The schedules remain at the bottom but are now only about a month away before they begin the game season rise.
Frozen stocks remain low and exporters are warning importers that venison avaliability will be reduced this year, as hinds slaughtered continues to show herd reductions.
May heralds the end of mating, and managers will be changing around or removing stags as they look to improve the efficency of their herd’s management, and tighten fawning in the drive for heavier, earlier progeny.
As appetite returns to all stags after the roar, quality feed is needed to put on body condition before the winter and ensure animals are in good order for growing new velvet in the spring.
Lamb schedules continue to languish at the bottom as demand remains weak, and everyone is being careful on how much stock they are carrying.
Average saleyard prime lamb prices have sat under a $100 for the last few weeks in both islands, and the weak export prices have also seen the premium disappear from South Island local trade schedules
The Chinese market import demand is weak with strong domestic supplies, and in Britain demand is also soft on the back of currency issues trading into Europe, and losses recorded by two of the large supermarket chains.
The NZ kill has slowed dramatically and is now behind last year, as the nations lower lamb numbers born, is starting to show.
Alliance is heralding strong progress in making it’s plants more energy efficient in the drive to lower costs, and has recorded savings equivalent to the energy needed to run it’s biggest plant.
The store lamb markets remain static in the north, but lifts in the south, as numbers restrict supply and winter crops revive with the rain.
Scientists have discovered animal safe compounds to curb methane gas from ruminants by 30-90%, but it may take at least 5 years to produce a product that can be used commercially on farm.
The North Island auction saw the market remain steady, as limited volumes, shipping requirements and close to the market purchases drives the market, and with next weeks South Island sale back 32% on rostered quantities, the steady tone should continue.
The foot rot resistance gene has been identified by geneticists, and the fine wool sector is excited by the chance to rid this animal health issue from their sheep, by selection of sires with this gene.
Beef schedules eased slightly this week as market nervousness builds in the US, around NZ volumes from the increased cow kill.
Prices for prime steers at the saleyards have been steady like the local trade values, but with the kill over 13% ahead of last year, winter/spring prices are sure to build.
Early indications from the bobby calf market are that the meat prices will be weaker and skins stocks higher, will be another price negative for the stressed dairy sector.
Weaner calf sales are coming to a close but have maintained strong demand all season, in spite of feed shortages in Canterbury, as farmers reinvest their profits in a sector with positive prospects.
In Australia the live export cattle market is growing, with more being spent on transport ships than new processing facilities.
Most animals are heading to Asian destinations to be finished on large feedlots where low feed costs make them profitable, and with the big reduction of cattle numbers in the US, this country could be a future market destination for live animals.
Having posted a 3% rise in half-year profit ANZ NZ, the country's biggest bank, is cautioning that chunks of the local economy face headwinds caused by the strong Kiwi dollar and slowing economic growth in key trading partners China and Australia.
ANZ NZ CEO David Hisco told interest.co.nz these headwinds are a watching brief for the bank.
"We just thought it was worth calling out that whilst commentators are calling it a rosy market which it generally is, there are still parts of the economy that will need to be carefully managed," said Hisco.
"I think we need to realise that whilst some parts of the economy are going along quite nicely, there are people within the economy (such as) tourism and exporters who are finding the higher dollar a bit more of a challenge. And then obviously China slowing down a little means that they will be probably a little more careful about what they're doing," Hisco added.
Against this backdrop Hisco suggested Prime Minister John Key trying to open trading in new markets is "exactly the right thing to do in terms of spreading our trading risk."
His comments came after ANZ NZ posted a $24 million, or 3%, rise in March half-year profit to $877 million. That's a fifth straight record high interim profit and compares to $853 million in the March half last year.
For ANZ NZ, the country's biggest rural lender, last week's cut in Fonterra's forecast milk price payout to $4.50 from $4.70 per kg of milk solids for this season is also in focus. The returns for Fonterra farmers are looking like being about $6 billion down on last year, when the milk price payout was $8.40.
"If we had a low payout for the next 12-18 months, then I think towards the end of that period it would start to really put stress on some farmers," Hisco said. "But we're staying close to all our customers and making sure we can help them wherever we can."
In a statement the bank said the profit result reflected marketshare growth in both lending and deposits, confidence in the economy and continued productivity gains within ANZ NZ.
Net interest income rose 4% to $1.422 billion, and total operating income was up 1% to $1.931 billion. Operating expenses increased 2% to $739 million. Provision for credit impairment came in at $31 million for the half-year, versus a write-back of $39 million in the same period of last year.
