "quite a bit of denial" in terms of public acknowledgment by the banks that there was a problem.

But banks had decided they could not continue to pour money into farms that would not return the investment, Briden said.

"They've cut off so much credit that a lot of farmers are not paying their bills, that sort of stuff, forcing a few sales of holiday homes ... some farmers have been forced to sell [their farms]."

Still plenty of denial from affected parties out there.

Anyone any comment on this?

Long term, the dairy industry is still a good one Les.

And, I've read the posts following my above one, but until I see the actual evidence of a large scale forced sale of dairy farmers, I will continue to go with the facts that I still have at the moment, which is that banks are not making hasty, or ill judged decisions, they will continue to see the majority of their dairy customers through this.

Yes, there will certainly be an increased incidence of those with the biggest debt loads forced off, no doubt about that - noting that a certain level of has always been happening, indeed, probably the biggest individual dairy farmer to 'go' in this manner in South Canterbury, did so well before this supposed crisis even started - but I still do not see this as the 'avalanche' or extreme crisis intimated above, or in Fran Sullivan's article (which I have to say did surprise me).

I might be wrong - it's happened before :) All we can all do is keep a watching brief.

Les
Its called the Denial stage. If you look at farm debt and farm incomes there is no way this debt can be serviced. Its maths. Banks are choosing denial over acceptance and admission of shoddy lending practices. Im hearing stories of farms needing a 20% increase in production to break even. No one is mentioning Fonterra's financial state, yet. The banks are going to suck the life out or Rural NZ one way or the other.

Hi guys

We've put up a new thread here.

http://www.interest.co.nz/ratesblog/index.php/2009/06/19/big-problems-wi...

We're keen to get out'n'about to see what you've been talking about so we can get some photos and video footage etc. More on the other thread, including email addresses for you to get in touch if you wish.

All set to hop on a plane and come on down.

Great work

Cheers

Alex and Bernard

In the interests of a balanced approach to this debate, Im including a article from the USA. It gives a good view of the changing attitudes and problems we face for the foreseeable future.

EMPATHY, CONCERN, OR INDIFFERENCE ABOUT WORLD MILK PRICES: (By J. Kaczor) The
phrase "misery loves company" refers to a sense of consolation felt by someone who is facing problems from knowing others are in the same situation. The U.S. dairy industry is definitely facing problems, going through one of the worst financial crises in its history. However, the consolation referred to above may not apply to feelings about what's happening within the U.S. It's certainly no secret; the losses incurred and the sense of helplessness has touched every state in the Union and virtually every milk producer. Stories, local and national, about persistently low milk prices, high and rising costs, and monumental losses have been printed daily for some time. For various reasons, the feelings of some producers about what is happening elsewhere in the U.S. may
range from frustration to satisfaction, skipping right over consolation.
There are many examples that could be mentioned. Two touch California producers. California producers may rightly feel frustrated because they have, as a whole, been producing less milk in one way or another for ten straight months, while some producers in some states have been expanding over the same period. On the other
hand, satisfaction may be felt by producers in the East and Midwest that California producers are paying the price for their monumental growth over two decades that resulted from a combination of natural advantages and weak corporate leadership "“ and which did contribute to more milk being produced in California and the U.S. than could be readily marketed. Case in point: sales of California nonfat dry milk to the Commodity Credit Corporation since last October totals 258 million lbs; sales by plants in the other 47 lower states totals
zero.
But, over-riding the regional differences within this country, which are part of the industry fabric, are the hard questions all U.S. producers are facing: how much longer will this continue; what is keeping milk prices so low;
at what point does it no longer make sense to continue. These common questions, arising as they do from the collapse of milk prices late last year, leads to another question "why us?" And that leads to a look at what is happening elsewhere and perhaps, finally, at least a small sense of consolation.
At the heart of the collapse of domestic and international milk prices in the U.S., Western Europe, and Australia/New Zealand is the world-wide economic recession which was preceded by a record run-up of virtually all commodities, from field crops, to dairy, to oil and minerals. The recession (and the accompanying financial crisis) resulted in a significant reduction in international demand, including that small portion of world milk production that is traded internationally. Those countries who rely on exporting surplus dairy products suddenly found themselves with a huge problem: a surplus of dairy commodities, and few buyers with less available credit "“ and nowhere to go.
Here's a glimpse of what's happening in Western Europe, where milk production has, overall, not been increasing and milk prices vary by country and are negotiated between producers, milkplants, and wholesale customers. Milk prices began to fall last year, and have continued to fall through at least last month. Most reports say that producers are receiving prices that barely cover feed costs. A major cooperative in Great Britain, representing ten percent of the nation's milk supply, became insolvent early this month, closed several plants, and left many producers with nowhere to ship their milk. Since last August, producers in France, Belgium, and Germany have resorted to blocking traffic, dumping milk, sit ins, depositing manure in front of government
buildings, burning tires and hay, and otherwise protesting milk prices too low for them to exist. Is Western Europe the problem? Don't think so. Until early last year, milk production and domestic consumption there was well balanced "“ and then domestic consumption began to slip and their export volume also moved lower.
A different picture emerges from New Zealand and Australia. Their milk production is much lower than either the U.S. or Europe. Combined, these countries produce about 50% more than the amount of milk produced in California alone, and they consume only about 15% of their production. When their exports began to fall, prices
followed, and producers in both countries are now just about where U.S. producers have been since December. Recent stories by analysts in New Zealand paint a grim picture: Fonterra's forecast for prices for the next production year beginning in July will cover the costs of only those who have no debt; all others are facing severe cash flow shortages and their lenders are pulling back. They are at the mercy of the international
marketplace, and their leaders are placing much of the blame on the U.S. and Europe for the decline in dairy commodity prices (or more precisely, for the lack of price recovery once prices hit bottom at the beginning of the year).
Should U.S. producers care about what's happening to milk producers in other parts of the world? Empathy for those producers might be appropriate and, if it helps, some consolation that what you are enduring is shared by countless others who are doing nothing more than a very good job of producing one of nature's most nutritious
products. It should be easy to feel their pain because it's a lot like what you are dealing with right now. But let's take another look at those numbers. It appears that the industry leaders in Australia and New Zealand believe they are entitled to very much more than their fair share of the international dairy product market. They've been at it for a long time and they do a very good job in serving their extensive customer base, but entitlement? On the other hand, Western Europe's milk production is huge, but has been fairly well balanced with domestic consumption and regular exports. The same can be said for the U.S., although over response to record high prices in 2007 and early 2008, along with "windfall export volume" generated just under three percent more milk than was assured of a market "“ and that over-production is being remedied this year.
The facts show that New Zealand and Australia have been producing about 500% more milk every year than they use internally, and their projections of production this next year show further increases. They have the unique competitive means to channel their milk supply from plant to plant in order to take advantage of the most
profitable output at any particular time, including manufacture and sale of Milk Protein Concentrate to U.S. customers. Western Europe's supply this year is projected to be level to or lower than last year's output. The U.S. supply is projected to be lower this year as well as the next. Neither the U.S. or Europe have the means to control milk production or usage. That is why governments in Europe and the U.S. have taken actions that are compliant with World Trade Organization agreements to reduce existing surpluses by subsidizing exports.
That brings us to a few questions that may need answering. Should we care what happens to global dairy prices if domestic prices in the U.S. and Europe can be insulated from global prices? It's quite possible that when milk prices recover later this year in the U.S. because of the sacrifices being made by U.S. producers, global dairy commodity prices may remain much lower until global economic conditions substantially improve. If that happens, should we care, pretend to care, or derive just a bit of satisfaction that the piper must be paid by those
who call the tune?