CEO David Hisco said the ongoing simplification programme following the culling of the National Bank brand in 2012, putting the ANZ and National banks onto one IT platform, and drastically reducing the number of products on offer from the combined bank, is continuing to benefit the bottom line. On top of this the adoption of new digital technologies for both customers and staff are contributing to productivity improvements.
ANZ NZ said its cost to income ratio for the half came in at just 38%.
"We have maintained our momentum into 2015 with a strong first-half performance. Confidence among businesses and consumers is lifting economic activity and lending volumes," Hisco said.
Net loans grew $3.5 billion, or 3% between September 30 last year and March 31 this year to just over $109 billion. Customer deposits increased a shade under $4 billion, or 5%, to $80.3 billion.
The bank said its share of the home loan market rose to 31.2% at March 31 from 31% a year earlier, and its share of the credit card market increased to 28.9% from 28.4%.
|ANZ NZ||March 2015||Sep 2014||March 2014|
|Net interest margin||2.27%||2.29%||2.32%|
|Cost to income ratio||38.3%||39.8%||38.1%|
|Return on assets||1.05%||1.10%||1.10%|
|Gross impaired assets as a % of gross loans||0.48%||0.67%||0.82%|
Smith defends Asian strategy despite challenges
Meanwhile, parent the ANZ Banking Group, also posted a 3% rise in half-year net profit after tax to A$3.5 billion. Group CEO Mike Smith, said the current environment presented some challenges with lower growth likely for the foreseeable future with occasional volatility and shocks.
He said the twin impacts of expansionary monetary policy on institutional lending margins and lower commodity prices on trade volumes, were being felt at ANZ's international and institutional banking arm.
However, Smith defended the group's "super regional" strategy that has a strong focus on growth in Asia, which has come under question.
"This environment presents some challenges, however we are confident about the benefits of our super regional strategy over the longer term and the opportunity to continue to improve financial performance in the near term," said Smith.
The ANZ group is "increasing the pace of execution" of its super regional strategy within international and institutional banking to improve returns, added Smith.
The group interim dividend was increased 4% to A86 cents per share, meaning a payout to shareholders of A$2.4 billion.
By Allan Barber
Previous downturns or relative changes in sector profitability have generally led to a change of land use; and because sheep farming was the predominant 20th century rural activity, land use change was usually to a form of farming other than sheep.
Think forestry in the late 80s and 90s, dairy since the early years of this century, horticulture, grape growing and rural subdivision for lifestyle blocks since the 1980s.
Now the dairy payout has almost halved in 12 months because of global overcapacity and weaker economic conditions, the question arises whether there will be a flight from dairy, either back to sheep and beef or to one of the other agricultural options.
There are two main facts about the dairy sector: the current price is below the cost of production and global dairy production will continue to increase.
There are also differing opinions about the implications of the price downturn and the prospect of improvement in the near future.
Improvement will depend on recovery in the world’s major markets, notably the EU and China, as well as a resolution of the stand off between Russia and NATO countries.
China is going through an adjustment of its economy, as it tries to achieve a soft landing, but its growth rate will not be allowed to move back up to its previous heights.
While last year’s record payout was almost entirely due to the impact of Chinese demand, this is unlikely to be repeated in the next five years, if ever.
Europe’s economy is a basket case because of lack of demand and deflation in most EU countries, while the ECB tries to stave off a recession by printing billions of Euros.
However the removal of milk production quotas on 1 April will see a lift in volumes in some countries, including Ireland with an objective of 50% growth by 2020, western France, Denmark and the Netherlands, which will result in more dairy volume on global markets. EU exports have already increased by 45% in the last five years. The United States economy is improving and dairy production there is also rising.
Fonterra’s recent announcements don’t exactly give great confidence there is any improvement just round the corner. GDT prices have fallen sharply since February which contrasts with hope expressed before Christmas the price would recover to $3500 a tonne which was the average required to preserve a $4.70 payout. Now the payout forecast has fallen to $4.50 where NZX Agrifax has had it for the last two months.
Almost worse, the dividend payment is stuck at 20-30 cents per share, at a time when low milk prices should have flowed into better added value margins.
In an environment of greater milk production and hopefully increased global demand, the importance of a value added product strategy becomes ever more pressing. Fonterra appears to be stuck closer to the commodity end of the spectrum and its product mix is still geared towards the farmer milk payout priority.
Unfortunately this season has illustrated how limited that strategy is.
The V3 initiative the company is pursuing must make fast progress as suggested by the third V in the strategy, that of velocity.
But for those looking to change their farm activity, the main alternative farming type, sheep and beef, has failed to maintain its 2014 improvement, further progress on meat industry restructuring is unlikely to happen, until participants assess potential developments arising from Silver Fern Farms’ equity raising programme.
The red meat sector needs to get its act together in a hurry, if it is to have any hope of encouraging dairy farmers to jump back over the fence.
At the moment the best the sector can hope for is a slowdown in the rate of dairy conversions which surely must come to a sharp halt after the latest downgrade.
Next season will be a nervous time for both dairy farmers and New Zealand as a whole, as they wait to see whether the White Gold rush will come again or merely more milk down the drain.
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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at email@example.com or read his blog here ».
By Gareth Vaughan
Standard & Poor's has downgraded its credit rating on Rabobank New Zealand by one notch to A from A+, meaning the rural lender's credit rating has now been downgraded five notches in less than four years.
The downgrade of Rabobank NZ's long-term issuer rating comes after an unconditional guarantee from its parent company, the co-operative Rabobank Nederland, expired on May 1. (Here's a statement from Rabobank NZ on the downgrade).
Last October S&P said it expected to lower Rabobank NZ's long-term rating by one notch to A+ after the parental guarantee expired. However, since then, in November when its parent was downgraded, S&P has downgraded Rabobank NZ to A+ from AA- with the rating placed on CreditWatch with negative implications.
The additional downgrade to A leaves Rabobank NZ's credit rating below the AA- of ANZ NZ, ASB, BNZ and Westpac NZ, and below the A+ Kiwibank has from S&P.
Loss of coveted AAA rating
As recently as 2011 Rabobank NZ had the highest possible AAA credit rating from S&P, but was cut two notices to AA in November 2011 as the credit rating agency applied its post global financial crisis ratings criteria to the world's banks. S&P also dropped the bank's credit rating, to AA- from AA, in November 2012.
Despite cutting the bank's long term rating S&P has, however, affirmed Rabobank NZ's short-term issuer rating at A-1, and removed the bank's ratings from CreditWatch with negative implications, where they've been since October last year.
"The ratings on Rabobank New Zealand were previously equalised with its parent, reflecting this guarantee, which covered all obligations of Rabobank New Zealand," said S&P credit analyst Andrew Mayes.
"We also understand the obligations incurred on or before April 30, 2015, remain covered under the guarantee until these obligations are withdrawn."
Parent seen likely to provide support
Mayes said the expiry of the parent guarantee doesn't affect Rabobank NZ's stand-alone credit profile of bbb+. He says S&P believes Rabobank Nederland is likely to provide timely financial support to Rabobank NZ, if needed.
"This is based on our opinion that Rabobank New Zealand remains a highly strategic subsidiary of the group, which recognises the integral role Rabobank NZ's main business lines play in relation to the group-wide strategy. We also consider it highly unlikely that Rabobank Nederland will divest Rabobank NZ, particularly given the subsidiary's success over a sustained period as one of New Zealand's largest providers of food and agriculture lending," said Mayes.
S&P's negative outlook on Rabobank NZ's long-term rating mirrors that on its parent because S&P expects to maintain the long-term rating on Rabobank NZ one-notch below that of its parent.
This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
By Nigel Pinkerton*
During my time at Waikato University in the early 2000s I almost majored in Geography, before changing focus to Economics.
At that time, there was a lot of concern about “urban sprawl” and the fact that prime agricultural land was being gobbled up by development.
Lifestyle blocks were perhaps the biggest concern.
Some of the academic staff seemed to think that all the farmland within 30 minutes’ drive of Hamilton was destined to be carved up for lawns and gardens.
As a student I tended to buy in to this view.
Indeed if it wasn’t for fairly restrictive planning rules in Hamilton and the surrounding districts it is almost certain there would be more 1-5 hectare sections and less land in “productive” agriculture.
As a lifestyle block owner myself now, I can of course see the other side of the argument.
Land prices have gone up significantly over the last ten years as farmers have been able to earn more with the same land. The drivers of increased returns have been both higher prices (particularly Dairy) and better technology and farming practices.
Land prices, like any asset, tend to reflect the next best use.