Andrewj.

That is a US perspective, but I think they are a lot further along the path to acceptance (denial, anger, bargaining, depression, acceptance) than are NZ dairy producers. I translate four extracts from your post:

Oceania dairy industry leaders are blaming everyone but themselves for low world prices. Their arrogance is so profound that they intend increasing export production into falling world demand while the US and Europe take steps to reduce production. Domestic prices will imprive but international prices are going to stay low and seriously hurt producers dependent on exports. You dumb bastards (your industry's leaders at least) have cooked your own goose, and that provides us with some satisfaction given the damage you have done to world dairy markets.

They (Oceania) are at the mercy of the international marketplace, and their leaders are placing much of the blame on the U.S. and Europe for the decline in dairy commodity prices (or more precisely, for the lack of price recovery once prices hit bottom at the beginning of the year).

It appears that the industry leaders in Australia and New Zealand believe they are entitled to very much more than their fair share of the international dairy product market. They've been at it for a long time and they do a very good job in serving their extensive customer base, but entitlement?

The facts show that New Zealand and Australia have been producing about 500% more milk every year than they use internally, and their projections of production this next year show further increases.

It's quite possible that when milk prices recover later this year in the U.S. because of the sacrifices being made by U.S. producers, global dairy commodity prices may remain much lower until global economic conditions substantially improve. If that happens, should we care, pretend to care, or derive just a bit of satisfaction that the piper must be paid by those who call the tune?

The history of Fonterra is one of a series of marketing disasters.

andrewj:

The article by J. Kazcor might provide "balance" in that it is "from the USA", but in the end it's just a misleading opinion piece.

For instance, the article states: "At the heart of the collapse of domestic and international milk prices in the U.S., Western Europe, and Australia/New Zealand is the world-wide economic recession..."

Really? Sure, the "global recession" is an easy scapegoat, and no doubt had an impact But global dairy prices started falling in the second half of 2007, well before any real economic impacts of the financial crisis were being felt.

I suggest anyone genuinely interested in the influence of US milk production on global markets to take a look at the USDA's data, compiled nicely at http://future.aae.wisc.edu/tab/prices.html.

The reality is that from early 2005, growth in US milk production lifted to nearly 3% pa, from its long-term historical average growth rate of around 1% pa (the latter being approx equal to US domestic demand growth). All this new excess ended up as exports, peaking at around 570k metric tonnes of powder/butter/cheese (not an insignificant quantity - about 1/3 of NZ's exports of powder/butter/cheese for the same period of about 1730k mt).

The result? After an initial period of absorption, international markets collapsed under the weight of excess supply. The global recession worsened the situation, but was not the heart of the problem, as suggested.

US dairy farmers, collectively, sowed the seeds for their own downfall, though my sympathies go to those that are clearly suffering at the individual farm level.

Briefly, the implications are fundamental to the outlook:
1. the collapse in global dairy prices was not so much due to a drop in demand as it was an increase in supply.
2. global supply growth is slowing dramatically and milk supply in the US is outright falling.

None of which absolves Fonterra of its responsibilities to its shareholders. It's done a terrible job in setting expectations, if nothing else. But neither do I think the outlook for global dairy prices is a dismal as many believe, or that NZ farmers (or their co-op) have any sense of "entitlement" to a greater share of the global market.

A roommate recommended me to look at this site, brill post, fanstatic read... keep up the nice work!