In other words, for me to buy a couple of hectares I had to be prepared to pay more than a farmer was, based on the return he could make farming the land with modern agricultural practices.
But that is not the whole story.
Society has made a decision that we will not let people carve up land however they choose.
Because of artificial planning restraints there are not many smaller titles available, so the price paid for a bare 2 hectare block is usually significantly more per hectare than a larger block (or a similar sized block not on a separate title).
I recently had the privilege to attend the Waipa stakeholder’s breakfast, where the Council was discussing the future of the Waipa District. It was interesting to hear the plans for the future, and explore Waipa’s recent economic success. Something that jumped out at me was a throw away comment from one of the presenters about how the new innovation park was “better than it ending up in lifestyle blocks”.
As a lifestyle block owner, you may understand if I took that comment a little personally. It appeared to betray an ill feeling that many planners and council employees still have towards lifestyle blocks.
Previously however, the presenters had been hammering home the message that Waipa needs to attract workers from outside the region.
I myself am one of a growing number of geographically mobile workers who earns their income from firms based in big cities, but have the choice of where to live due to remote working.
My advice to councils like Waipa is that, next to family connections, the most important draw card for people moving into a district is affordable property, including lifestyle blocks.
The key is to get the balance right.
Green belts, rural character, and protecting agricultural output are all good things to care about.
But the trade-offs need to be properly understood. Total land in agriculture can increase along lifestyle blocks. Marginal land has been put into more productive uses, while some of the land closest to population centres has been set aside for more rural-residential uses.
It also has to be remembered that not everybody mows their paddocks. Personally I hate to see this happening as it seems like such a waste. But most owners of larger blocks (over 1 hectare) plant orchards or keep a few animals. They sell or trade produce with friends and families.
Although such small blocks are unlikely to be as productive or efficient as larger scale operations, they are at least in keeping with the area’s rural character.
I grew up in Waipa District, it is a beautiful part of the country and many people already choose to live here and work in Hamilton, Auckland, or even further away as technology enables them to. To keep this trend going, and attract more people, councils need to have an accommodative planning regime that balances the need to preserve rural character with the needs of the people they are trying to attract.
Each geographically mobile worker who moves into a District is likely to spend most of their income in the district.
Even a small group of individuals choosing to move into a district can provide a significant and long-term boost for local businesses and the Council’s rating base.
By David Hargreaves
Fonterra's farmers say the cut in forecast milk price to $4.50 from $4.70 per kg of milk solids announced by the dairy giant co-operative will be a "difficult pill" for them to swallow and they are "disappointed" .
Fonterra Shareholders’ Council Chairman, Ian Brown said the reduced forecast demonstrated that, as with other industries in New Zealand, Fonterra and its farmers are subject to the volatility of the global economy.
“Moving forward Farmers will be looking to their Co-op to drive value from the milk they produce and take advantage where possible of the low Milk Price environment we are experiencing.
“It’s a given that Farmers need to continue be especially prudent with their financial planning and focus on getting their farm businesses in the best possible shape for next season."
A combination of the Reserve Bank officially indicating a move to more of an easing bias on interest rates and the announcement from Fonterra saw the Kiwi dollar drop sharply, from a shade under US77c to about US76.1c.
Fonterra kept its dividend forecast range unchanged at 20-30c a share - though it had dropped this forecast range by 5c only about a month ago.
And Fonterra has again, following on from a month ago, increased its forecast of the amount of milk supply in the current season.
Earlier drought conditions had been expected to trim the output quite markedly this season, but now Fonterra is estimating New Zealand milk production for the current season of 1,607 million kgMS, which is up from a forecast of 1,551 million just last month - and actually now puts the forecast production for this season about 1.5% ahead of last year's figure.
The significant thing about that is that the latest anticipated rise in production forecast comes at a time when global prices are being affected by over-supply.
Based on those updated production figures, the returns for Fonterra farmers alone are looking like being about $6 billion down on last year, when the milk price was $8.40 and the dividend 10c.
After the reduction in the milk price forecast, Fonterra is now forecasting a total cash payout of $4.70 - $4.80 for the current season. At the very start of the season - when global prices were much more buoyant - Fonterra was actually forecasting a milk price of $7.
Labour's finance spokesperson Grant Robertson suggested that the latest update from Fonterra confirmed that "an economic black hole of $7 billion" was opening up that would seriously affect the regions.
"The Government has repeatedly refused calls to help diversify our industries and export markets so that the country and local communities are not hit hard when a commodity price falls," he said.
“National has created an economy of milk and speculating on houses and pretended that it will continue to flourish. But the cracks are showing."
Fonterra's chairman John Wilson said the latest reduction in forecast milk price reflected the "continuing and significant volatility in international dairy commodity prices caused by over-supply in the market".
“We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GDT prices for products that inform our Farmgate Milk Price have fallen 23 per cent since February."
Wilson said the reduction would "impact" cash flows for our farmers, and they would "need to continue exercising caution with on-farm budgets".
“Our farmers are already managing very tight cashflows. Although this reduction is not the news that anyone wants, it is important we keep our farmers updated given the significant market uncertainty.
“Given the reduced Milk Price forecast, we are also lowering the Advance Rate of scheduled monthly payments to our farmers.
“We will continue to keep our farmers updated as the season progresses,” Wilson said.
Chief executive Theo Spierings said geopolitical unrest in places such as Russia, the Middle East and North Africa is impacting global dairy demand.
“Remote as they are, events such as the flow of refugees from Libya to Europe come together with factors like lower oil prices to soften dairy demand,” Spierings said.
By Keith Woodford*
Those analyses confirm to me that MIE has missed the big picture.
The key MIE recommendation has been that companies must amalgamate, with the most important merger being between the two big co-operatives Silver Fern Farms and Alliance.
However, Alliance has been consistent in their position, both before and since the MIE report, that the numbers needed to support an amalgamation do not stack up.
Alliance has taken considerable criticism from parts of the farming community for their lack of interest in joining Silver Fern Farms. Chairman Murray Taggart has been the front man and has had to bear the brunt of this.
There are many sheep farmers who are struggling, and it is human nature to blame everyone else, even when financial logic says otherwise.
Silver Fern Farms interest
From where I sit, an amalgamation between Alliance and Silver Fern Farms has never been a realistic option.
Quite simply, the fundamental weakness of Silver Fern Farms would, in all likelihood, have dragged down the combined financial entity.
Essentially, the Silver Fern Farms problems go back to the first few years of the 21st century when Silver Fern Farms bought out North Island based Richmond Meats. After that, Silver Fern Farms never got its debt back under control.
Since then it has been experiencing a declining share of the sheep meat market.
That decline has been despite its pre-eminent position as the nation’s largest meat processing and marketing company. That failure in itself tells a lot about the challenges of amalgamations.
Silver Fern Farms has itself been explicit that they now need $100 million of extra capital, although the reality is that they need much more than this.
The problem is that there is no ‘white knight’ out there who is going to come up with free cash.
If some entity does come up with significant cash, then that entity will be taking control. In that case, Silver Fern Farms will no longer be a co-operative.
The meat processing industry interest
All of the other companies understand the inherent weakness of the Silver Fern Farms position.
Everyone in the commercial industry knows that something now has to happen.
Accordingly, everyone is now waiting to see what opportunities this creates. Each company will be looking at which Silver Fern Farms assets would complement their own assets
There will also be some nervousness in these other companies as to what might eventuate.
None of them wants to see a cashed up overseas entity take control at Silver Fern Farms. That would only increase the competition for livestock. Inevitably there would then be company casualties.
The national interest
If a new overseas entity were to buy all of Silver Fern Farms, then important questions have to be asked as to whether or not this is in the interests of New Zealand. It needs to be asked whether or not this is consistent with the overarching need for industry rationalisation.
Although the restructuring of Silver Fern Farms assets is now being actively played out, it is all happening behind closed doors.
The process is being managed by international merchant banker and merger specialist Goldman Sachs. The first round expressions of interest have now closed. Those who survive the first round of the beauty contest will now get access to a lot more confidential data from Silver Fern Farms, and they will either fine tune their position or withdraw.
Silver Fern Farms has been saying that they want the process to be completed in June. That may or may not occur. However, timing is important with any new structures needing to be well in place before the start of the next season.
I consider there are four options:
Option One. The status quo will be maintained.
This is unlikely because Silver Fern Farms’ bankers will not agree to this. And Silver Fern Farms cannot operate without the support of its bankers.
Option Two. An overseas entity will buy all of Silver Fern Farms
This is a definite possibility, with the buyer being either from China or Brazil .There is nowhere else a buyer might come from.
If this occurs, then the new buyer may choose to close down some facilities immediately, particularly some South Island sheep processing plants, and factor this into the price they are prepared to pay. However, any buyer would have to ask itself why it would want to take on such a task of closing down plants with all of the associated environmental and logistical issues.
Alternatively, the buyer might have sufficient funds to upgrade the existing plants and then take on the other industry players, with the aim of being the last man standing. But only a buyer with huge amounts of testosterone, or a misunderstanding of the challenges, would make such a play. Accordingly, I see this as relatively low probability, although it cannot be ruled out.
Option Three. A ‘white knight’ emerges
Rather than purchasing all of the company, a white knight emerges who invests at least $100 million. Given the shakiness of the current equity, any such investor would require majority ownership. The company would then formally cancel its co-operative structure, which in any case has essentially become a legal fiction.
In making such an investment, the white knight would need to factor in that not all suppliers will stay with the new company. North Island farmers will predominantly supply whoever is paying the most. But some South Island sheep farmers, who have a different culture in regard to co-operatives, would move to Alliance and perhaps other companies.
On balance, I see the ‘white knight’ model as being of similar likelihood to Option Two. It could happen, but the weakness of this model is that most of the new capital will go straight to debt reduction. If Silver Fern Farms is going to compete long term, then it needs reinvestment capital well beyond the $100 million, in which case existing shareholders will have no more than a minimal shareholding. A new entity may therefore prefer to get rid of them completely.
Option Four. The Silver Fern Farms assets are spread in multiple directions
With this option, the better assets will be sold to a range of buyers and the weaker assets will then have to be written off by the remaining Silver Fern Farms shell.
There is a range of permutations within this overarching strategy. There will definitely be interest from China for the beef assets, and this could also be of interest to a Brazilian company.
Whereas new entities could look at taking on all of the beef assets and perhaps some of the sheep assets, local companies would in all likelihood be interested in taking over particular assets.
These local companies have the advantage of being able to graft any new assets onto an existing marketing structure, whereas new entities from overseas will need to set up new logistic and marketing structures.
Companies such as ANZCO could well be interested in specific beef plants which complement their current geographical spread. Alliance may well look at some or all of the original Richmond sheep processing plants to complement their geographic spread. And as for AFFCO, no-one but the Talley family will know what they have their eyes on.
My assumption is that all of the existing major meat companies will have entered the first round beauty contest to express interest in Silver Fern Farms. The only reason not to do so would be if the entry cost to the beauty contest has been too high. Even if they finally make no purchase, every company would love to do due diligence on the Silver Fern Farms assets to better understand their competitor.
My assessment is that the most likely outcome will be some permutation of Option Four.
From the banks’ perspective, it would be cleaner if assets are disposed of in large rather than small aggregates. However, in terms of creating a more sustainable industry, a more piecemeal outcome that gets each facility to the most appropriate long term owner would be preferable.
Depending on the specific permutations that emerge, there is likely to be a remaining shell of facilities that have no buyer, and which needs to be closed down. At that point, a liquidator will need to be called in.
Closing down meat processing facilities is an expensive business. The Government needs to take an interest in this to ensure that sufficient funds are held within the shell to undertake these operations before the banks get their share.
Natural justice says that workers’ rights and redundancies need to have first call, but natural justice does not always play out.
While the Silver Fern Farms restructuring is going on, no other significant restructuring of the meat industry can or will occur. As always, all other processors will be watching their cash flows very closely to ensure they are in a survivable position going into next season.
I have previously said that whatever happens, the changes at Silver Fern Farms will be like an earthquake going through the meat industry.
Given that Silver Fern Farms is New Zealand’s biggest meat company, it cannot be otherwise.
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. He will be writing a regular column here. His archived writings are available at http://keithwoodford.wordpress.com
Content supplied by NZAGRC and PGgRc*
New Zealand scientists have identified animal-safe compounds that can reduce methane emissions from sheep & cattle by up to 90 per cent.
The announcement was made yesterday by Pastoral Greenhouse Gas Research Consortium (PGgRc) Chairman and New Zealand Agricultural Greenhouse Gas Research Centre (NZAGRC) Steering Group member Rick Pridmore.
This significant research progress comes as a result of substantially increased government and farmer funding into agricultural greenhouse gas mitigation over the past five years.
Results from animal trials were presented at the NZAGRC-PGgRc Greenhouse Gas Mitigation Conference in Palmerston North on Tuesday 28 April.
Dr Pridmore says the successful test of methane inhibitors is news that New Zealand farmers can get excited about.
“The results are significant for two reasons. First, because they work on livestock consuming a grass-based diet and, second because the short-term trials showed such dramatic results.
“It must be stressed that these are early days. Further trials are needed to confirm these compounds can reduce emissions in the long term, have no adverse effects on productivity and leave no residues in meat or milk.
“We are already looking to engage with a commercial partner and, all going well, we could possibly see a commercial product within five years.”
More than 100,000 compounds have been screened, and many thousands tested in laboratory experiments over the past several years. To date five compounds, selected as the most promising options, have been tested on sheep and resulted in reductions of methane emissions from 30% to more than 90%.
The research is funded by the jointly industry/government backed Pastoral Greenhouse Gas Research Consortium and the wholly Government-funded New Zealand Agricultural Greenhouse Gas Research Centre. Collaboration between New Zealand and international scientists, made possible through New Zealand Government funding in support of the Global Research Alliance on agricultural greenhouse gases, was critical for reaching this milestone.
The Ministry for Primary Industries’ International Policy Director and representative to the Global Research Alliance, Chris Carson, says “this is an exciting development and it is pleasing that funds made available by the New Zealand Government to support international cooperation in agricultural GHG research have played a role”.
Methane inhibitors are only one of several options that New Zealand scientists are pursuing to help reduce greenhouse gas emissions from agriculture says Dr Pridmore. Other approaches include breeding, developing a vaccine and specific feeds to reduce methane emissions, exploiting natural plant properties to reduce nitrous oxide emissions, and increasing the amount of carbon stored in pastoral soils.
“Breeding for reduced methane emission is progressing very well. We have shown that the trait is heritable and indications to date show no negative production impacts. The difference between high and low emitters currently is about six percent.
“This means sheep farmers should have access to breeding value information in about two years that allows them to select for animals with lower methane emissions than the average sheep.
“Work on cattle is only starting, but based on lessons we have learnt from sheep, we hope that cattle breeding values will follow within five years.
The Conference will cover latest developments in domestic and international climate change policy and prospects for reducing greenhouse gas emissions from agriculture. In addition to Dr Pridmore, speakers include New Zealand’s Climate Change Ambassador Jo Tyndall, and the Government’s Chief Science Advisor, Sir Peter Gluckman, along with a range of domestic and international experts on climate change and agriculture, including the Intergovernmental Panel on Climate Change.
NZAGRC is the New Zealand Agricultural Greenhouse Gas Research Centre, and PGgRc is the Pastoral Greenhouse Gas Research Consortium
At last a forecast North Canterbury dry land farmers will be excited about, as heavy rain and mild conditions this week should start the grass recovery.
The rest of the region has recovered reasonably well, thanks to early tough decisions preserving pastures from being damaged by continual heavy grazing.
The rest of NZ has had average autumn growth rates, that will allow pastures to recover over the winter break, and ensure cows put condition back on before the new seasons calving.
More and more cows are being dried off, as managers make decisions based on body condition score and time to recover before next calving, but for farmers in the drought areas the amount and quality of winter feed available will be an important managerial influence.
Waikato farmers are reporting high cow empty rates as a result of the poor spring last year and the outlawing of inductions ensuring that mating bulls were removed earlier.
The short term analysis of the market looks grim, with little likelihood of any upside for this year, and a much more pessimistic view for the new season, as the upturn is predicted to arrive slower than earlier estimated.
And with Dairy Base revealing average farm operating expenses now sitting at $5.22/kg ms before interest payments, the enormity of the financial challenge is well illustrated.
Westland today downgraded its predicted 2014/15 payout to $4.90-$5.10 blaming global skim milk prices out of Europe at $US$2100-$2200/tonne, and the rising currency values, as the reasons for dragging the market down.
Other analysts have noted the costs of forex trading on the payout, predicted to inflate the present Fonterra payout ahead of the market, but costing Synlait plenty in their milk return downgrade.
Fonterra shares have recovered slightly to now sit at $5.43, as the company announces plans for two new driers at Studholme, and report that the $150million Edendale expansion is on track to process all increased milk from the oncoming season.
By Keith Woodford*
Synlait’s Akarola is about to transform China’s infant formula market.
Fonterra’s new partner Beingmate, and all the other marketers of infant formula, are in for a huge shakeup.
On 25 March of this year I foreshadowed that infant formula prices in China were about to become much more competitive.
I based my report on information from dairy industry sources within China that New Hope Nutritionals – owned 75% by China’s New Hope and 25% by New Zealand’s Synlait - was about to launch a new brand of New Zealand- made infant formula called Akarola.
I reported that the new brand would be sold exclusively online, at prices much less than half of normal prices in China.
A few days later New Hope Nutritionals launched their online campaign on JD.com.
The price that I foreshadowed of 99 RMB for a 900 g per can was indeed correct. In New Zealand dollars, this is about $21, or $16 in American dollars.
In itself, there is nothing remarkable about selling infant formula at this price. It is a price that is broadly in line with international prices.
But it is a price that is totally out of line with what has been happening in China.
For the last few years, Chinese consumers have been paying several times the normal international infant formula prices. Brand owners, distributors, and retailers have all been making a killing.
It has been a crazy scene.
In 2012 and 2013 it was possible to buy infant formula at retail prices in New Zealand, Australia and the UK, then ship it to China, and still make a huge profit. There were also more than 100 brands – some have suggested over 400 brands – that were coming out of two Auckland factories.
The Chinese have tried to bring order to the market in various ways. First, in 2013 many of the large dairy companies, including Fonterra, were fined for alleged price collusion. And then in 2014, new laws were put in place requiring all brand owners to meet stringent standards of documentation and certification relating to food safety.
Those new rules have quickly sorted out most of the fly-by-night brigade. Within parts of the New Zealand media there was considerable anguish, based on a false assumption that it was all some Chinese conspiracy to block legitimate New Zealand companies. However, it was something that had to be done.
What New Hope and Synlait are now doing is the next stage in a major revolution.
This time everyone else marketing infant formula in China will be very concerned.
In marketing terms, the News Hope and Synlait strategy is a disruptive behaviour.
It is changing the rules of the game.
New Hope is telling Chinese mums and dads that they have been getting ripped off.
On JD.com they are showing what infant formula sells for in other parts of the world, and comparing that to the crazy prices in China.
New Hope and Synlait’s online presentation comparing international retail prices for infant formula. The big message is why should English mums buy infant formula at 89 RMB, Dutch mums at 90 RMB, and Canadian mums at 105 RMB, while Chinese mums pay about four times this price?
They are telling the mums and dads that they can now have the same quality product from the green pastures of New Zealand, and saying there is total traceability back to the Synlait factory on each individual can.
The story is illustrated with pictures of Canterbury pastures and snow clad Mt Hutt.
Linking Akarola back to Synlait’s Canterbury production base.
New Hope is a huge Chinese agri-food conglomerate headquartered in Chengdu.
It totally dwarfs a company like Fonterra. And it has the financial resources to make a play which others can only dream of.
New Hope has figured out that it can still make a nice profit at these much reduced prices, as long as it can build market share. They know that about 40% of infant formula purchases are already made online and that this is increasing rapidly. So the key to success will be getting sufficient supply from Synlait.
Within days of the product launch on JD.com, the existing supplies ran out and currently there is still no more supply available.
Over the next few months, they may well struggle from an ongoing shortage.
However, as Synlait’s third dryer comes on stream in September, with specialist infant formula capacity, those supply issues should be attended to.
That new Synlait dryer has a yearly capacity to provide 50,000 tonnes of product per annum, which is 55 million cans of formula !
The classic analogy for a market disruptive strategy is Henry Ford and the Model T car. It wasn’t Henry who first invented a car. And initially the invention of the car did not in itself threaten horse drawn carriages. But once Henry Ford introduced the Model T in 1908 at a price that millions could afford, the world did indeed change. There was no going back.
Chinese dairy company Yashili, which uses only New Zealand dairy products in its infant formulas, has now responded by saying that from May it too will sell its infant formula online to Chinese mums and dads for a similar price. The final price has yet to be confirmed, but it will be no more than 108 RMB.
Now that the ball is rolling, others will have to follow suit.
It may take a while, but the outcome is inevitable:
Chinese infant formula prices are going to come down to international levels.
I am already getting mail from some industry players saying that this is going to be a disaster for New Zealand. But I don’t think that is necessarily so.
The middle men have been the ones soaking up all of the profits.
The supply chains into baby shops – where most infant formula is sold - will now have to become much more efficient to compete with online sales.
But there is a lesson here for all New Zealand agri-food suppliers into China: if you aren’t selling online then you are going to end up missing in action.
China is different and online is where all the action is.
New Zealand and Synlait linked to China on JD.com
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. He will be writing a regular column here. His archived writings are available at http://keithwoodford.wordpress.com